What to do if you’ve underpaid your staff

From retail to hospitality, staff are the bread and butter of any business. Every manager should know the value of happy employees, which means that every manager should also know the value of giving every employee a fair go. At the very least, this means complying with minimum wage laws, and making sure all employees are properly reimbursed for their time.

Of course, payroll can be complex. And crunching numbers doesn’t always add up. Mistakes do happen, and most of the time they’re completely unintentional. Here’s a few scenarios that can lead to underpayment:

• Genuine human error or computer glitches
• Failure to apply penalty rates or entitlements
• Forgetting to factor in minimum wage increases
• Junior employees have a birthday and advance to a higher pay rate
• An employee’s duties change, which elevated them to a higher award or agreement
• An employee acquires a job-related qualification
• An apprentice or trainee advances to the next pay level

Don’t worry, it happens. What you do need to do is fix the situation as soon as possible.

So, what should you do if you suspect you’re underpaying your staff? Don’t stress, we’ve got your back with a step-by-step guide to working out how to fix underpayment issues.

Step 1: Calculate how long you’ve been underpaying the employee

The absolute first step is to figure out how long the employee has been underpaid. Under Australian law, employees must be paid minimum rates and entitlements. Or, if you’ve agreed to pay an employee more than minimum wage this will need to be honoured. You’ll need to refer back to payslips and be as thorough as possible. Remember, underpayment can occur as an isolated incident/error or an ongoing issue.

Step 2: Calculate how much the employee has been paid

This step is relatively straightforward, as you simply need to add up every payslip the employee has received over the period in question. Take not of hours worked, and rates of pay. Make sure you add up the total gross amount before tax, not the figure that was deposited into the employee’s bank account.

Step 3: Calculate how much the employee should’ve been paid

Now, take the number of hours the employee’s clocked up on incorrect pay, and multiply this by the correct pay rate. The result will be the amount the employee should’ve been paid. Don’t forget to factor in entitlements like penalty rates, overtime, allowances, leave payments and leave loading.

Step 4: Calculate how much the employee is owed

Next, take the previous figure and subtract the amount the employee has been paid. Use this basic formula to keep things simple:

• Amount A: Total amount the employee should’ve been paid
• Amount B: Total amount the employee has been paid
• Underpayment amount: Amount A – Amount B

For example, Sarah Jones is underpaid for two months. She was being paid $16/hour for 15 hours of work each week, but her employer didn’t realise the minimum rate was $17/hour. Sarah uses the FairGoWages pay calculator and finds out she’s been underpaid for 60 hours of work over the past two months. To date, she’s been paid $960 (60 x $16). According to the pay calculator, she should’ve been paid $1020 (60 x $17). Therefore, Sarah has been underpaid by $60 ($1020 – $960).

Step 5: Back pay the employee

There’s no getting around it – the employee must be reimbursed for their time as soon as possible. The amount can be included as part of the normal pay cycle, or as a separate payment. Don’t forget to adjust the new amount in the employee’s pay records, and tweak your own accounts accordingly.

Of course, paying out lump sums isn’t always easy, especially for small businesses. If the employer can’t afford to pay a lump sum, another option is negotiating a payment plan between the employer and the employee. Time scales can be flexible, with agreements ranging from a few weeks to several months. It’s essential to put payment plans into writing, and get both parties to sign an official document.

Step 6: Stay on the ball

You’ve crunched the numbers, you’ve reimbursed your employee and you’re back on track. Now, the next step is to stay on the ball and keep up to date with all future wage rates, increases and penalties. Something as simple as noting down birthdays or annual apprentice progression milestones will help you stay on top of pay rates, and avoid any underpayment issues in the future.

What’s next?

Underpayment does happen, and the reality is that most of the time it’s unintentional. The important thing is that you fix mistakes fast, and avoid making the same ones in the future. You don’t need to report incidents to the Fair Work Ombudsman if they’ve been resolved inhouse, but you do need to record and update your own records.