Understanding the FWO Payroll Remediation Guide

According to the 2023-2024 Fair Work Ombudsman (FWO) Annual Report, the FWO recovered $473 million in unpaid wages and entitlements for almost 160,000 employees and recovered an additional $333 million in employee underpayments for nearly 110,000 workers from the large corporate sector. It has since announced in its Corporate Plan for 2024-2025, that its main focus will be:

1. to use enforcement tools to achieve compliance with workplace laws; and
2. detect and address serious and systematic non-compliance.

Timely with this announcement, the FWO recently published its first Payroll Remediation Program Guide (PRP Guide) – a document designed to assist employers and their representatives to identify and correct large-scale employee underpayments under the Fair Work Act 2009 (Cth) (FW Act).

There are often significant challenges faced by employers in ensuring payroll compliance and addressing non-compliance. To support employers facing these challenges, the FWO outlines a structured, employee-focused approach for implementing a payroll remediation program.  Adhering to the PRP Guide can help foster a more collaborative and constructive relationship between employers and the FWO when it comes to payroll non-compliance and underpayments.

What is the role of the Fair Work Ombudsman?

The role of the FWO is to promote harmonious, productive and cooperative workplaces, and it attempts to achieve this by, amongst other things:

• monitoring compliance with the FW Act and industrial instruments;
• inquiring investigate breaches of the FW Act; and
• taking appropriate enforcement action.

The FWO’s compliance powers and enforcement outcomes

The FWO has multiple tools at its disposal when it comes to enforcing employer compliance.  This can include:

1. Findings Letter: where a Fair Work Inspector has completed an investigation, the FWO will notify relevant parties of the findings and outcome of that assessment;
2. Contravention Letter: which informs the person of the failure and requires the person to take specific action to comply with the letter;
3. Compliance Notice: Compliance Notices can be issued as an alternative to the FWO commencing court proceedings against employers and their officers. A Compliance Notice will require that the person take specified action to remedy the direct effects of the identified contraventions, including calculating and repaying any underpayments where relevant, and/or require the person to produce reasonable evidence of compliance. Failure to comply with the Compliance Notice without a reasonable excuse is a contravention of the FW Act, and the court can impose penalties. FWO can commence litigation for non-compliance with a Compliance Notice;
4. Infringement Notice: such notices can be issued for contraventions of the FW Act relating to record-keeping, payslip, or job advertisement obligations. An Infringement Notice requires the person to pay a penalty for committing the contravention. Where a person complies with an infringement notice, the FWO is unable to commence court proceedings against that person for the contravention(s) that are the subject of the Infringement Notice;
5. Enforceable Undertaking: the FWO may accept a written undertaking from a person concerning a contravention. While an Enforceable Undertaking is in place, the FWO cannot commence court proceedings in respect of the matters dealt with in the undertaking. An Enforceable Undertaking is a publicly available document; and
6. Civil Litigation: the FWO may decide to commence civil court proceedings for any non-compliance it identifies where it has sufficient evidence to do so and deems the commencement of proceedings to be in the public interest.

Unpacking the Payroll Remediation Program Guide

With the FWO sharpening its compliance focus on all businesses, it has become more important than ever to ensure that your payroll systems are appropriately set up and managed to avoid non-compliance. Where employers have inadvertently engaged in non-compliance, the FWO expects that the non-compliance will be remedied.

According to the FWO in its PRP Guide, there are seven elements for an effective payroll remediation. These include:

1. Designing your own Payroll Remediation Program

The first step is for businesses to identify potential compliance issues and determine the scope and review of the remediation program. For example, where a business is satisfied that the compliance issue is confined to a specific issue, then it may be appropriate for the remediation program to only take steps to address those specific issues. However, where compliance issues are broader, it will be appropriate for the remediation program to also be broader in scope and application.

The FWO expects that the review period looks as far back as possible, taking into account:

• the availability of employee records or other reliable data sources to assess and quantify underpayments; and
• the point in time when non-compliance started to occur.

Although there is a six-year statutory limitation period in the FW Act for the commencement of proceedings to recover an underpayment, the FWO has said that it: “expects that six years should be viewed as a minimum period for review, and not as a bar to additional remediation.”

The FWO has also stated that it expects businesses to consult with its workforce about the set-up and methodology of the remediation program.

2. Methodology issues

Methodology refers to the ‘rules’ that underpin a remediation model to produce the calculation outputs relied upon to rectify an underpayment.

It’s expected that businesses can explain the reasons for a particular methodology they have implemented. The FWO will seek to understand what sources of pay, time and attendance, and employee data sets are available, as well as how an employer has classified an employee under an applicable industrial instrument.

The FWO has stated that its ‘general position’ with respect to offsetting is that employers must pay employees in full for each pay period in accordance with the applicable industrial instrument – which means that if an employee is paid more than the minimum amount in one pay period, an employer can’t use this to satisfy a less than minimum amount paid in another pay period.

However, the FWO has stated that it understands that employers often enter into contractual offsetting arrangements, and where this is the case, and the employer seeks to rely on such contractual terms to offset, the FWO will require evidence of such terms to assess the employer’s approach.

3. Communications

The FWO has emphasised the need to have a ‘comprehensive communication plan’ in place. That is, the FWO expects that:

• all employees (including former employees) who are impacted by the compliance issue be notified;
• notification should occur as early as possible;
• the channels used for communication are fit for purpose (and perhaps even using multi-channel approaches to help maximise the communication reach);
• communication should be in a language that is simple and clear for employees to understand;
• communication should be transparent by addressing the non-compliance and explaining what is being done to rectify it; and
• communication should allow for simple avenues for employees to raise queries or concerns.

4. Making payments

The FWO expects that back-payments made to employees include interest. Paying interest on back-payments is not a legal requirement (unless imposed by a court order), however, the FWO has confirmed that it expects interest payments to be made.

The FWO has stated that a “simple interest calculation on the underpayment is appropriate.” An acceptable approach to the calculation of interest is to use the Pre-Judgment Rate from the Federal Court of Australia’s Interest on Judgments Practice Note, which is the relevant Reserve Bank of Australia cash rate for each half-year period plus 4 per cent.

Where an employer takes a different approach, the FWO will expect the employer can demonstrate the reason(s) for taking such an approach.

5. Former employees and outstanding payments

Employers are expected to take all reasonable steps to locate and make payment to all former employees. This includes employers making ‘repeated attempts’ to locate former employees via multiple channels.

If an employer is unable to locate former employees, then they will be required to pay the unclaimed monies to the Commonwealth.

6. Corrective measures

Once an issue is identified, employers are expected to put into place immediate steps to ensure that further non-compliance is prevented. Where a compliance fix requires significant planning or implementation, it is expected that employers put in place ‘interim’ measures to prevent non-compliance. If an employer allows non-compliance to continue during the remediation program without putting in place corrective measures to address it, this is likely to give rise to a serious contravention of the FW Act.

7. Future compliance

The last step in the payroll remediation program is for the program to consider what additional steps or measures can be implemented to strengthen an employer’s compliance generally and into the future. For example, employers should consider:

• Conducting audits;
• Addressing workplace culture and governance;
• Reviewing systems and technology; and
• Identifying areas of additional education and guidance to provide to payroll staff and managers.

When should you report issues to the FWO?

The FWO’s primary focus of their investigation process is seeking to obtain assurance about the steps taken by the employer, e.g., that the steps taken are likely to result in employees receiving accurately calculated entitlements in a timely manner and have identified and addressed the causes of non-compliance.

If there has been a notification to the FWO, the FWO will generally provide the employer with an opportunity to provide information voluntarily to assist with the assurance process (i.e., not using its statutory powers to compel the employer to provide information). However, the FWO will likely use its statutory powers to progress an investigation if:

• information isn’t provided voluntarily; and
• if employers are uncooperative or not timely in response to requests for information.

The FWO has said that “isolated payroll errors resulting in underpayments over a short period of time (up to 12 months) do not need to be actively reported to the FWO, as long as:

• employees are appropriately informed of the underpayment;
• employees are back paid in full as soon as possible; and
• changes are implemented to ensure the error does not happen again.”

With respect to “broader and/or potential systematic non-compliance,” the FWO encourages employers to report at an early stage.

The key takeaways for employers

The consequences that flow from payroll non-compliance can be catastrophic for businesses, their directors, and others charged with payroll responsibility. Any misstep in a situation of non-compliance, including in the early stages after identification, can affect the remainder of the remediation process and can influence how the FWO responds to the non-compliance.

Employers should ensure that payroll compliance is at the forefront of their minds. Where non-compliance is identified, employers are encouraged to seek advice about how to proceed in light of the introduction PRP Guide and other matters relevant to compliance remediation.

Irrespective of the size of the non-compliance, employers should consider engaging external experts at an early stage. Early support will allow employers to establish a payroll remediation program that meets the requirements of the PRP Guide. With the assistance of external advisors, the employer will likely be better placed to carefully consider whether self-reporting to the FWO is appropriate in all of the circumstances, strategically engage with employees and unions, as well as ensure that all organisational actions and decisions are appropriately recorded and justified.

If any of this information has raised questions about the FWO’s Payroll Remediation Guide for your business or you have another workplace matter you need assistance with, please reach out to our friendly Citation Legal team for a confidential chat.

About our author

Amanda Curatore is a qualified Solicitor and Senior Associate at Citation Legal and Citation HR. Amanda is highly experienced in providing workplace relations advice and assistance to clients in a wide range of matters, including employment contracts, modern award interpretation, managing performance, bullying and harassment, terminations and managing risk.