By Adrienne Silla | Head of Advisory, Australian Payroll Association
Every payroll review throws up its share of surprises, but one issue appears far more often than most organisations realise: full-time employees whose 38 hour ordinary time obligation has not been correctly recorded, classified or paid.
It sounds like a basic thing to get right.
Full-time employment in Australia is generally built around a standard of 38 ordinary hours per week (or the equivalent under an applicable award or enterprise agreement) and payroll systems are supposed to be configured to reflect that. Yet time and time again, when we sit down and reconcile paid hours against rostered or contracted hours, the numbers don't match.
While this article refers to the standard 38 hour week, the same principles apply wherever an employee’s ordinary hours are defined by an award, enterprise agreement or contract.
Falling short of 38 hours
In several recent reviews, we identified full-time employees who were paid for fewer than 38 ordinary hours in the pay period, with no corresponding explanation on file.
Where unpaid leave had been recorded, we checked whether paid hours plus unpaid leave hours added up to the required 38. In a number of cases, they still didn't. That is a meaningful finding because it rules out the simplest explanation. It isn't a case of an employee taking leave without pay and the shortfall being accounted for elsewhere in the pay record. The hours are simply unaccounted for.
Some of the shortfalls we found had a clear and reasonable explanation. Employees commencing employment part way through a pay period will naturally be paid fewer than 38 ordinary hours for that week and this is entirely appropriate. Once we adjusted for start dates, however, a number of shortfalls remained and we simply could not establish a reason for them from the payroll data available.
That is the part that should concern every organisation. An unexplained shortfall in hours paid to a full-time employee is not a rounding error. It is a potential underpayment and under Australia's strengthened wage compliance framework, underpayments are receiving far greater regulatory scrutiny than ever before.
More than 38 hours, but no overtime in sight
The same type of reviews also turned up the opposite problem. We found instances where full-time employees were paid for more than 38 hours in the sample pay periods, once ordinary hours and any leave taken were combined, yet no overtime had been paid.
If an employee's paid hours and leave genuinely exceed 38 hours in the period, something in the calculation should prompt further investigation. Those additional hours should either attract overtime or another entitlement under the applicable industrial instrument or there should be a clear explanation as to why they remain ordinary hours.
What we should not see is hours simply accumulating above the employee's ordinary hours without any assessment of whether additional entitlements have been triggered. While there are legitimate circumstances where hours may average over a roster cycle or be managed differently under an industrial instrument, payroll should always be able to explain why the hours have been treated the way they have.
When overtime is counted towards the 38 ordinary hours
A more subtle issue we have identified is where employers count overtime hours towards an employee's 38 hour ordinary time obligation.
Unlike the previous scenario, the employee is paid their overtime correctly. The overtime payment itself is not the problem. The issue is that the employer believes those overtime hours make up part of the employee's 38 ordinary hours.
For example, an employee works 34 ordinary hours and four overtime hours during the week. The payroll records and pays 34 ordinary hours and four overtime hours. At first glance, everything appears correct because the employee has been paid for a total of 38 hours, plus the applicable overtime premium.
However, the employee has only been paid for 34 ordinary hours. The four overtime hours do not become ordinary hours simply because they are paid. They are separate entitlements paid at different rates for different reasons.
Where an employer treats those four overtime hours as satisfying part of the employee's 38 hour ordinary time obligation, the employee has still only received 34 ordinary hours. The overtime payment does not replace the obligation to provide and pay the employee's ordinary hours; it is a separate entitlement paid because the employee worked additional hours.
This issue also affects the leave entitlements and superannuation entitlements as overtime does not accrue annual leave and does not attract superannuation obligations.
Leave forms part of ordinary hours
A common misconception in payroll is that only hours worked count towards a full-time employee's ordinary hours. They don't.
When assessing a full-time employee's 38-hour week (or the applicable full-time standard), authorised leave must also be taken into account. Paid leave is treated as part of an employee's ordinary hours and while authorised unpaid leave reduces the amount the employee is paid, it should still be recorded as hours in the payroll. Together, ordinary hours worked, paid leave and authorised unpaid leave should account for the employee's full weekly hours.
One of the most common misconceptions we encounter is that unpaid leave creates a shortfall in an employee's ordinary hours. It shouldn't. While unpaid leave reduces the amount an employee is paid, it should not create a gap in the employee's recorded hours. If the unpaid leave hours have been correctly recorded, there should be no unexplained shortfall in the employee's 38-hour week.
This is why it is important to reconcile hours, not just payments. A payroll system may correctly reduce an employee's pay because they have taken unpaid leave, but if the corresponding unpaid leave hours have not been recorded, the payroll records will show an unexplained shortfall in the employee's ordinary hours.
Why this keeps happening
In our experience, these issues rarely stem from a single dramatic failure. They tend to result from a combination of smaller problems compounding over time:
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Payroll systems configured around standard hours that do not adjust correctly for partial pay periods, leave combinations or mid-period employment changes.
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Manual adjustments made in one pay run that are never reconciled back to rostered or contracted hours.
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Overtime rules contained in awards or enterprise agreements that were never fully configured into the payroll system.
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Incorrect pay category mapping, where overtime, leave or other hours are coded as ordinary time, resulting in the correct total hours being paid but the wrong hours being classified.
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A lack of routine reconciliation between rostered hours, paid hours and leave.
None of these causes are unusual. That is exactly why this issue turns up so often. It is rarely a case of an organisation deliberately underpaying or overpaying staff. More often, the payroll system has quietly drifted away from what the legislation, industrial instrument or employment contract requires and nobody notices until someone takes the time to reconcile the detail.
What payroll teams should be doing
Payroll reconciliation should extend beyond simply confirming that employees have been paid.
Each pay period, organisations should reconcile:
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Ordinary hours against the employee's 38-hour full-time obligation (or the applicable standard).
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Leave taken to ensure the employee's full-time hours remain fully accounted for, even where some of those hours are unpaid.
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Overtime to confirm it has been correctly identified, classified and paid.
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The allocation of hours between ordinary time and overtime, not just the total number of hours paid.
Where an employee falls short of their ordinary hours, confirm whether the difference is explained by a commencement or termination date, leave without pay or another legitimate reason. If it is not, investigate before it becomes a recurring issue.
Likewise, where hours exceed the employee's ordinary hours, confirm that the additional hours have been correctly classified and paid in accordance with the applicable industrial instrument. If the hours simply look wrong, treat that as a payroll data integrity issue rather than a payroll quirk.
Don't wait for a Fair Work investigation, an employee complaint or your annual audit to identify these issues. The earlier discrepancies are identified, the easier and less costly they are to resolve.
How We Can Help
At APA, this is exactly the type of issue our payroll reviews are designed to uncover.
We don't just look at whether employees were paid. We examine whether ordinary hours, leave and overtime have all been correctly classified, reconciled and paid in accordance with the relevant legislation, award, enterprise agreement and employment contract.
Seemingly small discrepancies can become significant compliance risks when repeated across an entire workforce. If you would like an independent review, we would be happy to have that conversation.
