Five recent developments relevant to the C-Suite (... and tax, HR, legal, payroll and ER/IR teams.)
It’s been a big couple weeks for CROs, CFOs, CPOs, HRDs, payroll teams, employment lawyers and tax practitioners. The landscape is evolving with legislative changes, senior tax administration appointments, new developments in payroll compliance tools and its potential use as an alternative dispute resolution tool.
Here’s some of what you need to know.
Employment law
It’s been widely reported that the Closing the Loopholes Bill was split in two after support from the Greens and cross bench. This means wage theft laws will be law, and the definition of wage theft extends to include superannuation.
What is 'wage theft'?
[To avoid doubt, the following is not legal advice; just my musings…]
For wage theft, the key question is the meaning of ‘intentional’ underpayment. If there’s evidence that a company knew of payroll deficiencies but continued to make payments without trying to fix things, could that be an intentional act, or is it simply ‘reckless’?
Expect a regulator to test the definition of ‘intentional’ at some point, and when the courts consider the issue existing taxation case law will probably set a high bar. For some guidance, the ATO’s view is that ‘intentional disregard’ means that there must be actual knowledge that the statement made is false. Translated into the payroll compliance realm, could intentional mean that there is actual knowledge that workers are being underpaid due to deficient systems?
In a tax context, to establish intentional disregard, the entity must understand the effect of the relevant legislation and how it operates in respect of the entity's affairs, and make a deliberate choice to ignore. Dishonesty is a requisite feature. Evidence of intention must be found through direct evidence or by inference from all the surrounding circumstances, including the conduct of the entity. (For my employment or IR specialist friends, see?Weyers v. Federal Commissioner of Taxation?[2006] FCA 818; 2006 ATC 4523; (2006) 63 ATR 268).
Payroll underpayments are still trending
The FWO recently reported over $1b of recovered wage underpayments over the past two years with barely a ripple of media coverage. Nearly $300m of underpayments were uncovered in the large corporate sector this year.
Anecdotal evidence suggests underpayments are still tracking between 1% to 3% of organisational payroll payments, regardless of the level of investment in new payroll systems. Errors are still at the margins but often on a very big base with serious consequences for all stakeholders.
Traditional payroll compliance frameworks are failing
Payroll systems aren’t designed for the Australian market requiring ‘workarounds’ (this is where problems sit). Some organisations still use paper and excel files. Regulatory technology can (and does) help with monthly reviews allowing variation fixes and it doesn’t require an entirely new parallel payroll system or a new system with different deficiencies and new workarounds. Smart companies are implementing monthly reviews of payroll payments. If you don’t yet fall in my - rather self serving - ‘smart company’ category, let’s chat.
Tax developments
The Federal Treasurer announced a new Commissioner of Taxation, Rob Heffernan - a very experienced public servant and an extremely safe pair of hands. I predict a focus on areas of the compliance program requiring urgent attention - the collection of $40billion+ outstanding tax debts, superannuation compliance using STP2 data and closing the small business ‘tax gap’. Also expect more effective inter agency collaboration.
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The ATO continue to have significant wins in the courts in the large business market (e.g. Pepsi and diverted profits tax (DPT)). Objectively measured on compliance results and influencing behaviour, Rebecca Saint has been outstanding in the Deputy Commissioner, Public Groups role.
In other tax developments, we’re starting to see the effects of data provided by Single Touch Payroll Phase 2 move into compliance activity in the PAYG and superannuation space.
Who owns payroll compliance?
Are Heads of Tax roles expanding to include responsibility for payroll compliance? In recent weeks I’ve had interesting discussions with a couple of Heads of Tax who now have carriage over shared services/payroll. A new trend?
Why? Similar reasons to my own 2020 career pivot: they are comfortable dealing with administrators and regulators; able to read legislation, EAs and Awards; good with finance, systems and processes; comfortable engaging advisors, etc.
I’m not advocating a particular position (nor am I sure my Head of Tax friends would thank me for the suggestion), but perhaps payroll compliance is finding a natural home reporting through to an experienced Head of Tax and then into the CFO?
Watch this space. Comments welcome below - where should payroll compliance sit?
Fair Work Ombudsman meeting - regulatory tech and ADR
Marcus Zeltzer and I recently had a great meeting with the FWO about potential uses of regulatory technology to support wage and entitlement compliance, including sharing a brief paper outlining Yellow Canary’s views on its potential use in facilitating alternative dispute resolution (ADR). If you’d like to see a copy of our memo with some potential guiding principles for ADR, please reach out (and yes, the FWO are happy for us to share - provided we make it clear they haven’t endorsed our views).
What now?
In light of recent tax, payroll and legislative developments, the need for vigilance and adaptability is more apparent than ever.
The debate surrounding wage theft and the nuances of intentional underpayment necessitate a keen understanding of legal intricacies, and a proactive approach to compliance.
As always, feel free to reach out to me, or any of my colleagues at Yellow Canary ( Marcus Zeltzer , Georgia Phillips , Warren Brandt Kirsty Martin ) if you need any help with using regulatory technology to support your existing payroll function to help identify and review any variations in payroll compliance on a monthly basis.
Further reading
(*Jellyfish photo provided free by Theodor Tkachuk)