Hours Worked...How Hard Can It Be?

The Missing Link in the Critical Dataset

Those of us who have had the opportunity to work with the Australian Taxation Office and other agencies on the Single Touch Payroll design (1st and 2nd phases), had been asked to consider the inclusion of "hours worked" in the Pay Event more times than I can recall. The question is always genuinely asked by each new government entrant and the answer is always confusing to those who asked the question.

There are a range of factors that influence the complexity of the answer, but it's always been given verbally that doesn't lend itself to be "passed on" successfully. I never bothered to document our reasons, because "hours worked" didn't make the cut for a variety of very good reasons. Never been a reason to put it in writing for all to see.

With the Australian Bureau of Statistics release of their excellent "Payroll Jobs and Wages" (an unfortunately misleading title for STP-sourced data), it's widened the audience to this critical digital infrastructure, co-designed by the ATO and industry over the last 5 years. Now there are many others wondering why "hours worked" aren't included in STP so they can just "divide the payment by the hours worked to derive the hourly rate".

That's the most significant reason why it's not included: that's not how Australian remuneration works! In order to marry time and pay, you need to understand the complex relationship between the two. It's not that simple.

Factors for Consideration

There are quite a few factors to take into consideration when government is considering "hours worked" to be included in future phases of Single Touch Payroll that is sourced from data in...you know, PAYROLL. The full context and complexity of each issue is not detailed here, as that would just freak out all the non-payrollers. It's just an introduction to the concepts:

Software

"Hours Worked" may not be in payroll, nor might it be possible to be in the future. Maybe government misunderstood what "payroll" is? Payroll is only one component in an extensive range of software that an entity may use to assist its business processes and employment obligations. Technology may include one piece of software that includes all components of functionality required to manage employment obligations: people, time and attendance, organisational management, learning and talent, health and safety, employee benefits, performance management, recruitment, onboarding, accounting for payroll and ... payroll. Or each of these components may be delivered by different software from the payroll software, or no software at all or managed by a third party provider.

Only specific data is available as inputs to the payroll from the other components/sources, sometimes in summary format only. Which data is output in the payroll results/tables is a separate matter from what is input. An input may not be output because the detail is in one of the other components, or may not have been required for payslip or external reporting purposes before. So, the primary issue is the data availability of "hours worked" in the outputs of payroll for reporting in the pay event. It may only be available in the time and attendance software, depending on the other factors.

Cash vs Accrual Data

"Hours Worked" may not be required just for the "employee", it might have to be represented against different factors: much harder than it sounds! The primary purpose of payroll is to effect the timely and accurate remuneration of the industrial instruments for the employee. Employers have obligations to maintain accurate records of employment, correcting when necessary. Data lives in retro, constantly changing, correcting, receiving, removing, adding, deleting data. What was initially an attendance for ordinary hours may become a paid absence in retro. What was initially a paid absence for personal leave may become a lower-paid workers' compensation absence in retro. It's what we need to do to keep accurate records and payments, including things we find out about after the pay is closed. The accounting for payroll aligns to accommodate these changes in payroll to correctly reflect where the expenses and balance sheet items ended up being assigned. Accrual methods that adjust in the period of correction.

However, the ATO requires the STP pay event to report cash payments in very cash-oriented ways: what you pay on 1 July is taxed and reported in that financial year, even if you're paying in arrears for the last fortnight in June of the prior financial year. So, if entity A paid the payroll, but we later find out entity B should have paid it, the payroll correction triggers the accrual accounting correction to reassign cash, expenses and balance sheet items from entity A to entity B, but the ATO wants you to continue to report the initial payer: entity A. That's why the PAYGW in STP may be reported for a different entity than the one that is in the Accounts Payable vendor to pay to the ATO.

So, where would "hours worked" need to be assigned to if we did need to store/save it in payroll? The same disconnect between PY and FI/CO that exists to complicate the reconciliation between cash and accrual for the pay event now? This would introduce a disconnect between PY and TM and now we have a reconciliation nightmare. I'm not going to bother to point out the disconnect between the pay event and superstream files. Each regulator wants the data sliced in different ways for different services - and we have to manage all of them! Reduction in red tape? I think not.

Pluralist Approach to Payments

Not all payments are derived the same way. There is an array of remuneration methodologies in the Australian industrial landscape. Some payments are fixed dollar amounts that are not based on hours worked or may be paid when an event occurs or to achieve specific outcomes (piecework); others are paid on hours worked, but the rate may vary, depending on the different activities performed per hour.

Some payments are attributable directly to each hour, others may be spread over the period, or paid for a minimum number of hours, regardless of the hours worked. Some payments are paid at lower rates based upon the worker attending or being absent from work and why. Some payments are spread evenly over the roster period to give regularity to the payment even though they don't work their hours uniformly. We keep a range of different hourly rates in payroll to valuate the various attendances and absences and roster cycles. We make decisions on factoring the pay when you need to account for the components separately that make up the whole.

Some payments are set as a fixed rate and no additional payments are made unless the hours worked are in excess of the outer limits. Some "payees" in the STP pay event reflect concurrent employment arrangements, where the amounts reported for one payee are the sum of more than one employment contract (job), each with different pay and entitlements. Some payments relate to "hours worked" in previous pay periods or financial years, but are paid now. Truly complicated stuff that challenges payroll professionals.

Uniformity of Time Capture

Not all hours worked are required to be captured in time and attendance to be passed to payroll for valuation. Some salaried workers are paid an amount that isn't attributable to the hours they actually worked, but their contracted hours instead, so only exceptions are captured, such as for monthly paid salary, where different months have different working hours but the pay is the same every month. Other workers are remunerated on units rather than hours, so capture those units instead. Other workers must capture hours worked or hours worked per activities, so award interpretation and valuation can occur.

We capture contracted hours of employment for those workers who have a known work pattern, such as for full time or part time workers. Others may not have fixed hours in their work pattern, such as for some casuals. There are lots of different work patterns that may apply for casuals, depending on the cause, duration and activities being undertaken.

So, we know planned hours for some, actual hours for others and a mix of the two or both for other workers. And what consideration for swapping shifts? So what sort of "hours" does government want: planned, actual, alternative units or something else entirely?

What Type of "Hours Worked"?

"Worked" is probably the easiest place to start for this one: do we really mean only for the time the employee actually worked? Because if someone is on paid annual leave for the pay period, we assume government still wants to know those hours and not "zero" because they weren't working? What about unpaid absences, where there is no payment (usually) but there are actual hours of absence? If a worker would be paid for 38 hours for the week, but has 7.6 hours of leave without pay, they will be paid for 30.4 hours, do we report that? Or the units for LSL weeks, or part time employment average hours used for some absences? Messy, complex computations occurring in payroll with no precise regulator guidance to assist us to all do it the same way: not for payroll software and not for employers.

Now comes the big hitters with respect to "hours worked" and these need to be carefully considered, particularly in light of the disaggregation of gross reporting in STP Phase 2:

• Public Holidays - when some workers would have normally worked, if not for the public holiday, they will be paid ordinary time for the ordinary hours they would have worked. They may also be paid additional penalty time for the shift if they are required to work it on the public holiday. So, now we have attendances, absences and public holidays that may comprise the "hours worked". How do all the software solutions account for the worked PH in TM/PY: do they all classify it the same way? Do some classify it as a PH shift penalty at 200%; or as PH ordinary hours at 100% plus PH shift penalty at 100% plus a shift penalty % for variation to the span of hours? This impacts the type of hours considered - you want to only count the hours once, not twice, even though they may be paid "twice". MA clauses tend to focus on payment types, not time types.
• Exchanging Attendance for Absence - there are many circumstances where a worker will perform "hours worked" without direct remuneration for those hours worked, as the attendance may be swapped for a later paid absence (RDO, TOIL, addition to annual leave). So, will those "hours worked" be included, or will the later "paid absence" be included?
• Exchanging Absence for Payment - for cash out of leave in service, an employee may forego the absence for the payment in lieu. Those "hours" would have been an absence, but are exchanged for payment. What to do there? Purchased Leave schemes where you sacrifice payment now for absence later? Leave at half pay where you still accrue leave at the full rate, but are paid at half rate for the absence? Tricky things happen when you exchange time and pay, especially when you do it over different periods of time.
• Ordinary Hours or All Paid Hours - it's easy to distinguish the simple case of, say, working 38 contracted ordinary hours and also a paid overtime meal break and 4 hours of overtime (T1.5 for the first 2 hrs and T2.0 thereafter) as, what: just 38 hours and ignore the 45 minute paid meal break and 4 hours of overtime? Especially if you pay up to the ATO reasonable amount, so don't report the paid overtime meal break, but what if you pay more? So it's not really hours worked. What about a shiftworker who worked pre-arranged overtime after their shift and was required by their employer to work their normal shift the next day, even though they haven't had their required 10 hour rest break and must be paid at overtime rates until released from work? How do all the software solutions account for that shift paid at overtime rates: as overtime or ordinary time plus penalty rates? Leave accrues and the SGAA says it's ordinary time and superable, so I hope it's the latter and not the former or "hours worked" won't align. The wording of some MA clauses is quite complex: "absent but paid for ordinary working time occurring during the absence".
• Actual vs Paid - payment made for being on-call or on stand-by, but if it's not within the ordinary span of hours, it's overtime, so are those hours excluded? You may only be called to work 1 hour, but are paid for 4 hours. So, how many "hours worked" is that to avoid either shortfall or double-dipping?
• Travel/Training Time - sometimes, these additional activities are paid as ordinary time: just another activity; others at penalty rates. Sometimes, these activities are paid assuming an expense has been incurred, other times it's just compensation for work effort. It depends on what the industrial instrument says and what it actually is.

This is only the obvious tip of the iceberg: Australia's industrial instruments include extensive and detailed conditions and circumstances for remuneration. Variations are too numerous to mention. Pay and entitlements have to be uniformly classified and examined for the implications with respect to "hours worked" by those with skill, knowledge and ability in the subject matter. Getting it wrong could lead to disastrous outcomes for government use of the data.

STP Phase 2 has highlighted some gaps in government knowledge of Fair Work requirements, so there are still plenty of pitfalls ahead on what is already required of payroll. If advanced signals are changed without careful planning, the train could run right off the rails.

Future-Proofing

It all starts with the Fair Work Commission: they make the rules for what and when to remunerate employees; the ATO make the rules for how to classify those payments for PAYGW, superannuation guarantee and STP purposes. But FWC/ATO use different terminology and generally ignore the complexities set by the other. It's time the regulators for payroll started learning each others business if government is to achieve a successful outcome for future phases of STP. A great opportunity for the Fair Work Ombudsman to step into this space and provide detailed guidance for payroll.

If government doesn't understand the landscape of the labour laws that drive remuneration through payroll, then what are they asking for and what do they think they'll get if they can't explain it with sufficient expertise and detail to payroll professionals and digital service providers? What do they think employers will do in their payrolls? How might government misinterpret the data?

Call to Action

My article is intended to inform and educate, not to criticise those who are not subject matter experts. It's a call to action to become knowledgeable about the subject matter: please!

Government can't assume that all software will be able to deliver or to deliver within the tiny little snippets allotted to government design phases or that they'll understand how to interpret the data if they do receive it. It's time for government to educate and inform itself about the complexity of payroll if there are to be successful future phases of Single Touch Payroll. It'll take much longer than you think it will. Develop an informed, achievable future vision - in consultation with industry.

There's no "one size fits all" for payroll in Australia.

I'd be interested to hear from other payroll professionals and DSPs about additional factors to consider for the inclusion of "hours worked" in future phases of STP. Or maybe you see no issue at all?