Most of us have now heard that another company — Woolworths this time — has underpaid workers and are going to have to pay the workers back a large amount of money, and are likely to face large fines. This has prompted the usual suspects to renew their calls for criminal penalties to apply in cases like these and for board members, directors, CEOs and the like to do time.

This is why they are (mostly) wrong.

I say mostly, because under one circumstance they would be right. This is where a business has deliberately opted to break the law on paying workers – the 7-Eleven franchisees that deliberately faked timesheets and used other such methods to underpay workers spring to mind. Where there has been deliberate fraud then, and only then, should criminal sanctions be used – and they should be used to the full extent of the law.

The usual next step in the argument is the one about “You only hear about businesses underpaying workers, never overpaying, so it must be happening deliberately”. This is an understandable, and attractive, argument. If the underpayment of workers was due to random mistakes, then logically there should be as many overpayments as there are underpayments – right?

Wrong.

Let’s start with a basic fact. In an economy with inflation, wages normally go up on a regular basis. As people progress in their careers, their wages normally go up. Terms and conditions imposed by legislation, regulation, industry agreements, Enterprise Bargaining Agreements and so many other things go up.

As a result, any mistakes made innocently by some HR minion, wages clerk or accountant will normally result in an underpayment, as they miss one or another source of wages or terms and conditions improvement.

As an example from my own experience working with charities – which I won’t name – there was an EBA they had negotiated with their workers. It had a long duration, and was agreed and passed by the workers concerned, their union and the relevant regulatory bodies. During the life of the EBA the charity made all the relevant payments under the EBA and there were no issues. The negotiations for the next EBA came along; protracted discussions lasting over a year.

During those discussions, it was noted that a new award for some of the workers covered by the EBA had come into effect and that those workers were being paid less under the EBA than they would have been under the award. You can see where this is going.

The result was a large payout, one that hit the charity’s bottom line deeply. They had no malicious intent, but were caught simply because their payroll person had no knowledge that the award had changed and now offered benefits over and above the provisions of the EBA. The managers were also unaware and the board simply did not even have the issue on their radar.

Should anyone there go to jail here? I can’t see why.

The other side of this is that overpayments to employees are also treated very differently to underpayments. Where they occur in many cases it’s embarrassing – so like underpayments you want to keep it secret.

Unlike underpayments, though, there’s no need to disclose these. They are not going to threaten the profitability of the company, and so who do you report them to? Very rarely will a company try to recover large overpayments from their employees all at once (can you imagine a company insisting their employees pay back many thousands of dollars) so they normally recover a little bit over time or even forgive the debt to save the embarrassment and hassle.

Next time you hear one of these stories – and there will be more – please think a little of the poor HR managers who is now possibly facing the end of their careers as the result of an unfortunate misunderstanding of a very complex area of law and a little less about how the obviously evil board and CEO should be locked up.

The workers almost certainly were paid what they thought their entitlements were, and will now also be getting a nice — possibly a very nice — bonus.

The company will now be paying more for HR consultants to go through every other pay rate in their payroll systems to check for any further flaws (as Woolworths no doubt now is) and the Tax Office will also be getting a little windfall as they take their cut from the worker’s elevated pay.

The only people really hurt here will be whoever will be demoted or fired for getting it wrong and the shareholders who (yet again) will pay for all this.

And those shareholders are you – if your super fund holds Woolworths shares. Most do.

Andrew Reynolds is a CPA, NFP and Company Director in Australia and the UK.

Illustration: Gracie Films/20th Century Fox.

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