[Australia] Payroll integrity considered in corporate takeovers

After a succession of underpayment scandals involving Australian companies, key mergers and acquisitions players say payroll integrity has become a factor in corporate takeover deals, The Sydney Morning Herald reports.

The underpayment scandals have reportedly forced mergers and acquisitions (M&A) advisers to factor payroll into the due diligence process of corporate deals. The uncovering of entrenched underpayment in sections of corporate Australia has also placed company payroll systems under increased scrutiny.

Andrew Gray - partner at King & Wood Mallesons - says he has seen this focus on payroll compliance by companies involved in M&A deals, "When buyers are looking to acquire businesses now there is a much greater focus on payroll/award compliance which is getting a lot more attention - including through audits as part of the due diligence process - particularly in certain sectors.”

Tracy Angwin - the chief executive officer of the Australian Payroll Association - believes thorough payroll audits should be part of any M&A process, "If there are underpayments you may have a historical liability and the company that you buy might be less valuable," she said. Continuing, "I think large organisations need to be doing compliance audits (as opposed to tax audits) every one or two years."

There have been a series of underpayment scandals in recent memory - with a concentration in the $170 billion franchising industry - as The Sydney Morning Herald previously reported. Convenience store super chain 7-Eleven, Domino’s Pizza, Pizza Hut, Caltex, Retail Food Group (which operates Brumby’s, Michel’s Patisserie and Donut King) and bubble tea operator Chatime have all been found underpaying workers.

SMH reported on Beaurepaires Australia’s recent discovery that it had incorrectly paid workers since 2010. The oversight a result of payroll system errors which resulted in nearly $2 million in underpayments. Lockheed Martin, Australia, was accused of underpaying dozens of past employees for more than a decade. The wages bill for that error is expected to come to more than $1million. Qantas, Super Retail Group and public broadcaster ABC have also been discovered underpaying their staff.

Natalie James - Deloitte partner and former Fair Work Ombudsman - said she is aware of companies that have had to fix long-standing underpayments shortly after making acquisitions, "My advice is that businesses should be looking for this or they might inherit some very smelly baggage." She went on, "The degree of inquiry has to be quite robust to identify some of these long-standing embedded issues. Standard payroll audits may not find these issues because they are sometimes off the books."

Tracy Angwin revealed that a payroll benchmarking report this year found 90 per cent of payroll staff were not properly qualified for the job, leading to industry awards being incorrectly interpreted and incorrect superannuation calculations. Mistakes in superannuation calculations earn heavy fines from the tax office and bad publicity.

She said there was often a "set and forget mentality in payroll": "People who are not necessarily qualified set up these payroll systems to manage an employer's largest expense and if it is not right you can get these underpayment and overpayment issues happen."

"If I was doing a payroll compliance audit, I'd want to know if I had qualified staff on my payroll team. I'd want to test their knowledge and identify the knowledge gaps around things like superannuation. If you haven't done a payroll compliance audit to make sure awards and liability are being calculated correctly, that may have a material impact on the profitability of the company you just bought. If you don't really know that your labour cost is correct, then you have a problem," Ms Angwin said.