Incorrect employee entitlements - how much is it costing your business?

Incorrect employee entitlements - how much is it costing your business?
6Aug2018

When was the last time you reviewed your payroll processes? In this real life example, we explain how one simple error can result in employees incorrectly accruing extra superannuation and personal and sick leave, affecting your business' profits by $1,000s per year. It pays to check!

One of the major focuses for business owners in any industry is bottom line. You’re no doubt making a conscious effort to control your costs, increase your revenue, and have better control over the business’ cash flow. And it’s probably one of your main discussion topics at your weekly or fortnightly meetings with other people in the business.
 
An area that you might not have given much thought to when it comes to maximising profit is payroll; specifically, employee entitlements. Many business owners or internal payroll processers are unaware that making a small error when setting up employee payroll files can result in costing the business $1,000s per year. If you pay your staff by the hour, it’s time to review your payroll processes to ensure you’re not sacrificing profit margins.
 
If you have staff who are paid by the hour rather than a set annual salary, there may be times when they work over the standard 40-hour week, and as a result, you pay them overtime.
 

Did you know that you are not obliged to pay superannuation or accrue personal and annual leave on this overtime?

 
In our experience, you probably don’t know this! Whilst reviewing some of our clients’ payroll processes, we identified a common trend that employee entitlements are often set up incorrectly and have been for some time. Employees working overtime were being paid superannuation on the extra hours worked and accruing extra leave hours – costing their employer $1,000s per year in additional costs.
 
We’ll work through a real-life example to show how you how quickly these costs can add up.
 
  • Joe White is an electrician who is paid $30p/h
  • He usually works a 40-hour week
  • His weekly wage is $1,200 ($30 x 40 hours)
  • On this wage, Joe should be accruing $114 per week in superannuation ($1,200 x 9.5% super)
  • Joe should be accruing 3.077 hours of annual leave per week
  • Joe should be accruing 1.5385 hours of personal leave per week
 
The company that Joe works for has plenty of jobs to attend and so Joe does five hours of overtime per week, resulting in a 45-hour working week.
 
  • 5 hours of overtime per week = 240 extra hours over a year (5 hours x 48 weeks)
  • With this overtime, Joe earns an additional $7,200 per year (240 hours x $30p/h)
  • Joe’s employer is unaware that he doesn’t need to pay super or accrue additional leave on overtime
  • Joe is accruing an extra $684 per year in superannuation ($7,200 x 9.5% super)
  • Joe is accruing an extra 18.462 hours in annual leave per year = $553.86
  • Joe is accruing an extra 9.231 hours in personal leave per year = $276.93
In total, this is an extra $1,514.79 per year that Joe’s employer is paying, unnecessarily, for just five hours of overtime per week. How many other employees are set up incorrectly this way?
 
Although employers are entitled to make an adjustment of leave balances if the employee is still in the business, businesses often wear the cost so as not to disgruntle valuable staff but putting them in minus leave.
 
It pays to check. Take the time to review your processes to ensure you’re not making the same mistake and increasing your costs unnecessarily through payroll. Carbon Payroll are just a phone call away if you need a payroll health check.
 
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