Audit Firm Liable for Damages Caused by an Error in the Payroll Administration

An audit firm that carried out a client’s payroll administration had failed to inform the employer that the employer’s obligation to pay a certain allowance under the CLA had expired. When the employer, who had just continued the allowance payment, found out, it claimed compensation for the overpaid wages. The Court ordered the audit firm to pay compensation since informing the employer of the change in the CLA was part of the audit firm's duty of care.

A start-up security company had commissioned an administration firm to carry-out the company's financial administration per 1 January 2014. This administration firm had made an agreement with an audit firm that, because of its special expertise in the area, would carry-out the payroll administration for the administration firm's clients.
In 2019, when the security company switched to another administration firm, the employer found-out that, as of October 2013, the CLA no longer contained the working-time reduction (adv-reduction) allowance for on-call workers (5%). Yet, the employer had continued paying-out this allowance and now it held the administration firm liable for the damage arising from the overpaid salary: an amount of just over €67,000. The administration firm in turn held the accountancy firm liable.
After some initial procedural “wanderings”, these two liability claims meant that it was for the District Court of Zeeland-West-Brabant to rule on the liability of the accountancy firm.

The Court assessed the liability of the accountancy firm on the basis of the criterion that the accountancy firm, being a contractor, is obliged to act as a reasonably competent and reasonably acting professional colleague would have done. According to the Court, this implies that the accountancy firm had a duty of care.
According to the Court, part of a payroll administrator’s job is to investigate whether any changes in legislation and regulations have occurred that require a salary adjustment. Checking whether the remuneration is in accordance with the CLA is part of it.
The audit firm had pointed out that it concerned a minimum CLA and that remuneration above the CLA was permitted, but the Court ruled that the employer's interest entails that also remunerations above CLA shall not be excluded from the check. The fact that the audit firm's computer program only drew attention to payment under the CLA does not preclude this.
The accountancy firm had argued that the payment above the CLA already took place when the firm started to carry-out the payroll administration, but according to the Court, being an expert in the field of payroll administration implies that discovering errors is part of the firm's task. This is all the more applicable, according to the Court, because at the time it concerned a new assignment and a recent change in the CLA. Furthermore, a note on a pay slip showed that an employee of the firm had already discovered the error in February 2014, but that the error had not been communicated at the time either.
According to the Court, the accountancy firm had thus breached its duty of care.
The accountancy firm’s defence that the administration firm partly also had the blame because it had failed to discover the errors was unsuccessful. The Court held the opinion that there was no need for the administration firm to check whether the salary amounts corresponded to the terms of the CLA, because it had no expertise in that area. Therefore, the accountancy firm was ordered to pay damages, the amount of which had by then amounted to over €89,000.

Of course, the liability of a company that provides payroll administration for employers depends on the scope of the assignment and the applicable conditions. The scope of the assignment can be limited by explicitly specifying how far it extends, and the scope of the liability can be limited, e.g. in general terms and conditions.
Without explicit restriction the assignment of a company that provides payroll administration services will usually include more than just providing correct payslips and correct wage tax declarations. Employers usually also expect advice on it, for example when it concerns employment law, employment conditions, employee insurance and pensions. Companies that specialise in providing payroll administration often also pride themselves on their expertise in these areas and therefore obtain assignments from employers.
Anyone who takes on the task of advising employers on relevant topics around payroll administration should, of course, do so properly and should keep up with the many developments in the relevant areas in order to timely take appropriate action in the employer's interest. This requires an ongoing investigation into the applicability of CLAs and into the mandatory affiliation with a company pension fund. Relevant changes in the law, in CLAs and in pension schemes should be pointed out. Anyone who does not properly do so risks liability for damages suffered.
True, errors in this area do not always directly lead to damage. E.g.: underpaid wages are not really damage, because the employer only has to pay what should actually have been paid earlier. Even the statutory interest due is not really a damage, because the employer itself also enjoyed an interest advantage by paying later. In such a case, however, the employers’ most common experience is, that they have to pay something they had not taken into account. The fact that they cannot recover it from the party that made the error, will not improve the relationship with the client.
Under-deductions from wages may constitute damages if the requirements of good employment don’t allow the employer to recover the overpaid wages from the employee.
The above Court's ruling shows that overpaid wages can also constitute damages for the employer.

All this combined: limiting liability in the general terms and conditions as a solution to the problem of liability for errors in payroll administration is not a good choice.
Taking out a professional liability insurance, however, is.
It ensures that the client will be compensated for his damage, so that the relationship with the client does not necessarily have to suffer as a result of the error made. Where a professional liability insurance has been taken out, limitations of liability in general terms and conditions will only result in the professional liability insurer not paying out or paying out less, which, in the end, will leave the client out.