Written by Ruth Rosedale, Daniel Delimihalis, Holly Gretton & Claudia Taranto
What you need to know
Insurers are reporting to us that employment-related claims are now a very significant proportion of all claims against warranty & indemnity insurance (W&I) policies and that of those claims, more than 75% arise from a failure to comply with industry awards and enterprise agreements.
These statistics are indicative of a significant problem for financial sponsors, as they are the direct result of buyers (including many financial sponsors) purchasing companies with undetected systemic employee underpayment and other industrial instrument compliance issues. Issues of this nature can require back-payments and other costly remediation measures, as well as ongoing changes to employment practices and higher tax bills which can materially erode earnings and result in the buyer having overpaid for the target group. The Fair Work Ombudsman (FWO) has also continued to focus on wage underpayments by employers, using its enforcement tools in FY19-20 to issue 952 compliance notice and recovering approximately $7.8 million in unpaid wages - more than triple the number of compliance notices and seven times the amount recovered in the previous financial year.
There are also very real reputational risks for financial sponsors and other business owners associated with wage underpayments. We are all familiar with the headlines that have named and shamed many companies.
In response to the disproportionate number of claims arising from industrial instrument compliance issues, we are now seeing a trend of hypervigilance in this area. Although the discourse around wage underpayment, particularly in the media, often seems to be premised on the assumption that underpayments result from a deliberate decision not to pay staff what they are entitled to receive, in reality, correctly determining award coverage, classifying employees and complying with award requirements requires significant analysis by sophisticated HR and business leads and legal advisors. The award and industrial instrument system is very complex, in particular, correctly determining coverage and classifying employees under awards and other industrial instruments. Importantly, none of these tasks are a ‘set and forget’ exercise, rather they need to be regularly revisited as part of an employer’s compliance framework.
Although the discourse around wage underpayment, particularly in the media, often seems to be premised on the assumption that underpayments result from a deliberate decision not to pay staff what they are entitled to receive, in reality, correctly determining award coverage, classifying employees and complying with award requirements requires significant analysis by sophisticated HR and business leads and legal advisors. The award and industrial instrument system is very complex, in particular, correctly determining coverage and classifying employees under awards and other industrial instruments. Importantly, none of these tasks are a ‘set and forget’ exercise, rather they need to be regularly revisited as part of an employer’s compliance framework.
What are classifications?
If an employee’s employment is award or enterprise agreement covered, their rate of pay is determined by the ‘classification’ that they fall within under the instrument. Classifications – typically expressed as ‘Levels’ – are descriptions of roles and work types, usually with reference to duties performed, number of direct reports, experience, and qualifications.
Classifications are notoriously challenging to properly assess – particularly in the context of an award - and the challenges are manifold.
On the one hand, most awards use very general language, including in describing the criteria for different classifications, making it objectively difficult to know which level a person falls within. This also means that assessing classifications will almost always involve judgement calls due to a lack of bright line distinctions between classification levels.
Classifications as described in awards are also inherently generic and not tailored to a particular business and the duties of its specific employees within its business – particularly as new and emerging work types continue to develop. At a practical level, assessing classifications also requires a clear understanding of the target’s business and each individual relevant employee’s role, duties, qualifications, training and length of service.
There can be significant consequences for getting classifications wrong. Employees can claim unpaid entitlements for at least the last 6 years – if payment is awarded there is also typically other follow on remediation required including the payment of interest and in some circumstances, superannuation contributions. Penalties can also be sought of up to $66,600 for each contravention of the relevant industrial instrument or up to $666,000 for serious contraventions (involving a systematic pattern of conduct knowingly designed to contravene the Fair Work Act 2009 (Cth)).
What you need to do next
Financial sponsors undertaking any diligence or post-acquisition workplace compliance review will not be able to properly assess any employee wage compliance issues if they have not critically assessed whether there is robust workplace compliance framework and governance processes to ensure that employees have been determined to be correctly covered by an industrial instrument and also correctly classified under that instrument.
By way of example, red flags should be raised where:
- employees with the same role title are designated coverage under two different awards;
- employees appear to all be classified in ‘Level 1’ (the lowest level in most awards); and
- the relevant business does not have a sophisticated, structured and documented framework for assessing classification levels and reassessing them as an employee increases their tenure, skill and job capacity or where automatic progression within a classification occurs at certain points in time.
Award covered (or not)?
The complexity of award coverage came up recently in the Federal Court decision of King v Melbourne Vicentre Swimming Club Inc (King) which required the Full Court to determine whether a former Australian youth squad coach was award covered.
The fact that this question required the attention and consideration of a Full Court is demonstrative of the opacity and difficulty employers face daily in attempting to correctly assess award coverage and classifications for their workforce.
The key question for the Court was whether the coach, who worked at a Melbourne swimming club, was covered by the Fitness Industry Award 2020 (Award). Ultimately, the swimming coach was successful in proving that he was award-covered and was able to recover 6 years of underpayment claims for entitlements under the Award.
At first instance, the Federal Court found Mr King was not award-covered, because, amongst other things, he had a silver licence instead of the bronze licence referred to under the award’s classification level 4. However, on appeal, Justices Collier, Katzmann and Jackson found Mr King did fit within a level 4 classification on the basis that although Mr King ”did not meet the specific wording of the Award, on its proper construction that wording did not exclude employees with higher levels of work, qualifications and experience”.
The Full Court relied on settled principles regarding the construction of awards – the most important of which is that awards should be interpreted in light of their industrial context and purpose, and that a ‘narrow or pedantic approach’ to interpretation is to be avoided. In other words, industry awards are practical documents that are designed to apply to a wide variety of businesses, and so should be interpretated purposively and practically.
  FCAFC 123.
 Amcor Ltd v Construction, Forestry, Mining and Energy Union  HCA 10; (2005) 222 CLR 241 at .
  FCAFC 123 at .