15 November 2019

No leniency from the Fair Work Ombudsman on employment underpayments

This article was written by Philip Willox and Ruth Rosedale.

Employment underpayments and compliance ‘scandals’ are emerging on a regular basis.  Businesses across Australia, both big and small, are self-reporting or being called out for failing to make the correct payments to their workforces, often for years without detection.

The Fair Work Ombudsman has made it clear that businesses will no longer be given leniency for failing to have their house in order, even where they self-report underpayments.  Identification of underpayments and associated record keeping obligations is now a key focus.  Politically, momentum is building for the Federal Government to strengthen penalties to tackle this issue, including the possible introduction of criminal sanctions for deliberate and systematic “wage theft” and the exploitation of vulnerable workers.

As recently as this week, the Senate has approved an inquiry into wage and superannuation “theft” which will cover a wide range of issues including the extent and impact of underpayment of workers and protecting those who expose and are the victims of “wage theft”. The scope of the inquiry moves away from the previous focus of taskforces and inquiries on vulnerable workers and general “corporate avoidance” to tackle mainstream employment practices of Australian businesses . The outcome of the inquiry is expected to be tabled in June 2020. The intense media reporting on this issue also highlights this as a matter of significant public interest, also going to corporate reputational image and brand and employee morale.

While this might previously have been considered an issue predominantly for the retail and franchise sectors, it is clear non-compliance is not limited to conventionally understood high risk industries.  This year has seen an surge in large listed organisations as well as government agencies self-reporting (or being investigated for) substantial breaches of workplace laws and underpayment of minimum entitlements to staff running into the hundreds of millions of dollars.  

The types of issues that are commonly found at the root of these compliance “scandals” include the misclassification of workers (including as casuals or contractors), annualised salaries that don’t keep up with the way workers are actually working, ordinary hours versus overtime and payments required, not applying penalty rates and loadings correctly, and not paying superannuation on correct ordinary time earnings.  These issues are compounded by the fact that what can be a relatively small non-compliance on a per person basis can, when aggregated over an entire workforce over a number of years, result in a very significant liability.

It would be fair to say, in some cases, that the errors have resulted from complex interpretational issues.  It would also be fair to say that when sophisticated employers with dedicated expert resources trying to get it right are making mistakes, this points to complexity of and uncertainty in the system.  However, it is also clear that there are a variety of ‘causes’, including:

  • inadequate understanding of what industrial instruments apply;
  • inadequate understanding of the way entitlements are to be applied;
  • inadequate payroll processes;
  • poor time and record keeping practices;
  • underinvestment in governance and compliance protocols and resources;
  • lack of verification and audit processes; and
  • general complacency and carelessness.

Further uncertainty and complexity will be introduced in this area through the changes proposed to annualised salary provisions in many awards by the Fair Work Commission which will impose additional and onerous requirements on employers who rely on these award provisions as a means of compliance.

Both employers and officers have been put on notice that workplace compliance needs to be prioritised from the board level down and that organisations will be held accountable for breaches of workplace laws. The potential for significant financial exposure and reputational damage arising from non-compliance in this area is a risk that should be considered by directors as part of their due diligence obligations.  The potential for individual liability under the accessorial liability provisions in section 550 of the Fair Work Act 2009 (Cth) further reinforces the need for individual managers and directors to take reasonable steps to ensure compliance in this area.  Without doubt, now is the critical time for employers to revisit this issue to ensure workplace entitlements are understood and being correctly applied.  This requires a regular review of workplace instruments, contracts and policies as well as verification of how they are being applied to ensure correct outcomes.

Our team regularly assists employers to conduct due diligence and manage labour compliance risks and would be pleased to discuss our approach in this area with you further.

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