19 December 2019

Underpayment and the Fair Work Ombudsman – what does this mean for Boards?

This article was written by Ruth Rosedale and Andrew Gray.

2019 has been a year rocked by wage ‘scandals’ and workplace non-compliance issues for Australian businesses both big and small.

There is an ever growing list of publicly listed and private companies that have dominated the headlines this year because they have self-reported, or are being investigated by the Fair Work Ombudsman (FWO), for employment underpayments and non-compliance.

Why is this happening?

The common theme arising in many of these cases appears to be a failure of employers to understand the industrial instruments applying to their workforce (even where they have been negotiated by them at an enterprise level) and how entitlements are required to be calculated and paid.

In some situations, the errors have resulted from complex interpretational issues and are potentially explained by the complexity and rigidity of the relevant instruments and broader industrial relations system. However, there are a variety of wider ‘causes’, including:

  • misclassification of workers (usually as casual employees or independent contractors);
  • use of annualised salaries and a failure to meet at least the minimum pay obligations in the underlying industrial instrument when actual hours worked (including overtime) are factored in;
  • inadequate payroll processes;
  • poor time keeping practices;
  • underinvestment in governance and compliance protocols and resources;
  • lack of verification and auditing processes;
  • general complacency and carelessness toward calculating employee entitlements. 

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.  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.

How is the FWO addressing the situation?

The FWO has now publicly made its frustration clear about the number of businesses increasingly coming forward to admit they have failed to correctly pay their workforce and have unambiguously sent the message that employers will no longer be given leniency for failing to have their house in order.

Specifically, the FWO has said that employers should expect to be held accountable for breaching workplace laws. Self-reporting will no longer mean an amnesty from FWO enforcement action. Indeed, a default position has been adopted by the FWO that, as a minimum, non-compliant employers will be required to enter into an enforceable undertaking with the FWO. What other action may be taken by the FWO, will depend on the severity non-compliance.

For employers, we expect this to translate into an up-tick in the FWO’s focus on auditing, an increase in the quantum of contrition payments being imposed, the public naming and shaming of non-compliant employers including by requiring the making of public apologies and a greater likelihood of prosecution. All of which have significant financial and reputational consequences for employers who are found to be non-compliant as well as lowering employee morale and trust in the employment relationship.

What does this mean for Boards?

It is clear the FWO expects Boards to be taking a leadership role on the issue of workplace compliance. Pertinently, Boards are on notice from the FWO that workplace compliance must be prioritised from the Board level down and has foreshadowed that it intends to speak to Boards across the country on this very issue.

But what does this actually mean in practice?

On our reading of the FWO’s position, the bar has been set that Boards need to be active in taking responsibility for their organisation’s workplace compliance culture and considering whether appropriate governance systems are in place to ensure their workforces’ pay and wage arrangements do not fall below minimum entitlements under applicable industrial instruments.

At practical level, we see this as an extension of Boards’ already existing compliance framework and focus in other workforce related-areas such as health and safety and can be achieved by:

  • making workplace compliance a priority of the organisation;
  • taking stock of the compliance culture of the organisation to assess if its non-compliance risk profile is high;
  • monitoring workplace compliance proactively on an ongoing basis by requiring and approving the undertaking of regular audits to assess whether the organisation is complying with applicable industrial instruments and laws;
  • establishing adequate governance systems to confirm that measures taken over time to meet compliance targets and rectification of any identified issues in audits are met;
  • considering developing workplace compliance key performance indicators to be attached to senior management bonus arrangements to incentivise a focus on and achievement of a compliance culture.

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. 

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