Tougher stance on underpayment contraventions

Posted by on May 16, 2017

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This year we have observed that the Fair Work Ombudsman (FWO) and the courts appear to be adopting a tougher stance on underpayments and similar contraventions, especially in relation to ‘vulnerable’ workers. A significant case (handed down late April and outlined below) indicates that the Courts are willing to extend their reach when attributing liability for such contraventions.

We note that there have recently been a number of high-profile underpayment stories in the media. For example: The Press Club, Gazi and Hellenic Republic (restaurants owned by Made Establishment and with George Calombaris as one director), have been reported to have underpaid 162 employees a total of $2.6 million; 7-Eleven franchises have reportedly back-paid $55 million to underpaid employees; ‘widespread non-compliance’ has been reported at Pizza Hut; and Domino’s pizza chain has similarly been in the papers for all the wrong reasons.

We have watched these developments and read the reports with keen interest. From our point of view, these are the key things to note:

• ‘Accessorial liability’ provisions are being extended (where a person who is involved in a contravention can be held personally liable).

The Federal Circuit Court last week found an accounting firm to be accessorily liable for the contraventions of its client, a business operating a Japanese fast food chain. Ezy Accounting provided payroll services to its client, Blue Impression, which included entering hours of work and rates of pay into MYOB. Blue Impression was audited by the FWO in 2014, and Ezy Accounting assisted them in the process. Through the audit, Ezy Accounting became aware of the various contraventions and also the correct rates of pay under the Modern Award. The Director of Ezy Accounting advised Blue Impression to comply with the FWO letters but did not take any further steps. His evidence was that he did not want to know anything further about the ‘distasteful’ conduct as it was outside of his expertise. Later in 2014, another employee contacted the FWO about underpayments and the FWO commenced proceedings against Ezy Accounting, claiming that it was involved in those underpayments. Ezy Accounting argued that it was not aware that this employee worked for Blue Impression, and therefore did not have knowledge of the contraventions. The Court found that Ezy Accounting, and its Director, had all the necessary information to confirm that its client was not meeting Modern Award obligations, but had nonetheless persisted with maintenance of the payroll system. The Director was wilfully blind to the contraventions, and therefore Ezy Accounting was found to be accessorily liable.

In other cases, the Courts have found Company directors, human resource managers and even payroll staff to be accessorily liable.

• The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 also seeks to strengthen accessorial liability provisions, by holding franchisors/holding companies responsible for certain contraventions by their franchisees/subsidiaries.

If it is passed, the legislation will result in higher civil penalties for serious contraventions (10 times higher than the current penalties) and increased penalties for record-keeping failures.

At a recent Australian Industry Group conference, the Fair Work Ombudsman, Natalie James, noted that the proposed amendments to the Fair Work Act would have a significant impact on her capacity to address the exploitation of vulnerable workers, especially in relation to record-keeping. Ms James explained that poor record keeping is often a feature of businesses that underpay staff and that this can hamper the FWO’s ability to gather evidence to prove underpayments. In some cases, the FWO has had to take ‘labour intensive steps’ to gather evidence, including translating an employee’s personal diaries into English and camping outside retail stores to witness when employees are entering and leaving work. The courts can penalise an employer for record-keeping contraventions, but these penalties are comparatively low. Ms James surmised that the low penalties for poor record-keeping may be creating an incentive for employers not to keep accurate records in order to conceal underpayments.

The Senate Education and Employment Legislation Committee is currently reviewing the draft legislation and will be releasing its report to the Senate in May.

• There are indications that investors are beginning to take note of the risk that appertains to businesses that underpay staff. First Super, an industry super fund, has recently announced that it will be conducting a review of its private equity portfolio, following concerns about the investment risks associated with companies that have poor labour practices (such as underpaying wages). First Super has stated that it wants to make sure that any company it is investing in is doing the right thing.

These developments suggest that the FWO’s appetite for enforcement is growing, that penalties for non-compliance are likely to grow and reflect community and social expectations in relation to compliance. Employers and advisors alike should be on notice and ensure that they are aware of (and complying with) minimum entitlements for employees. If you need assistance with these matters, please do not hesitate to contact us.

Allie Terrill is an Associate at Justitia. To view her profile, click here.