Australia: A change of federal government may lead to a tougher stance on employers and their directors who underpay their workers

Last Updated: 15 February 2016
Article by Jennifer Teh
Most Read Contributor in Australia, September 2017

With an election due later this year, employers should be aware of the federal ALP's policy to crack down on employers who exploit their workers. The Opposition has stated that it plans significant changes to increase the penalties imposed on employers for underpaying their employees.

The Opposition's position is in response to the high number of underpayment and sham contracting cases last year, involving Myer, 7-Eleven and Pizza Hut. According to the ALP's information sheet about the proposed reforms, the Fair Work Ombudsman recovered $22 million in backpay for more than 11,000 workers in 2014-15.

The planned reforms are set out below.

Tougher penalties for underpaying workers

The ALP proposes to increase the maximum civil penalties for underpaying workers in breach of the Fair Work Act 2009 (Cth) (FW Act) in order to act as a greater deterrent, which could be the higher of:

  • three times the amount of the underpayment; or
  • $216,000 (1,200 penalty units) for an individual and $1,080,000 (6000 penalty units) for a body corporate.

This exceeds the current maximum civil penalties of $10,800 per breach for individuals and $54,000 per breach for corporations.

Importantly, for intentional or reckless underpayment the ALP proposes it become a criminal offence involving up to two years imprisonment for an individual. The Courts may also have power to disqualify directors.

Sham contracting

Under the FW Act, it is unlawful for an employer to engage a worker as an independent contractor under a contract for services if they are really an employee. However, it is a defence if the employer can prove that they did not know and were not reckless as to whether the contract was a contract of employment.

In a significant departure, the ALP plans to change the test so that if a reasonable person would think someone is an employee, then the person must treat the person as an employee with access to entitlements such as annual leave and personal/carer's leave. The ALP also plans to develop a definition of independent contracting that will provide certainty to workers and employers, instead of having to rely on the current test under the common law.

There are also plans to increase the current penalties for sham contracting. The ALP may also introduce a new criminal offence and the Courts may be given power to disqualify directors.

Phoenix employers

Under the proposed changes, directors will be personally liable for debts in relation to outstanding compensation owing to workers or civil penalties owing as a result of breaches of the FW Act. The term "phoenixing" refers to the arrangement where assets are intentionally transferred from an indebted company to a new company, whereby the existing debts are left with the old company. The old company is then generally placed into administration or liquidation, thereby leaving nothing for its creditors. It is proposed that directors will be personally liable for unpaid employee entitlements in order to overcome "phoenixing".

Foreign workers

The ALP will also crack down on exploitation of temporary overseas workers who work in Australia pursuant to temporary visas with work rights, including 457 visas. The ALP wants to introduce a new criminal offence for those who deliberately exploit such workers and breach the FW Act, even if they are employing the worker in accordance with the terms of a visa. However, inadvertence or negligence would not constitute an offence.

This offence will be punishable by up to two years imprisonment or a fine of up to $43,200 for an individual or a fine of up to $216,000 for a corporation. This offence will supplement the current criminal offence which makes it illegal to employ someone or to refer someone to work if they are not legally entitled to work.

Further, any person who is underpaid will be able to seek recourse for unpaid entitlements, and not just those who are employed pursuant to a visa. That is, illegal workers will now have recourse.

Employers will also be required to provide all temporary overseas workers a new Temporary Overseas Worker Support Pack, upon the commencement of their employment in Australia, which sets out their rights and entitlements. Failure to do so will expose employers to a civil penalty of up to $10,800 for an individual and up to $54,000 for a corporation.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Jennifer Teh
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