Australia: Employee underpayment: 10 ways in which employers put their businesses at risk

Employers who underpay their workers risk a number of adverse repercussions, including facing enforcement litigation, usually brought by the Fair Work Ombudsman (FWO). This can result in orders for back pay and monetary penalties.

Penalties can be ordered against company directors and senior management personnel, as well as companies. The monetary penalties which can apply in relation to underpayment breaches are presently up to $54,000 for a corporation and $10,800 for an individual. To illustrate the severity of underpayment breaches, it's worth knowing that in 2014/15, the FWO recovered $22.3 million in back pay for over 11,000 workers.

With this in mind, here are 10 of the most common ways in which underpayment contraventions occur, and the relevant repercussions.

  1. The payment of hourly rates which are less than the prescribed minimum rates of pay

Probably the most common of ways in which underpayment occurs is through the payment of hourly rates which are less than the prescribed minimum rates of pay. Often this occurs by accident – perhaps due to a misclassification under an Award or its terms. In those cases, employers should rectify the relevant errors without delay. Sometimes though, it occurs in ways which cannot be passed off as "accidental".

Take the case of Fair Work Ombudsman v Ohmedia Melbourne Pty Ltd [2015] FCCA 50. In this case, the employer (Ohmedia) had an arrangement with a third party, Lycamobile, to recruit and provide staff to promote Lycamobile's products. Ohmedia and one of its directors, Mr Zhou, employed 45 casual employees to perform work for Lycamobile across a 3.5 week period. 37 of the 45 workers were not paid for the work that they performed in that time. The remaining eight workers were paid less than the prescribed minimum rate of pay.

The total amount underpaid to the 45 employees for the 3.5 week period was $59,145.43.

The Court ordered Ohmedia to rectify the underpayments to each of the employees (which, remarkably, it hadn't yet done, despite the matter having taken some three years to proceed to judgment) and ordered a total aggregate penalty against Ohmedia of $85,000 and against Mr Zhou personally in the amount of $15,000 – sizeable penalties for a string of offences spanning only 3.5 weeks (the fact that Ohmedia hadn't rectified the issue as at the date of the judgment didn't help with the size of the penalties).

  1. The failure to pay penalty rates, overtime, allowances and/or loadings

Another common way in which underpayment occurs includes through the failure to pay penalty rates, overtime, allowances and/or loadings. This is also something which can happen accidentally. Whether due to a misunderstanding of a provision of an Award or Enterprise Agreement or its terms, or perhaps a misinterpretation as to the applicability to a particular worker of an allowance or loading, this type of error is something which employers should also rectify without delay. Failure to do so puts an employer at risk of, like Ohmedia, facing prosecution by the Fair Work Ombudsman.

  1. The deprivation of the relevant and various types of statutory leave

Some employers are unscrupulous and simply seek to deprive their employees of the right to either accrue or take leave. Hopefully where this happens though, it is more often accidental. Employers who are complying with their employee record-keeping obligations should not have an issue with keeping track of employee leave accruals and entitlements. It is not unheard of, though, for payroll software to malfunction and for consequential mistakes to occur. Again, errors such as these should be rectified by employers as soon as they come to light.

  1. Inappropriate deductions from wages

Another offender in the underpayment space was, in 2013/14, Baiada, a significant Australian poultry meat supplier. Baiada made headlines and incurred the wrath of the FWO in 2013/14 when, following the broadcast of an exposé by the ABC's Lateline, an inquiry was commenced into its labour hire processes.

A report produced by the FWO following its inquiry demonstrated that workers at Baiada production sites in NSW had not only been underpaid in more traditional ways (underpayment of the relevant hourly rates applicable, denied penalty rates, overtime, allowances, loadings, statutory leave entitlements etc), but also that they:

  • were living in overcrowded residential houses which were owned by labour contractors to Baiada;
  • alleged that they had been informed by their recruiters (labour contractors to Baiada) that they would not get work unless they rented accommodation from the recruiter; and
  • had exorbitant rent compulsorily deducted from their pay.

To provide greater context, the FWO's report produced following its inquiry, indicated that workers (who were already being severely underpaid in most cases) were paying $100 per week rent. One property was found to have sleeping accommodation for 21 people, all of whom were identified as being migrant workers at the Baiada plant in Beresfield (near Newcastle, NSW). In relation to that property, it was ascertained by the FWO that it had been purchased for use as a tenanted property in March 2012 for $370,000. Based on 20 people paying $100 per week, the potential rental income for the property was over $100,000 per year.

  1. Work performed "off the books"

This is another common one. It was something which Baiada was also said by the FWO to have been tied up in. Employers who engage in this type of underpayment of workers not only risk the full wrath of the FWO, but also of the Australian Taxation Office (ATO) or the State Revenue Office (SRO), etc.

  1. Sham contracting

Sham contracting is wrongly claiming that a worker is a contractor when they are in fact an employee (often done for the purpose of avoiding employee entitlements). Sham contracting is, where done deliberately or recklessly, an offence under the Fair Work Act 2009 (Cth) (Act) and the same penalties as referred to above can apply. This was something else which the FWO inquiry implicated Baiada in respect of. Don't be like Baiada.

  1. Unpaid "work experience"/ "internships" and the use of "volunteers"

Employees are required to be paid unless they are "on a vocational placement" as defined by the Act. Generally speaking, if the work is not undertaken as a requirement of an authorised education or training course, it will not be work undertaken "on a vocational placement" (see further in this regard below). That hasn't stopped some employers from giving it a go.

Take the case of FWO v Crocmedia Pty Ltd [2015] FCCA 140 (29 January 2015). Crocmedia was prosecuted by the FWO in respect of allegations that two of Crocmedia's employees, whilst they were employed on a casual basis, were not paid any wages for work performed although they did receive payments in respect of "expenses" in an amount between $75 and $120 per shift worked.

The FWO investigated the matter and found that Crocmedia had underpaid the workers in the amount of $22,168.00. Crocmedia cooperated with the FWO investigation and immediately rectified the underpayments. Regardless of Crocmedia's cooperation and rectification, the FWO commenced proceedings against Crocmedia alleging a number of breaches including failing to pay in accordance with the national minimum wage and failing to provide pay slips.

The Court considered whether the workers met the exception of "vocational placement" as outlined in the Act. The Court had regard to a report that was drafted for the FWO in January 2013 (Stewart and Owens, "Experience Or Exploitation", Report for the Fair Work Ombudsman, January 2013", CH.4), which states that unpaid work experience placements and internships are less likely to involve employment if:

  • they are mainly for the benefit of the person;
  • the periods of the placement are relatively short;
  • the person is not required or expected to do productive work; and
  • there is no significant commercial gain or value for the business derived out of the work.

Ultimately, the Court determined that the arrangement was not a "vocational placement" and therefore found that Crocmedia was in breach of the Act.

Accordingly, the Court considered the appropriate penalties and, after having regard to a number of mitigating factors including Crocmedia's early rectification of the underpayments, full cooperation with the FWO's investigation and the lack of any previous breaches, ordered that a penalty of $24,000 be issued.

  1. "Commission-only" arrangements

Unless an Award specifically permits it, commission-only arrangements are generally a "no no". Longridge Group accidentally found this out the hard way. Longridge Group Pty Ltd (Longridge) operates a business constructing new residential homes. Historically, Longridge has employed a number of individuals as sales consultants to negotiate contracts for the sale of residential properties to be constructed by Longridge for members of the general public.

Longridge paid these sales consultants on a commission-only basis (i.e. they did not receive any remuneration other than commission) prior to the involvement of the FWO. Longridge understood at the time, that the sales consultants were not covered by a modern award. As such, it followed the general industry practice of paying sales consultants by way of commission only. Longridge also believed that the two sales consultants, whom the FWO was acting on behalf of, were senior employees outside of the scope of any modern award.

The FWO investigated the arrangement and determined that a modern award did in fact cover the sales consultants – namely, the Miscellaneous Award 2010 (Award). The Award does not provide for commission only remuneration and, of course, provides for a minimum wage, penalty rates, loadings and allowances. Consequently, the FWO instituted proceedings against Longridge alleging failures to comply with the Award.

In the proceedings (FWO v Longridge Group Pty Ltd [2015] FCCA 129), Longridge ultimately admitted that it had failed to pay the two consultants in accordance with the terms of the Award. However, it asked the Court to take into account a number of mitigating factors when determining the appropriate penalties. One such factor was that it genuinely understood at the relevant time that the sales consultants were not covered by the Award and indeed this was the common understanding in the industry.

The lack of deliberation on the part of Longridge, as well as its cooperation with the FWO investigation process and the admissions as to culpability, was taken into consideration by the Court. Ultimately, the Court ordered that Longridge pay penalties in the amount of $29,790.00.

  1. "Selling jobs"

A novel concept, is "selling jobs". Adlawgroup, a new legal firm in Adelaide (although yet to commence in its operations), attracted significant media and other unwanted attention when it came to light that it planned in late 2015 to offer two-year placements for newly admitted lawyers for a fee of $22,000, to "cover the cost of supervision, mentoring and education programs", leading to an unrestricted practicing certificate.

Adlawgroup's justification for its proposed business model is (according to its website) that it was a "...concept developed to create a gateway opportunity for young lawyers in South Australia", developed to "...address the urgent and critical gap in the employment market for new lawyers in South Australia."

Following an inquiry into the arrangement by the FWO (who is currently taking no action) and a review of the proposed business model by the Law Society of South Australia, Adlawgroup is (again, per its website): "continuing to engage with the Law Society of South Australia and others to develop viable solutions to the complex issue but will not launch the pilot until they can provide participants with complete confidence in the program". I suggest that this novel approach will remain a pipe-dream.

  1. "Phoenixing"

All too common an approach is the illegal practice of phoenixing. It is not accidental. Phoenixing is basically when an indebted company intentionally transfers the assets from that company to a new company, then places the indebted company into administration or liquidation to avoid paying creditors, tax and/or employee entitlements and has the new company operate the same business.

In the Baiada matter, many of the employees involved were engaged through a complex labour supply process involving some 39 different contracting entities. During the FWO inquiry, a large number of those entities ceased trading, at times ceasing to exist the day before scheduled meetings with the FWO. The FWO referred these cases to the relevant corporate governance authorities, including the Australian Securities and Investments Commission (ASIC). It is unclear whether action has been taken. However, I would suggest that it is likely that it has and that the directors of the relevant companies have paid, or will pay the price for such conduct. Presently there are reforms proposed to seek to counter the prevalence of phoenixing.

Conclusion

Underpaying workers – through whatever mechanism – places you and your company at risk, even if the underpayments occur accidentally.

The price to be paid for underpaying workers not only impacts businesses (and directors and in some cases senior employees too, if they are involved in the conduct) from a financial perspective, but also from reputational and supply chain perspectives. A prime example of this would be Baiada, (who ultimately avoided prosecution by the FWO in exchange for agreeing to very onerous, and in some instances ongoing, terms as to its workforce and workplaces) is still, I believe, suffering the fall-out of its conduct, not only from a reputational standpoint, but also in that some parts of its former supply chain now refuse to sell its products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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