Australia: Employers beware: Prosecutions and penalties for underpayments are on the rise

Last Updated: 19 October 2016
Article by Nicole Hebblewhite

Most Read Contributor in Australia, July 2017

So far in 2016, the Fair Work Ombudsman (FWO) has made headlines on a number of occasions due to successful prosecutions of companies for unlawful underpayments. This has resulted in the courts imposing record penalties on companies and their directors.

The FWO has published an open letter, warning companies and their directors of the consequences of underpaying employees. The letter, published on the FWO website, warns employers that the "tide is turning" against them and that the "escape routes of sending a company into liquidation to avoid penalties and having to back-pay workers ... are now being shut down". The statement from the FWO makes clear that it is pursuing employers that "cannot or will not pay" employees correctly "by using every lever available to us to ensure that wages that should have been paid to workers are put back into their hands". The FWO also states it will refer matters to the Australian Securities and Investments Commission for further investigation where the FWO believes a director's actions breach obligations under corporations legislation.

The letter is a strong statement from the FWO. It comes after recent decisions saw record-breaking undertakings and penalties applied to companies and directors found to have underpaid, or been involved in the underpayment, of their employees.

The 7-Eleven penalties

In Fair Work Ombudsman v Mai Pty Ltd & Anor (2016), the FWO secured its largest ever penalty against a Brisbane 7-Eleven franchise when Justice Jarrett imposed $408,348 in penalties. This included ordering the director of the 7-Eleven franchise to pay $68,058 and his company, Mai Pty Ltd, a further $340,290.

In considering the penalty to be applied, Justice Jarrett took into consideration the "particularly serious" underpayments, which represented substantial amounts to the employees who depended on minimum wage.

It also considered the company's attempts to frustrate the FWO's investigations and conceal more than $82,000 in underpayments. Another decision by Justice Jarrett further indicates that directors of companies will no longer be able to hide behind the corporate veil if they are involved in the underpayment of workers.

In Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & Anor (2016), Justice Jarrett imposed penalties of more than $308,000 with the director of the company, Mr Jennings, ordered to pay $51,400. Justice Jarrett remarked that Mr Jennings was aware of the correct employee entitlements under the applicable award, but flagrantly ignored them, demonstrating a "blatant disregard for Australia's workplace laws".

In addition to his significant personal penalty, Mr Jennings was made personally liable to back-pay eight employees almost $23,000. Unusually, Justice Jarrett took a further step of imposing an injunction on Mr Jennings from underpaying security industry workers in the future. This was no doubt a response to evidence tendered during proceedings that he had previously been a director of a company investigated for alleged underpayments, and he was currently acting as an officer of another company.

Four recent examples of underpayments

Below are the most high-profile examples of underpayments. However, figures from theFWO indicate they are the tip of the iceberg:

  1. Sub-contractors of major department store Myer were found to have employed cleaners on sham contracts, paying workers below the award wages and denying them penalty rates and superannuation.
  2. The systematic exploitation of 7-Eleven workers was uncovered, revealing the company had underpaid wages, doctored pay records and intimidated workers.
  3. Delivery drivers of Pizza Hut were paid as little as $6 per hour in sham contracting arrangements.
  4. Baiada Group, Australia's largest poultry processing company, was alleged to have underpaid staff wages, requiring employees to work excessive hours, as well as deducting payment for overcrowded rental accommodation from their salaries.

In 2014–2015, FWO recovered $22.3 million in back-pay for more than 11,000 workers.

Impact of recent decisions

On the back of these cases, the major political parties are calling for increased penalties for employers that deliberately underpay their workers. As part of its election campaign, the Labor Party proposed a new criminal offence for cases involving intentional or reckless behaviour. It also proposed increasing penalties for underpayment offences to $43,200 or two years of jail for an individual, and $216,000 for a corporation.

The Coalition proposed to increase penalties 10-fold for companies that deliberately and systematically underpay their employees. It has never been clearer that employers need to observe minimum entitlements set out in workplace instruments and ensure compliance with workplace laws. As well as the costs to your company and significant personal penalties, the damage to the reputation of your business can be insurmountable. Not to mention, such unlawful employment practices impose a significant cost on individuals and society generally. As the FWO stated in its 2014–2015 Annual Report, such behaviours "create barriers to workforce participation, weaken the integrity of the workplace relations system, distort the labour market and undermine the principles of fair competition".

It is important to note that employers must take a proactive approach to ensuring employees are correctly paid, and that they are getting the right advice to ensure they are working towards building compliance in the workforce.

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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