Woolworths recently joined an ever-growing club of businesses, including Wesfarmers, Qantas, Commonwealth Bank and Super Retail Group self-reporting employee underpayments to the Fair Work Ombudsman. Even the perennial champions for employee rights, Maurice Blackburn Lawyers are not immune.
In a statement to the ASX on 30 October 2019, Woolworths announced that "approximately 5,700 salaried store team members ... have not been paid in full compliance with Woolworths Group's obligations under the General Retail Industry Award" (Award) and that "the estimated one-off impact for remediation ... is expected to be in the range of $200-$300 million before tax."
What actually happened?
Unlike the 7-Eleven style exploitation cases, Woolworths fell foul of the Award due to some of their full-time salaried employees being paid what Woolworths' considered was an 'all up rate'. In practice, the effected employees had been receiving an 'above-award' annualised base salary that had had been calculated to cover any likely Award loadings, allowances and penalty rates the employee might otherwise receive.
After receiving a few complaints from affected workers and conducting a review, it was found that approximately 5,700 salaried workers had received less than the Award minimum remuneration because the 'all up rate' was not high enough to offset the actual wages these employees would have earned because of the amount of overtime the staff were working. In other words, these employees were not better off, and the fixed annualised salary failed the no-disadvantage test.
As Woolworths have discovered, the term 'all up rate' is a misnomer. Employees are "entitled to be paid the higher of their contractual salary entitlements, or what they otherwise would have earned for actual hours worked under the [Award]."
Woolworths had been misinterpreting the Award in its favour since 2010 to the disadvantage of approximately 5,700 employees (and are now coming to grips with the fact that it cannot contract out of its statutory obligation to pay minimum award wages).
Are Awards inflexible and unnecessarily complex?
All Modern Awards have flexibility clauses which permit businesses and employees to agree to vary award terms relating to wages, penalty rates, allowances and loadings, including bundling them into a single rate. The only catch is that the flexibility agreement must satisfy the 'no disadvantage test'. In other words, the employee must be better off overall on the fixed annual salary than if there was no agreement.
In the Woolworths' case, some 5,700 staff had worked sufficient overtime, that they would have actually been better off overall had they been paid Award rates. Woolworths simply didn't keep track of the overtime hours being worked by (award covered) salaried staff members or review patterns of work periodically to check whether the 'all up' rate was adequate and, relied on the requirement that staff work 'reasonable overtime' and treated their 'all up rate' as a set and forget rate, at least as far as the payroll system was concerned.
Woolworths CEO Brad Banducci said following the announcement that "[Award compliance] is a very complex issue which needs an industry-level dialogue on it. At the right time, we'd like to come back and talk about the lack of flexibility in [awards] when interpreted literally."
I must confess that I was amused by this statement for two reasons: the first was simply hearing the CEO of a publicly listed company bemoaning the fact that strict compliance with laws requiring payment of minimum wages isn't optional.
The second was that I had just spent half an hour getting lost in the maze of a Woolworths supermarket (thankfully, a very helpful shop assistant found what I was looking for in a jiffy). I could have pointed out to Mr Banducci the flaw in Woolworth's payment arrangements (with references) in less time than it took me to find pizza bases.
While I may have the advantage of being an employment lawyer, I do not accept that Award complexity and a lack of flexibility was to blame for the Woolworths staff underpayments. Proper timekeeping by store managers, consciousness that compliance is an ongoing and fundamental obligation requiring attention and some pragmatic legal advice could have saved Woolworths a lot of hassle. I also would have thought that keeping on top of this sort of basic administration wouldn't be too much of stretch for Woolworths (given it successfully handles the logistical challenge of managing millions of product lines nationally across almost one thousand stores).
The cost of flexibility
Bundling Award entitlements into a fixed annualised rate with minimal risk is relatively simple and can have great benefits for businesses and employees. Fixed or bundled rates are much easier to manage administratively and provide businesses and employees alike with certainty.
Unfortunately for Woolworths and its employees, Woolworths wanted the advantages of bundled rates without really paying for them. Woolworths probably needed to increase the base salary of the underpaid employees by about 4-5% on average (this is purely based on a 'back of an envelope' calculation) to satisfy the no disadvantage test.
This underpayment incident, like all recent cases involving high-profile organisations demonstrates the serious risks of short changing staff, including loss of reputation and the imposition of significant penalties, financial damages and onerous ongoing audit requirements. Businesses at the greatest risk of being next week's front-page news are the businesses that pay at or close to minimum Award wages. Some employers skate so close to the line between compliance and illegality that even the tiniest, inadvertent slip up will send them over the edge.
Tips to stay compliant for businesses using annualised salaries for Award covered employees
- Employers need to be pragmatic, and not underestimate the amount of overtime staff actually work – and do a periodic reality check of the adequacy, or not, of their all up or annualised rates;
- Flexibility clauses in each Award expressly define the entitlements that can be varied in a contract, so businesses need to take care they don't try and bundle up entitlements that are not negotiable;
- Employment contracts must also specifically state which Award entitlements have been varied or 'bundled' into a fixed rate. It is not enough to simply state that the base rate covers all Award entitlements that may apply;
- Each Modern Award is different so businesses covered by two or more Awards must ensure their individual contracts comply with the correct Award for each employee;
- Businesses need to review their payroll and Award rate adjustments at least annually to ensure ongoing compliance; and,
- Whether you are looking to implement annualised salaries or have been using them for years, get some legal advice. Early detection of underpayments will always save businesses money in the long run.
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.