Securing employees’ rights to be paid correctly: issues for employers and government

This article originally appeared in the September edition of the Law Institute Journal.

The list of well-known Australian businesses who have been recently accused of underpaying their employees seems endless: Qantas, Coles, Target, Woolworths, Bunnings, Dominos, Subway, ABC and others. These are the more notable businesses. There are many more who been accused, correctly, of underpayments, and many notable, and less notable, businesses have been subject to proceedings, adverse findings and civil penalties.

The high incidence of underpayments by employers stand out as one of the key employment issues currently affecting the Australian business community.

Indeed, underpayments have come to be described by some commentators and governments as wage theft, implying that at least in the more serious cases, the underpayments should be characterised and be dealt with as if they were criminal acts.

Significant adverse publicity has followed the exposure of underpayments claims and related court proceedings, but, even that publicity doesn’t seem to deter unlawful behaviour.

This article considers government responses, and some key initiatives on the reform agenda. There is widespread government and community acceptance that there is a problem, and the debate has moved on to finding solutions. Initial efforts at a Federal Government and at least at a Victoria Government level have been directed at deterring conduct: there has been increased civil penalties for serious contraventions at a Federal level and the criminalisation of wage underpayment in Victoria.

Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth)

In the wake of increasing concerns about underpayments, particularly in franchise arrangements, the Federal Parliament passed in 2017 the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (PVW Amending Act). This Act targeted some of the more egregious examples of non-compliance, including, as a deterrence, higher penalties for serious contraventions. According to the Explanatory Memorandum, the Bill was designed to address “increasing community concern about the exploitation of vulnerable workers (including migrant workers) by unscrupulous employers, and responds to a growing body of evidence that the laws need to be strengthened”.

Under new section 557A a contravention of a civil remedy provision of the Fair Work Act 2009 (Cth) (FW Act) that is both done knowingly and as part of a systematic pattern of conduct carries a tenfold increase, with $666,000 per contravention for companies and $133,200 per contravention for individuals from 1 July 2020.

Under section 557B an authorisation of the contravention, whether express, tacitly or impliedly, will be enough for to establish that a body corporate knew that there was a contravention for the purposes of section 557A.

Under subsection 557A(2) a number of non-exhaustive bad employment practices or factors will add weight to there being a systematic breach: for example, the existence of numerous contraventions, a large number of employees being affected, contraventions taking place over a lengthy period of time, an employer’s failure to respond to complaints about the contraventions, and failing to keep proper employee records or give pay slips.

Other reforms in the PVW Amending Act include: a prohibition on an employer knowingly making or keeping a record, or giving a payslip, that is false or misleading, liability extended to franchisors for breaches by franchisees in certain circumstances and greater enforcement powers given to the Fair Work Ombudsman (FWO).

The PVW Amending Act was a significant legislative intervention, but it is still too early to assess its impact.

To date there has not been any detailed judicial consideration at appellate level on the operation of section 557A of the FW Act. A couple of recent cases at first instance have made orders that there were serious contraventions but neither case provides an detailed exposition on the operation of the section.

In Fair Work Ombudsman v Wok Me Corporate Nq Pty Ltd & Anor [2018] FCCA 2635 the Federal Circuit Court made comments about whether the breaches were “serious” for the purposes of section 557A. It is not clear from the decision why the Court did so: the Fair Work Ombudsman did not seek declarations of serious contraventions and, moreover, the breaches took place before the PVW Amending Act came into operation. Nevertheless, the Court did not consider the contraventions serious for the purposes of section 557A (presumably if it applied): there was not a knowing contravention nor a systematic pattern of conduct as required by section 557A, rather the Court considered that “the breaches occurred in a context where insufficient attention was paid to detail in a business suffering an economic downturn”.

Senate Committee

In November 2019 the Senate referred an inquiry to its Economic Reference Committee into the “causes, extent and effects of unlawful non-payment or underpayment of employees’ remuneration by employers and measures that can be taken to address the issue”. The Committee’s original report date was June 2020 but that has now been extended to June 2021. 1009 submissions have been received. We will not see a report from this Committee until well into 2021.

Federal Government Consultation

Through the Attorney-General’s Department, the Federal Government is currently undertaking two public consultation processes, both relating to improving protections of employees’ wages and entitlements. The consultation process builds on the work undertaken by the Federal Government’s Migrant Workers’ Taskforce which published its final report in March 2019. In the current consultation process, the Federal Government has released two discussion papers.

The first consultation paper, released in September 2019, related to strengthening penalties for non-compliance and submissions have closed for this process. The paper canvassed a number of options regarding civil penalties, including: increasing penalties, calculating maximum penalties in different ways (e.g. on business size), not grouping offences where there is a course of conduct, and extending liability to a broader range of business models (e.g. liability on a head contractor). Submissions have closed.

The paper also raised the prospect of criminal sanctions. The discussion paper acknowledged that the Federal Government has accepted in principle a recommendation from the Migrant Workers’ Taskforce that criminal sanctions be introduced for the most serious forms of exploitative conduct, such as where that conduct is “clear, deliberate and systemic”. The paper records that work has commenced on drafting legislation. The Government has announced that the issue of criminal sanctions will be considered as part of the current work to be undertaken by the Federal Government’s industrial relations’ working group discussions, which are due to report in February 2021.

The second discussion paper, released in February 2020, related to further strengthening of the civil compliance and enforcement framework, however, the process is currently paused with the current Covid crises. The paper raised a number of issues relating to the exercise of compliance powers by the Fair Work Ombudsman (FWO), including: was the compliance notice and infringement notice system operating effectively, are enforceable undertakings operating effectively and whether the consequences of not complying with an exercise of the FWO’s compliance tools is appropriate, among other issues.

The paper also canvassed improving the means of redressing wage underpayment issues, particularly for small amounts, by modifying Court processes and possibly creating a role for the Fair Work Commission in those disputes.

Wage Theft Act 2020 (Vic)

The Victorian Government has moved ahead with dealing with criminalising underpayments by enacting, in June 2020, the Wage Theft Act 2020 (Vic) (WT Act). The Act will operate from 1 July 2021.

The key offence regarding underpayments is section 6: in short, an employer must not dishonestly withhold an employee entitlement, or authorise or permit another person to withhold an employment entitlement (which that other person does). An employee entitlement is very broadly defined to include, in summary, amounts or benefits payable or attributable by an employer, and the attribution of annual leave, long service leave, meal breaks and superannuation under relevant laws, contracts or agreements, including amounts above statutory minimum levels: subsection 3(1). In the case of a company, a corporate culture that directs, encourages, tolerates or leads to the withholding of an employee entitlement can amount to authorisation or permission: Subsection 6(3)(c).

Employers who breach section 6 face a fine of up to 6000 penalty units (or $991,320 at 1 July 2020 penalty unit rates), and individuals face a fine of up to 1200 penalty units (or $198,264 at 1 July 2020 penalty unit rates) and up to 10 years’ jail.

Not surprisingly, consent to a withholding of an employment entitlement is irrelevant if the effect is to reduce the entitlement to below the statutory minimum: subsection 6(2).

Quite separately to the obligations on the employer, an officer of an employer can be guilty of an offence if they dishonestly withhold an employee entitlement, or authorise or permit another person to withhold an employment entitlement (which that other person does): subsection 6(7). An officer of a body corporate is deemed to have committed an offence where a body corporate had committed an employee entitlement offence: section 13(1). Officers have due diligence defences available to them: subsections 6(10) and 13(2).

Officer is defined broadly in section 3 of the Wage Theft Act 2020 (Vic): in the case of companies it incorporates the definition of officer in the Corporations Act 2001 (Cth); otherwise, officer means a member of the board of directors of a body corporate (for non-companies), partners of partnership, an office holder in an unincorporated association, and a person who makes or participates in decisions that affect to whole or a substantial part of the business of the employer, or who has the capacity to affect significantly the employer’s financial standing.

The legislation has not left the meaning of dishonest completely to the common law. Dishonest means dishonest according to the standards of a reasonable person: subsection 6(11). The Explanatory Memorandum to the WT Act specifies that this is “to be an objective assessment and displaces the subjective assessment of the accused’s state of mind”. The adoption of an objective approach is consistent with recent UK authority on the meaning of dishonesty in Ivey v Genting Casino [2017] UKSC 67, overturning R v Ghosh [1982] QB 1053 which had included both objective and subjective elements in the test for dishonesty.

The Explanatory Memorandum to the WT Act also states that recklessness, not just intentional conduct, is captured as part a reasonable person’s understanding of dishonesty – the test is “what a reasonable person would have known, or was reckless to, in the circumstances”. By confining the definition of dishonesty in this manner, a belief by an employer, albeit genuine, that it was paying the correct amount, would not by itself by a defence, without an assessment of the reasonableness of that belief.

In the WT Act there are also offences for dishonest falsification of an employee entitlement record (section 7) and a dishonest failure to keep an employee entitlement record (section 8).

The WT Act creates the Wage Inspectorate Victoria (section 19) to be headed by a Commissioner (section 25). The Wage Inspectorate has extensive functions (section 20) and powers (section 21) to investigate and prosecute offences, including the power to execute search warrants.

The Victorian WT Act, and the operation of Wage Inspectorate Victoria, creates a regulatory overlap with the FW Act and the Fair Work Ombudsman, particularly, as is foreshadowed, if the Federal Government introduces its own legislation criminalising underpayments. Employers would quite rightfully be entitled to complain that they should not be exposed to two concurrent investigations from two government agencies for matters that arise from the same subject matter. The Federal Government has identified this duplication of resources as a problem, with the WT Act being described by the Federal Industrial Relations Minister as “ill-conceived”.

Future reform

It can be expected that over the next 12 to 18 months there will be further Government reforms, and, in particular, significant change to the FW Act. This may well see further legislative change at a Federal level to deter particularly egregious unlawful conduct with greater penalties and criminalisation. It can be expected that greater resources and powers will be given to the FWO, and the process for recovering underpayments simplified and made more accessible.

The broader debate about underpayments also puts on the agenda other issues such as better education for employers on employee entitlements, the assistance given to employers by government to understand their obligations, the simplification of the award system, and the role of the Fair Work Ombudsman and the Fair Work Commission.

Faced with a complex award system, with multiple pay points and sometimes unclear definitions in legislation, awards and enterprise agreements, it can be expected that many employers desire certainty at the commencement of employment in establishing pay arrangements, rather than finding out later in litigation that their interpretation and understanding of their obligations was wrong in law. It should not be beyond the ability of Government to provide that certainty: for example, if the FWO was able to issue a binding ruling, similar to the private rulings issued by the Australian Taxation Office, then employers could approach their pay arrangements with greater certainty than is currently the case.

Employees should never miss out on their due entitlements and, hopefully, the extensive legislative and regulatory changes expected over the next few years will turn around the historical and current mind-set which has led to the underpayment of so many employees.

Chris Molnar is a Partner at Kennedys and a LIV accredited specialist in workplace relations.

Read other items in Commercial Brief - September 2020