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Why Businesses Need to Be Vigilant Against Underpayment

There have been numerous recent developments regarding underpayments that may have left businesses feeling worried about their own workforce arrangements. The Fair Work Ombudsman’s efforts in addressing this issue only mean that businesses need to take a closer look at their workforce compensation processes.

Definition of Underpayments

Underpayment occurs when an employer or client fails to pay their worker the minimum monetary amounts, such as wages, contract rates and allowances, prescribed by the applicable industrial instrument. As such, employees or contractors can recover the underpaid amounts and/or entitlements through prosecution under Section 539 of the Fair Work Act.

The Fair Work Ombudsman can receive complaints from employees who believe they were not paid the correct minimum wage or conditions. The case is then referred to a workplace inspector who will investigate the raised complaint on behalf of the employee. Based on the findings, the employer can be prosecuted by the relevant state or territory authority.

Many instances of underpayments are the result of deductions. Note, however, that there are permitted and unlawful deductions. Section 324 of the Fair Work Act allows an employer to deduct an amount payable to an employee if:

  • the deduction is authorised in writing by the employee and is principally for the employee’s benefit, or
  • the deduction is authorised by the employee in accordance with an enterprise agreement, or
  • the deduction is authorised by or under a modern award or FWC order, or
  • the deduction is authorised by or under a law of the Commonwealth, a state or a territory, or an order of the court.
Vintage cash register

Below are a few examples of unreasonable deductions:

  • deductions to cover shortages from cash tills or floats
  • cost of training courses which the worker is directed by the business to attend
  • cost of mobile phone provided for work-related use
  • cost of uniforms, tools and equipment for work-related use
  • cost of damages to the business’s assets
  • cost of breakages or accidents

One company that has been under harsh spotlight by the FWO for underpayment of wages is convenience store chain 7-Eleven. Nine franchisees have been prosecuted so far, resulting in $26 million in back payments paid out of a compensation fund to date. One of its stores in Brisbane even received a record penalty of $408,348 last June 2016.

Unsurprisingly, 7-Eleven made changes to its business model to address this issue; however, recent video evidence allegedly revealed that workers are still being exploited and paid less than their award entitlements.

Liability for Breaches

The penalties associated with underpayments can be imposed not just on local or branch managers but even to the company directors. Section 550 of the Fair Work Act deems that a person ‘involved’ in a breach of the Act is taken to have personally breached it, and is liable for payment of compensation and penalties.

Frozen yogurt chain Yogurberry was recently penalised $146,000 by the Federal Court for the underpayment of four migrant workers. The penalty was secured against the master franchisor, YBF Australia Pty Ltd, and the company director, who were both directly involved in setting pay rates and payroll practices at store level, for being an accessory to the breaches of an associated company.

Courts can take into account several factors when deciding on the penalties:

  • Knowledge of or participation in conduct resulting in underpayment
  • Lack of cooperation with the FWO
  • History of non-compliance
  • Vulnerability of workers (Visa-holders, young, etc.)
  • Need for general deterrence (i.e., for the broader community)
  • Need for specific deterrence (i.e., against involved individuals)

This mixture of intentional and unintentional employer behaviour is to ensure that there’s no exploitation in their networks. The Fair Work Ombudsman herself, Natalie James, said that “The result of this matter sends a clear warning to the operators of franchise networks in Australia that refusing to take responsibility for addressing exploitation in their networks is not a viable option.”

Several other cases further demonstrated that the “corporate veil” will not protect directors or HR managers who know or should have known of a breach:

  • Brisbane cleaning company Brisclean Pty Ltd’s director was fined $126,000 by the Federal Circuit Court for four migrant workers who were paid $17 per hour under ‘sham contracting’ arrangements.
  • A former company director and operations manager of supermarket chain Coles were both fined $94,050 each for the underpayment of trolley collectors.
  • Crown Casino’s HR manager was found to have falsified employment records and made unlawful deductions from the wages of cleaners and was made personally liable for repayments plus fines of $10,800 per breach.

Companies can even be held liable for breaches within their supply chain, such as in the Coles case above in which the supermarket actually engaged a subcontractor to provide trolley collectors. This reinforces the need for businesses to ensure compliance throughout their supply arrangements.

Lessons and Reminders

Company directors and officers need to know and remember that they can be held personally liable for the company’s non-compliance with the Fair Work Act. They may be penalised in lieu of the company and ordered to pay fines, underpaid wages, back payments and legal costs. Greater vigilance on payroll and compensation practices need to be observed within the company.

Moreover, note that the Fair Work Act covers all workers in Australia. Migrant workers are entitled to fair pay and basic rights, and must be provided similar employment conditions as Australian workers performing the same work in the same location.

If you think you require the assistance of industrial relations experts in analysing your current workforce arrangements, please don’t hesitate to contact us. We can:

  • Compare/calculate your compensation rates/wages against the corresponding industry awards/instruments
  • Inspect benefits and entitlements awarded to employees and contractors
  • Provide possible solutions on payroll and compliance management

Ensure your business is #Readyfor2017 by taking proactive measures against possible underpayments.

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