Wages, underpayment & liabilities: who’s responsible & what should you do?

There is a real and increasing focus on ensuring employees are being paid their proper entitlements to stamp out underpayment of wages

There is a real and increasing focus on ensuring employees are being paid their proper entitlements to stamp out underpayment of wages, and new laws and legal precedents have a number of important implications for organisations, HR departments, franchisors and other parties, writes Gordon Williams

Sadly, underpayment scandals are all too common, affecting employees in a range of industries right across Australia. For example, in recent weeks, the Wage Theft in Australia report cited significant underpayments among temporary migrant workers, with some also having their passport confiscated and others having to pay a deposit to get a job.

Quite rightly, therefore, there is a real and increasing focus on ensuring employees are being paid their proper entitlements. This article looks at two recent developments – the introduction of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 and a recent decision of the Federal Circuit Court that resulted in a very significant fine against an accountancy firm because of an underpayment by its client.

The Vulnerable Workers Act is part of the Federal Government’s response to various scandals involving underpayment of workers, in particular in franchise arrangements. In effect, the Act significantly extends the scope of existing accessorial liability provisions in the Fair Work Act.

The Vulnerable Workers Act:

  • Makes holding companies and franchisors liable for certain breaches by their subsidiaries and franchisees if they knew, or ought to have known, about the breaches and did not take reasonable steps to prevent them. This applies to breaches of industrial instruments, the National Employment Standards and some other provisions in the FW Act (such as prohibitions on sham contracting).
  • Increases fines to up to $630,000 (by a factor of ten) for deliberate and systematic breaches – with an equivalent increase in fines for individuals (to up to $126,000).
  • Means franchisors and holding companies can also be ordered to pay amounts which a franchisee or subsidiary has failed to pay, in addition to any fines.
  • Will give the Fair Work Ombudsman powers to compel individuals to attend interviews and override the privilege against self-exposure to penalty (ie, where a person can decline to answer questions on the basis that they may incriminate themselves). This is to provide the Ombudsman with powers similar to those held by other regulators such as ASIC and the ACCC.
  • Prevents employers from unreasonably requiring an employee to spend or make payments to the employer or anyone else. Among other things, this is intended to prohibit employers asking for “cash back” from their employees (a response to reports of young workers being taken to the nearest ATM and forced to hand back part of their wages).

“The benefit of implementing an appropriate framework is not limited to just avoiding significant fines”

A franchisor or holding company will not be liable for a breach by a franchisee or subsidiary if it has taken ‘reasonable steps’ to prevent a contravention. This will require an appropriate framework and effective implementation. Of course, the benefit of implementing an appropriate framework is not limited to just avoiding significant fines. More importantly, it should ensure that franchisees and subsidiaries are complying with their obligations and employees are receiving their correct entitlements.

As part of any framework, it is important that franchisors and holding companies consider the following:

  • Understanding the current situation: checking the current level of compliance by franchisees and subsidiaries – this may involve an audit of their workplace arrangements.
  • Education: taking steps to ensure franchisees and subsidiaries know and understand their obligations as employers – this may involve face to face or online training and issuing material about their obligations.
  • Assessing compliance: how the franchisor or holding company assesses whether the franchisee or subsidiary is complying with its obligations – eg, periodic auditing and spot checking.
  • Complaint handling: any arrangements the franchisor or holding company has for receiving and addressing complaints about contraventions – eg, establishing a telephone or online complaints mechanism.
  • Requiring compliance with law: how the franchisor or holding company encourages compliance with the FW Act and other workplace laws – eg, at the very least, imposing contractual obligations on the franchisee or subsidiary to comply with law.

“The Fair Work Ombudsman successfully argued an accountancy firm was an accessory to an underpayment by its client (a Japanese restaurant) because it knowingly failed to include accurate rates of pay in its payroll system”

What other parties are responsible?
But it’s not just franchisees and holding companies that can be liable for someone else’s breach as demonstrated in the recent case of FWO v Blue Impression Pty Ltd & Ors [2017] FCCA 810.

In that case, probably a first of its kind, the Fair Work Ombudsman successfully argued an accountancy firm was an accessory to an underpayment by its client (a Japanese restaurant) because it knowingly failed to include accurate rates of pay in its payroll system.

Despite the accountancy firm arguing it was simply a service provider, and its role limited to entering data, the Federal Circuit Court accepted the evidence established the firm and its principal ‘had at their fingertips all the necessary information that confirmed the failure to meet the award obligations …and nonetheless persisted with the maintenance of its (payroll) system with the inevitable result that breaches occurred’.

Although the accounting firm faced potential maximum fines of $357,000, the judge imposed a fine of $53,800 – 15 per cent of the maximum. This was in addition to the $115,000 fine that the employer was ordered to pay.

These provisions reflect the sad truth that some employers cannot be relied on to do the right thing and that others, who are in a position of influence, are expected to take responsibility to ensure that they do so – or face the consequences if they fail to act.

5 key takeways for HR

  • Under the Vulnerable Workers Act, holding companies and franchisors can be liable for breaches of industrial instruments and the Fair Work Act by subsidiaries and franchisees
  • Fines are increased to up to $630,000 for deliberate and systematic breaches
  • Franchisors and holding companies can also be ordered to pay amounts which a franchisee or subsidiary has failed to pay (in addition to any fines)
  • Holding companies and franchisors should urgently review their operations and implement any changes to ensure compliance
  • The existing accessory provisions in the Fair Work Act continue to apply – and these have very broad reach

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