#FairWorkDisrupted: The changing face of wage underpayment

Five years ago, what did you imagine when someone mentioned ‘wage underpayment’?

You may have pictured an ugly image of exploited vulnerable workers in well known non-compliant sectors. Visa workers on the harvest trail, cleaners or fast food workers paid being paid rates like $8, $12, $15 per hour.

That was certainly the picture that I saw every day as Fair Work Ombudsman.[1] We commonly investigated cases of workers being paid well below the minimum wage in what was blatant non-compliance.

Visa workers were about 1 in 5 of those who complained to FWO, even they only represented 6% of workers in the labour market. [2] Young workers were also disproportionately represented in underpayment matters.

The Fair Work Ombudsman (FWO) rightly prioritised serious enforcement action when confronted with this deliberate conduct, which is why at times up to half the cases FWO took to court involved visa workers.

All this is still happening. And still a priority for FWO.?But a couple of years ago something else began to emerge....

Largescale, legacy corporate underpayments....

We’ve all read the headlines with brand names familiar to us.

We thought large businesses, with HR personnel, robust risk management frameworks and (often) a raft of obligations to the ASX, had the governance and the resources to be getting this right.

I had no reason to doubt this when I was FWO. And I as not alone – unions, businesses and even underpaid employees didn't spot what was going wrong.

Fast forward to 2021 and the FWO received more than 50 self reports in the 2020-21 financial year from large corporates [3]. It has set up a Corporate Sector Taskforce with dedicated funding of $22.3 million over four years.[4]?

FWO has listed Corporate Underpayments as a priority in both 2020-21 and 2021-22. It sits alongside some not so esteemed company: chronically non-compliant sectors such as contract cleaning and fast food [5]

With the emergence of underpayments by large corporates, we can also observe a significant increase to wage recoveries, particularly in the last financial year. FWO completed investigations into 22 of these matters in the financial year and backpay as a result of self-reports amounted to $90 million of a total of $120 million for the year, and involved more than 12,000 employees.

And in a sign of community sentiment about the seriousness of these failings, the Coalition Government introduced laws which would have criminalised ‘wage theft’ had they passed.

Who’s afraid of the FWO?

Many have been speculating about the regulatory response to corporate wage underpayments. I posed that very question in an article published here.

In my experience, businesses are mortified they have not correctly paid their employees and committed to fixing it: back paying monies owed and putting in place systems to ensure it never happens again. They report to the FWO and submit to its supervision as it investigates and decides an appropriate outcome.

These legacy corporate underpayments are very complicated – something acknowledged by the FWO, who refers to them as ‘large and complex’ and ‘extremely disappointing’[6].

In my experience, informed by dozens of million dollar wage remediations, the reasons behind corporate underpayments are not the same as deliberate non-compliance.

Usually there has been an intention to comply by these businesses. Often effective systems haven't been put in place to ensure all entitlements are met.

Or the systems haven’t done their job.

Or the systems haven't been properly coded or maintained. Sometimes the people coding them don't understand the complexity of the entitlements, or the entitlements are so complex they can't easily be automated.

Or insufficient or inaccurate information has been put into the systems.

The bottom line? Businesses have underestimated the complexity and risks associated with wage compliance.

So how has FWO dealt with the unsurprising community concern about these outcomes?

The most common resolution of corporate and not-for-profit self-reported underpayments has been Enforceable Undertakings (EU).

These EUs, which the businesses need to agree to, generally contain a string of admissions, ‘contrition payments’ (as a substitute for court ordered penalties) and a set of forward looking commitments to ensure compliance into the future.

EUs are published on the FWO’s website and the subject of media releases.

Now, for the first time, we’ve seen the most severe regulatory response in FWO's arsenal deployed on a corporate self-report:In June FWO initiated legal proceedings in such a case for the first time.

Signals

What can we take from the FWO’s approach to resolving corporate underpayment matters so far? These developments show:

1. The FWO will closely interrogate the details of the remediation and form its own view as to whether it properly correct underpayments. It will assess the appropriateness of the approach to calculations, the reasonableness of any assumptions adopted and test whether any ‘unlawful offsetting’ has occurred.?

• We know that FWO has been beefing up its capability in payroll analytics so it can properly scrutinise these complex matters.

1. Merely confessing to FWO and backpaying workers is not enough. FWO will expect businesses to properly compensate employees, with interest, demonstrate it will put in place sustainable compliance practices going forward and be subject to ongoing scrutiny to ensure those systems and practices are working. FWO will often require the business pay a form of penalty or contrition payment.??
2. The regulator has an increasing interest in taking the strongest of enforcement actions. We can be under no illusion now that FWO is prepared to take a matter to court if it is not satisfied that workers have been appropriately back paid.

Corporates in the sights of Work Regulators

While the federal regulator has crossed its Rubicon, we also see state regulators flexing their muscles in the constitutional field that remains for them to play on.

And in July, another two ‘firsts’ happened. Wage theft as a criminal offence became actionable in Victoria on 1 July (the first law of its kind in Australia, enforced by the newly formed Victorian Wage Inspectorate). And just two weeks later, a another well-known company was fined in Melbourne’s Magistrates Court for the underpayment of long service leave to 24 employees between October 2019 and April 2020.

This might seem a relatively confined outcome, but the Victorian Government has also appointed an ex-FWO official as its new Wage Inspectorate Commissioner which will oversee the state ‘wage theft’ laws.

Businesses also have relatively new state and territory labour hire registration frameworks to contend with that impose additional requirements on labour hire businesses to continue to operate legally.

Is there a get out of jail free?

As the regulators mature their approach to large corporate wage conduct, we will likely see more court cases emerging known brands, including listed companies. This highlights the importance of identifying and resolving these matters and ensuring processes and controls are in place so that problems do not arise in the future. Investing in the right systems and capability has never been more important.

One thing is clear. There are consequences for getting it wrong, beyond having to backpay workers. There is no get out of jail free card when it comes to industrial relations compliance.

[1] Natalie James was Fair Work Ombudsman for five years from July 2013

[2] FWO Annual Report, 2016-17, Year in Review

[3] FWO Annual Report, 2019-20, p.21

[4] Attorney-General’s Fact Sheet on Industrial Relations Reform December 2020

[5] FWO Enforcement Priorities, 2021-2022

[6] Sandra Parker, Year in Review, 2020-21 Annual report, p. 2.