Underpayments - when is a director at risk?
We continue to see high numbers of prosecutions of businesses and self reporting of large scale wage underpayments in Australia. The reasons for this are many and hotly debated. But in my experience this reflects partly the complexity of our labour law system (which is clearly not going away), and a lack of focus on or understanding of basic compliance steps by many businesses.
Sometimes legal or HR staff within a business, or external advisors, can raise concerns about these issues but struggle to get much attention. But one thing that really focuses the mind of CEOs and board members, tends to be the risk that they will be found to be personally liable in some way for the underpayments. This often arises because the Fair Work Ombudsman and other parties increasingly rely on s 550 of the Fair Work Act 2009, which provides that a person (such as a CEO) commits the same contravention against the Act that another party (eg: the company) commits, if they were "involved" in that conduct. Section 550(2) explains how involvement can arise in various ways, including if the person, through act or omission, was "knowingly concerned in or party to" the contravention.
So if decisions about payroll and employment arrangements are made and implemented by others in a business, how much did a director or other senior executive need to know about and understand, before they can be found to be "involved"?
In a recent decision, FWO v Chatime Australia (No 2) [2023] FedCFamC2G 712, Judge Manousaridis found that the Managing Director (MD) of that business (a bubble tea retailer) was "involved" in the underpayment contravention.
The MD had participated in an internal meeting where various payroll and employment options were discussed, and he endorsed the model that was then implemented. This model was later found to cause underpayments.
It was found that (a) he knew about some terms of the relevant award that were discussed in the meeting (such as "weekend penalty rate", "minimum award rate", etc), and the rates of pay that arose from application of all these terms, (b) he did not know the name of the award (which was the Fast Food Industry Award 2010), nor had he read it, (c) he knew that the model adopted meant the business would not pay casual rates and some weekend penalty rates (which was found to be the reason for the underpayments), and (d) he did not believe that the payroll/employment system adopted was unlawful, or otherwise inappropriate.
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The Court found he was involved in the contraventions, even though the MD "believed he did not commit Chatime to engage in any unlawful activity, and even though he believed that it was appropriate (to implement the model that was followed)". The issue of penalties for the MD will be determined in a later hearing.
This is only one decision in a lower level court. It will not be the last word on this matter, and some decisions of the Federal Court have expressed views that a more granular and detailed level of knowledge is probably required before an officer will be "involved" in the contravention (eg: White J in FWO v Devine Marine Group [2014] FCA 1365 at [188]). The issue has not been clearly settled.
What does this mean for business leaders?
Obviously, executives and officers of companies cannot assume that limited knowledge or understanding of business payroll and employment payment systems will mean they are not exposed to prosecution when the business itself underpays staff. Even if they honestly believed the decisions made are lawful and appropriate, this is not enough to exclude the risk. Time to ask more questions and do your "due diligence" on whether the business is properly managing its payment obligations.