Criminalising wage theft

Simplifying pay rates would help employers navigate the complex path that can lead to accusations of “wage theft”.

Directors are facing the prospect of increased liabilities as the federal government weighs options for new legislation to criminalise wage theft, with plans to introduce it later in 2023.

Wage theft is the act of employers not paying employees the correct wage or entitlements for compensation of their work, either by withholding wages or refusing to pay entitlements such as overtime, penalties, superannuation and allowances.

The more common threat to businesses is the accidental underpayment of employees, occurring because a business has poor payroll controls, particularly if they operate in an industry with a complicated award.

Underpayment of wages has been called an epidemic in the news media. It has significantly escalated as a risk for both large and small businesses since hitting public and corporate consciousness in 2015 with the exposure of the 7-Eleven underpayment scandal. In its wake, the company has paid out $320m to workers, franchisees and to install better systems.

A long list of organisations, including some of Australia’s biggest brands — from CBA to Woolworths, Coles and Melbourne University — have been feeling the heat of wage practice scrutiny and are self-reporting underpayment issues, kicking off costly remediation processes.

At the heart of the action has been increased scrutiny and a tougher approach from the office of the Fair Work Ombudsman (FWO). Among the achievements of its outgoing chief, Sandra Parker PSM GAICD, are year-on-year record back payments totalling $532.3m for 384,805 underpaid workers in 2021–22. In the same period, the FWO instigated 137 underpayment litigations, which represents a fourfold increase over Parker’s five-year tenure.

In May, submissions closed on the government’s wage theft consultation paper, Compliance and enforcement: Criminalising wage theft, which canvasses penalty options up to $825,000 for individuals, with a maximum penalty of $4.125m for corporations. The consultation also proposes to extend existing accessorial criminal liability for directors for an offence by the company via a new “failure to prevent” offence.

Industry groups are turning up the volume on their objections to mooted outcomes.

The vast majority of underpayment issues are not caused knowingly by theft or fraudulent behaviour, but by mistakes, in particular by a highly complex system that makes compliance extremely challenging.

Battling complexity

Complexity of the system is the resounding catchcry of employers, whether they’re called out or self-reporting underpayment. The Australian framework is widely acknowledged as one of the most complex in the world. It features 122 different “modern” awards, each of which ascribes countless pay rates that differ between jobs, skill levels and by industry. Added to those is a multitude of enterprise agreements — now covering almost 40 per cent of employees — along with obligations for superannuation, taxation and the requirement to comply with eight state and territory long-service leave Acts.

The onus is on employers to keep track and have the right systems and processes in place to meet those obligations, not least because what often starts as a small mistake gets bigger over time.

Simplification of the system must be the priority, argues Andrew McKellar, CEO of the Australian Chamber of Commerce and Industry (ACCI). Complexity pervades the workplace relations system, the ACCI wrote in its submission to the wage theft consultation paper.

“Modern awards are difficult to interpret and sometimes ambiguous in their meaning,” it said. “Enterprise agreements often include poor wording and confusing clauses, which endure in successive instruments after being agreed to by the employer far into the past.”

McKellar believes in tough treatment for perpetrators of deliberately fraudulent behaviour — and where people transgress, there needs to be an enforcement regime, which already exists.

“But does the bar need to be changed?” he asks. “Our concern is it will be set too low and people will be at risk of prosecution for actions that may have even been careless,” he says. “But did they set out to deliberately defraud employees of wages and other entitlements? Underpayment needs to be addressed in a more constructive way.”

Responding to a proposed “failure to prevent” offence for directors where a company is found to have committed wage underpayment, the AICD noted that it is not the role of the director — and neither is it possible — to know the details of every industrial or pay arrangement that applies to their organisation, many of which are complex and overlapping, or to evaluate for themselves whether the organisation is complying with every relevant pay agreement. Rather, what is reasonable is that directors appropriately probe management on compliance with relevant workplace laws, including seeking external assurance where possible.

Triggering refreshed debate is the consultation papers’ failure to describe the policy as intending to criminalise the theft of wages.

AiGroup CEO Innes Willox is concerned that the new rules might stop businesses self-reporting and rectifying wage underpayments and discourage constructive engagement with the FWO. The paper also resurfaced grey areas in the underpayment issue, not least that some businesses, in particular SMEs, often don’t have the resources or right information to comply with the complexity.

Making it simple

What’s certain, though, is that simplification of pay rates and other entitlements in Australia will not be straightforward or immediate.

The Productivity Commission touched on the need to simplify the system in its Advancing Prosperity report, delivered to the government in March. The Council of Small Business Organisations of Australia is also campaigning to make the system easier and fairer for small business employers by proposing a Small Business Schedule to go in all Modern Awards.

The introduction of the Fair Work Act 2009 delivered a harmonisation process that reduced the number of common rule awards from 1500- plus instruments to just over 120.

Attempts at simplification have been made through annualised salary arrangements, which started for some awards in 2020.

COVID-19 prompted further changes around management of employees, notes Vivienne Hardy, a conduct, risk and regulatory compliance partner at KPMG. “Simplifying can’t be done with a snap of the fingers,” she says. “It will require a lot of change and a lot of stakeholder involvement.”

Hardy occupies a box seat for what goes wrong for corporations as head of the consulting firm’s payroll compliance solution, KPMG ThinkPay. Interest in the services of its almost 50 payroll experts and technology runs strong today. Some of the common causes of underpayment are payroll errors, missed updates to modern award classifications and increases in minimum wages, incorrect penalty and overtime rates, unpaid meal break allowances and superannuation. Plus, not all businesses neatly fit into award categories.

Navigating the maze

“Some employers don’t know what awards apply to them and some aren’t aware that their employment contracts actually contradict awards that do apply,” says Hardy. “An understanding of the pay rules for each award is required, along with employees’ entitlements… We’ve worked with many law firms, and on one particular award, every single lawyer had a different interpretation.”

In February 2022, Woolworths confirmed that newly discovered payroll errors revealed a further $144m in underpayments for casuals, adding to the $427m the retailer had already disclosed for salaried workers. FWO investigations are ongoing. The General Retail Industry Award 2020, or GRIA, is the underpinning industrial instrument for the majority of Woolworths’ employees. In the group’s submission to the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022. Woolworths urged its simplification “in partnership with employers, team members and unions”. “The retail industry’s future productivity and prosperity requires an award system that can keep pace with the evolving nature of retail today and into the future,” its submission said. “More than 156,000 of our team are employed across 28 separate enterprise agreements, using 13 different awards as a baseline.”

What’s happening in the pay office?

“It’s impossible for someone in payroll to know everything that’s required, to keep on top of the updates and produce a compliant payroll at the same time,” says Tracy Angwin GAICD, CEO of the Australian Payroll Association (APA).

The findings of APA’s April survey of 2178 payroll professionals suggest corporate Australia is facing higher risks in payment errors due to the high-pressure working environment inside the pay office. Many payroll staff point to lack of leadership and resources within companies, with more than 41 per cent of payroll staff in large companies (500-plus employees) reporting they are burnt out. Just over 31 per cent plan to leave their jobs in the next 12 months.

At least part of the solution for organisations lies in providing greater support and investing in the payroll function, insists Angwin. A semi-government organisation she recently encountered had 76 people inputting payroll data in various departments, but not one of them was qualified.

KPMG uses a technology for continuous monitoring of clients’ obligations and risk factors and provides mathematical proof of issues and metrics for directors’ dashboards.

“But [technology] needs to be tailored to the organisation by people who know what they’re looking at from a data and obligations perspective,” says Hardy.

Another crucial point is that general audits are unlikely to show discrepancies in payroll — it must be a payroll compliance audit by those who know what they are looking for. Many see prospective new legislation on wage theft as a salve to a declining trade union movement. Others believe it will be effective as a deterrent to encourage increased compliance.

“Criminalising wage theft will go some way to making those charged with governance and senior management sit up and pay attention,” says Hardy. “It may well have implications for them personally, and there is a costly corporate reputational risk.”

McKellar sounds a warning. “In an environment where director liability is a live issue, we should be making it easier to comply and be giving them clearer guidance rather than setting the bar so low it’s easy to trip over,” he says. “The changes should be about empowering directors, business managers and employees by giving them tools and information to ensure compliance — without going into a draconian regime where unintentional activities run the risk of extreme sanctions.”

Overload of underpayments

The slew of underpayment announcements keeps coming this year, despite vigilant work by the regulator.

The Fair Work Ombudsman (FWO) recovered more than $532m for 384,805 underpaid workers in 2021–22 — a record sum of back-paid wages and entitlements for a record number of employees.

The recoveries, detailed in the workplace regulator’s latest annual report, are three times higher than the previous record recoveries in 2020–21, and more than quadruple that achieved in 2019–20.

More than half of the year’s recoveries came from large corporate employers, which back-paid nearly $279m to more than 267,000 employees. This was six times the amount returned from large corporates in the previous financial year.

Some of FY23’s most recent announcements include:

BHP

BHP agreed to pay current and former workers more than $430m following underpayment due to leave and contractual issues. The company said in June that it had underpaid at least 28,500 current and former employees in a dispute over leave days incorrectly deducted over a 13-year period. The company estimated the cost of remediating the leave issues would be up to US$280m before tax, including superannuation and interest payments. It said initial investigations suggested that OZ Minerals had been affected by a similar leave deduction issue before being acquired by BHP in May 2023. Another 400 Port Hedland workers have also since been identified as being underpaid due to contract errors. A Federal Court decision in March, clarifying employee rights around public holidays under the national employment standards, followed union action against BHP’s labour hire subsidiary, Operations Services, and found that companies could not automatically treat public holidays as work days without first asking employees to work the days — and employees having the opportunity to refuse that request.

Coles

In June, Coles announced in a statement to the Australian Securities Exchange (ASX) that following further investigation, it would make provision for another $25m in underpayments. The new lost wages come in addition to $25m in underpaid wages and costs the supermarket giant has confessed to, with salaried managers underpaid now almost $50m between 2014–20. The FWO is taking legal action against Coles Supermarkets Australia Pty Ltd that 7805 salaried employees were underpaid a total of $113.8m and that $107m remains outstanding. The highest underpaid amount for an individual salaried employee is now alleged to be $469,921. It is now alleged that 44 employees were underpaid in excess of $100,000.

Crown

The casino giant paid back more than $1.2m to about 200 employees at its Melbourne and Perth businesses after self-reporting underpayments in March 2000. Crown signed an enforceable undertaking with the FWO in late June this year. The underpayments were discovered during an audit that Crown conducted. It was found that the group had incorrectly identified some of its employees as award-free.

The AICD position

On 12 May 2023, the AICD made a submission to the Department of Employment and Workplace Relations on its consultation on criminalising wage theft.

As an advocate for good governance, the AICD believes companies should always comply with the law and directors can play an important role in fostering a culture of compliance.

Where corporations deliberately adopt a business model that intentionally and systemically underpays employees, it is appropriate that criminal penalties apply.

However, in light of the serious consequences of criminalisation, the AICD recommends that the imposition of a criminal penalty should only apply to the most serious cases that demonstrate deliberate exploitative, systematic wage theft.

The AICD has also opposed a proposal to extend existing accessorial criminal liability for directors for an offence by the company via a new “failure to prevent” offence.

This would lower the fault threshold from one where directors are knowingly involved in a contravention, to one where directors and officers are liable unless they can demonstrate that they exercised due diligence to prevent the offence.

This is not consistent with the Council of Australian Governments’ established principles for director criminal liability provisions and directors are already subject to a statutory duty to act with care and diligence and can be personally liable for corporate breaches of the law under the Corporations Act 2001 (Cth). 

This article first appeared under the headline 'Pay Attention’ in the August 2023 issue of Company Director magazine.