Beware: You could be personally liable for underpaying staff

As seen in many recent high-profile cases, the Fair Work Ombudsman (FWO) is persistently cracking down on directors of companies who underpay their staff.

The FWO media releases are full of stories where directors have been held personally liable for underpaying staff in contravention of the Fair Work Act 2009 (Act).

In addition to significant penalties, the extent of the personal liability for directors can include the total amount of underpaid wages and entitlements, particularly if the company is unable to pay.

Criminal act?

There has been much discussion in recent months about the Federal Government’s plans to introduce laws criminalising deliberate and systematic underpayment of employees. This could potentially mean jail time for offending directors.

This has occurred in response to the Migrant Workers’ Taskforce Report released in 2019. In principle, the Government accepted the recommendations outlined in the report, including criminal penalties for employers involved in the underpayments. Provisions criminalising wage theft were included in the Fair Work Amendment (Supporting Australia’s Jobs and Economic Recovery) Bill 2020 but were ultimately scrapped by the Federal Government.

However, the debate has heated up and some States have implemented legislative changes relating to wage theft whilst others have commissioned reports into the issue, including:

  • In Victoria, the Wage Theft Act 2020 (VIC) came into force from 1 July 2021 and criminalises underpayment of employees up to 1200 penalty units or 10 years jail for individuals, and up to 6000 penalty units for companies. In addition, a new statutory authority known as the Wage Inspectorate of Victoria has been established to enforce this legislation.
  • In Queensland, the Criminal Code Act 1899 (QLD) was amended in September of 2020 to expand the definition of “stealing” to include failure to pay employees the amounts payable, with a penalty of up to 10 years in prison.
  • In South Australia, the Select Committee on Wage Theft handed down its final report in December 2021, and included a recommendation to make underpayment a criminal offence.

These implemented or proposed legislative changes have significant implications for employers and their directors and this may change depending on which States or Territories an employer may operate in.  It’s important to note that directors ordinarily cannot seek indemnification from their companies if they are involved in criminal offences, this means it will come out of the director’s own pocket.

Given the increasing heat being placed on directors and business owners, it is important for you to understand the legal requirements and put in place compliance systems so that employees are being paid their legal wages and entitlements.

How could you become personally liable?

Under the Act, a director will be found to have been ‘involved’ in a breach of the Act or contravention if that individual has:

  1. Aided, abetted, counselled or procured the contravention; or
  2. Induced the contravention, whether by threats or promises or otherwise; or
  3. Been in any way, by act or omissiondirectly or indirectly, knowingly concerned in or party to the contravention; or
  4. Conspired with others to effect the contravention.

What does this mean? In a recent case before the Federal Circuit Court of Australia, the Court declared that two directors of five companies were ‘involved’ in failing to pay employees certain wages and entitlements, including contravening the National Employment Standards and modern awards. The relevant awards included the Professionals Employees Award 2010 and Clerks Private Sector Award 2010. The underpayments totalled approximately $1.9 million.

This case provides us with guidance on some key aspects that are examined to determine if a director has been ‘involved’ or is accessorily liable. These include:

  1. Knowledge and involvement – aka ‘standing by and watching’: The Court held it was not necessary that a person physically do anything to further the contravention. It is sufficient that the person became associated and involved in the contravention by what they said and agreed to do. There is a requirement for actual knowledge of the essential matters that make up the contravention. The person must have intentionally participated in the contravention. But the person does not need to have knowledge that their conduct was unlawful or constituted a contravention – ignorance of the law is no defence!
  2. Wilful blindness – aka ‘sticking your head in the sand’: An individual’s knowledge of circumstances can be inferred from the individual’s ‘wilful blindness’, which could include deliberately abstaining from asking questions or making enquiries, or a deliberate ‘shutting of one’s eyes to what is going on’. What this means is that directors have a positive obligation to ask relevant questions about whether people are being paid appropriately.
  3. Controlling minds – aka ‘looking through the company’: In this case, the Court found that because a corporate entity can act through the individual and directors are the ‘controlling mind’ of a company, directors can, in the absence of contrary evidence, be accessorily liable.
  4. Practical connection: The directors had a practical connection to the contraventions by the companies including:
    1. knowing that they had run out of cash to pay employees;
    2. knowing employees were not being paid wages and entitlements when they were due;
    3. requiring employees to attend work even though they were unpaid; and
    4. intentionally participating in contraventions by offering inducements or bonuses to stay employed by the companies.

It is a daunting process having your decisions and actions examined in Court, and something every business owner and director would rather avoid. Each case will turn on its own facts, but it is concerning for business owners that increasingly the Courts and Fair Work Ombudsman are looking to impose personal liability on directors for underpayment of employees’ wages and entitlements.

How can Andreyev Lawyers help you?

Our experienced team can provide you with legal advice so that you, as a business owner, can put proactive systems in place to manage the risk of underpaying employees. If you are involved in a dispute with an employee or the Fair Work Ombudsman, we can represent you.

Contact our team today on 1300 654 590.

‘Involved’ within the meaning of section 550 of the Fair Work Act 2009.

Fair Work Ombudsman v Priority Matters Pty Ltd and Fair Work Ombudsman v Superlattice Solar Pty Ltd and Fair Work Ombudsman v Geneasys Pty Ltd (in liq) and Fair Work Ombudsman v Silverbrook and Fair Work Ombudsman v Mpowa Pty Ltd (No 4) FCCA 56.

They were found to have been ‘involved’ in breaches of sections 44, 45, 293, 323, 328 and 542.

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