In recent years, reports of wage underpayment have significantly risen across Australian businesses, including small and medium sized enterprises.
A single inquiry from an employee regarding their pay or entitlements can trigger an investigation by the Fair Work Ombudsman (FWO), potentially leading to compliance notices and prosecution, which may result in significant fines, interest on back pay, and reputational damage.
A recent case involving a Sydney finance and mortgage-broking company, First Step Finance, exemplifies the risks.
First Step Finance Pty Ltd was penalised $117,190 after failing to back-pay three employees and for knowingly issuing false or misleading pay slips. The FWO began its investigation after the three affected workers sought assistance from the FWO.
The FWO issued compliance notices in August 2021, September 2022, and August 2023, indicating that two of the employees were underpaid minimum wages, while all three were owed accrued annual leave entitlements under the Banking, Finance and Insurance Award 2020, the National Minimum Wage Order 2022, and the National Employment Standards.
As a result of the company’s failure to comply with the three compliance notices and having knowingly provided false or misleading pay slips to two employees, the Federal Circuit and Family Court imposed a $97,710 penalty against First Step Finance Pty Ltd, and a $19,480 penalty against the company’s sole director and secretary, David Brian Ward. The company was also ordered to back-pay the owed entitlements to the affected employees.
Judge Robert Cameron emphasised the need for penalties to deter the company and others from future non-compliance, stating that First Step Finance had “chosen to disregard their obligations” to their employees. He highlighted the importance of sending a clear message that such conduct will not go unaddressed by the court.
Following the decision, Fair Work Ombudsman Anna Booth warned that business operators who fail to act on Compliance Notices should be aware they may face court penalties in addition to being required to back-pay workers and again, encouraged “any employees with concerns about their pay and entitlements should contact [the FWO] for free advice and assistance.”
Introduction of wage theft laws
On top of the already firm stance taken by the FWO, from 1 January 2025, intentional underpayment of wages by employers will become a criminal offence. The maximum penalty for contravening wage theft laws can reach up to $7.825 million for companies, and $1.565 million and 10 years in prison for individuals.
With the FWO’s expanded jurisdiction to also investigate suspected wage theft, underpayment issues will undoubtedly remain a focal point. It is imperative for businesses to prioritise compliance and seek advice for early intervention to safeguard themselves against serious repercussions.
Common pitfalls for SMEs
Here are some common pitfalls for SME operators when it comes to wage compliance:
- Assuming no awards apply to your employees – a common mistake is assuming that because no industry award applies to your business, it means that no award applies to all your employees. Awards can apply based on an employee’s occupation.
- Assuming the same industry award applies to all your employees – similarly, because an industry award applies to your business does not necessarily mean that it applies to all your employees. The scope of each award must be considered to determine its application.
- Thinking that paying annualised salary avoids underpayment claims – if the annualised salary is not set sufficiently high to discharge your liability for wage and non-wage monetary entitlements to an employee (e.g. overtime, leave loadings, etc.), you may still be exposed to underpayment claims.
- Any underpayment can be set off against above-award pay rates – offsetting underpayments against overpayments is only possible where an employment contract, award or industrial instrument allow you to do so. Set off clauses must also be carefully drafted as it is only valid if it specifies which entitlements are being offset.
Businesses should always seek legal advice if they are uncertain as to the application and the terms of an award or industrial instrument.
Getting on the front foot
To prevent an issue from accumulating and resulting in serious consequences over time, there are several actions that organisations should take to review their compliance. These include seeking advice to ensure the correct award has been applied to your staff, regularly reviewing and updating employees’ classification levels, undertaking regular reviews to ensure overtime entitlements, allowances and other pay-related entitlements have been properly recognised, conducting a review to ensure applicable industrial instrument entitlements have been correctly interpreted in your payroll system, and reviewing annualised salary practices to ensure salaries are sufficient to cover wage and all applicable entitlements.
By following these steps and – most importantly – seeking advice early and often, you can stay on the right side of the law.
If you need assistance with reviewing your organisation’s compliance with awards and industrial instruments or with instructing other specialists to provide you with the appropriate legal advice to manage and rectify any areas of risk exposure, please get in touch with Holding Redlich Special Counsel Virginia Liu here.
By Virginia Liu, Special Counsel, Holding Redlich
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