$1.7b Coles and Woolworths underpayment ruling: what employers must know
Coles and Woolworths have recently been in the spotlight, facing significant underpayments of an estimated $520 million and $1.2 billion respectively.
The decision will not only have an impact on the supermarkets but also on many employers paying employees under annual salaries or flat rates.
This is because previous common practice to use an annual salary to “smooth out” an employee’s entitlements across pay periods has now been identified as a likely breach of the Fair Work Act 2009 (Cth) (FW Act), potentially exposing employers to underpayment claims.
The Federal Court jointly considered four underpayment applications, finding that Woolworths and Coles underpaid salaried managers covered by the General Retail Award 2010 (Award) by failing to pay enough to capture Award entitlements (such as overtime, penalty rates, loadings and allowances) and to maintain adequate employment records.
Common law set-off
Woolworths and Coles sought to rely on common law off-set (or ‘set-off’) in defence of the underpayments, arguing the amounts paid to the employees over a six- or 12-month period were sufficient to meet the entitlements due under the Award.
However, the court found that an employer cannot not seek to “pool” the wages paid to an employee over a six- or 12-month period and rely on overpayment in one pay period (or over the six- or 12-month period in general) to make good or rectify underpayment in another pay period.
Rather, under the FW Act, employers must pay an employee in full for all the entitlements owing under the relevant industrial instrument, at least monthly (or more regularly in line with the industrial instrument’s pay period).
Record keeping requirements
The supermarkets mistakenly believed that payment of a salary via a “set-off” clause eliminated the requirement to keep records of each entitlement payable under the Award.
The Federal Court found that this practice fell short of record keeping requirements under the FW Act, including that records must:
- be kept in a way they are accessible to the inspector;
- set out any higher rates of payment, bonus, loading, penalty rate or other allowance an employee is entitled to be paid; and
- detail any overtime hours worked by the employee as either the total hours worked or start and finish time, in circumstances where a penalty rate or loading is to be paid for those hours (which it would be under the Award, in this case).
Justice Perram found that systems which “clock in” employee hours, in conjunction with scheduled rosters, were insufficient record keeping for the purpose of the FW Act.
Records must have sufficient detail for an employee to understand the basis of the entitlements which they have earned (which, presumably, would require additional detail about the actual hours worked and any penalty/loading attributable to those hours).
Importantly, in addition to breaching the FW Act, insufficient record-keeping results in a reverse onus of proof applying in underpayment claims. That is, rather than the employee proving they were underpaid, the onus shifts to the employer to prove that they were not – this can be difficult to do when faced with insufficient records.
Flexibility provisions
The Court also considered the requirements where an employee(s) and employer can agree to vary provisions of a modern award. Here, employees were entitled to a 12-hour break between shifts under the Award, and payment at a higher rate where the break was not provided. However, by agreement between the employee and employer, this could be reduced to a 10-hour break.
Justice Perram found there could not be genuine agreement unless the employee was aware of their right or entitlement. It is not enough that the employee agrees to work in accordance with this flexible term, the employer must show the employee knew the entitlement under the Award, and agreed to forgo it.
Actions for employers
It remains to be seen whether the supermarkets will appeal the decision.
In the meantime, to reduce the risk of underpayments and breaches of the relevant industrial instrument/FW Act, employers should proactively review:
- Remuneration arrangements, to ensure employees are paid in full each pay period;
- Contracts to ensure any set-off provision provides sufficient protection;
- Record keeping systems to ensure compliance; and
- Any current practice or agreement to vary modern award terms to ensure compliance.
At Business Law WA, our team of Workplace Relations experts can assist your business in ensuring compliance and reducing the risk of underpayment. We can provide legal advice on:
- Employment contract reviews;
- Pay calculations and compliance audits;
- Managing underpayments or non-compliance;
- Record keeping obligations; and
- Compliance with modern awards, including flexibility terms.
Contact the Business Law WA team on 08 9365 7746 or at [email protected] for further information.
This article is authorised by Business Law WA, an incorporated legal practice and wholly owned subsidiary of CCIWA. The contents of this article is general in nature and is not legal or professional advice and should not be relied upon as such.
