Underpaying staff, intentional or not, can occur in a business of any size. We explain the increased penalties and how to address the risks.
The Fair Work Ombudsman (FWO) is intensifying enforcement and implementing stringent measures to address underpayments in the workplace.
Businesses will face increased consequences with higher penalties at stake if found to be underpaying employees.
As part of the Fair Work Legislation Amendment (Closing Loopholes) Act 2023, sections 327A, 327B and 327C will be added to the Fair Work Act 2009 (Cth) (the FW Act) addressing underpayments which may be subject to harsher financial penalties and possible prosecution.
What are the risks for your business?
Whether intentional or not, underpayments can occur in a business no matter the size. Underpayments may result from a lack of knowledge of requirements, incorrect classification of an employee’s industrial instrument, non-payments, record keeping failures, reliance on flat rates or annualised salaries and incorrect payroll configurations just to name a few.
Underpayments do not only create financial burdens for organisations, but also pose significant effects on employers and on the overall brand reputation, including:
- Decrease in employee morale: Pay has a direct effect on productivity and job satisfaction, therefore a business can expect an underpaid employee to be far less likely engaged at work. The overall morale in the workplace can significantly decrease, while employee turnover increases.
- Brand reputation: A business may experience increased difficulties when trying to recruit quality talent as their overall brand suffers from long-term reputational damage. Once a business’ image has been tarnished by being associated with underpaying staff, it can be extremely difficult to change that perception.
- Financial and legal penalties: Employers can face legal action and increased financial pressure as penalties may be imposed, which once the new changes come into effect, could be a maximum of $7.825 million for businesses or a maximum of $1.565 million for an individual. An individual could also be sentenced to a maximum of 10 years’ jail.
- Stress on the business: Employers underpaying employees are at risk of facing litigation, which can involve long court proceedings, and potentially legal representation. Aside from the cost of these proceedings, the time consumed by these processes may also be draining to the business, taking away from time spent on achieving business objectives.
The biggest risk of all – criminalisation of wage theft
The new wage theft provisions will be in effect from January 1, 2025. Section 327A of the Act addresses underpayments and non-payments to employees, with section 327C providing for when an underpayment offence will be subject to further action by the Department of Public Prosecutions.
An employer may be found to have committed an offence under section 327A if,
- the employer is required to pay an amount to an employee or on behalf of an employee for their benefit under the Act or other applicable industrial instrument; and
- the amount is not an amount covered under subsection (2) (for example excludes superannuation); and
- the employer engaged in the conduct; and
- the conduct results in the failure to pay the required amount to the employee in full or on the day when the required amount is due for payment.
In addition to the above, the absolute liability and the intention is also relevant. An employer has absolute liability if they were required to make the payment and the employer intentionally engaged in the conduct, intending that their conduct would result in a failure to pay as required.
A business can be ordered to pay a penalty maximum of $7.825m. Where the court can determine the amount of the underpayment, the organisation may be liable to pay the greater of either three times the amount of the underpayment or up to the maximum. If the court is not able to determine the underpayment amount, then the organisation may receive the maximum penalty.
Additionally, an individual can be sentenced to a maximum of 10 years’ jail, as well as receive a maximum $1.565m fine if the court is not able to determine the amount of the underpayment, or if determined, the greater of three times the amount of the underpayment or up to the maximum.
The Voluntary Small Business Wage Compliance Code
If the FWO is satisfied that a small business complied with the Voluntary Small Business Wage Compliance Code, section 327B states the FWO must not refer the conduct to the Department of Public Prosecutions.
CCIWA’s HR & Learning Consultancy can provide fixed-fee wage spot checks to give you the peace of mind that you’re navigating Australia’s complex industrial relations legislation correctly. Reach out today to learn more via email to [email protected].
