Underpaying wages – getting it wrong can be costly

Why are so many getting it wrong and at what cost?

Paying wages seems simple, however many businesses have been found to have underpaid their employees, including large corporations such as Woolworths¹, the Commonwealth Bank of Australia², the Australian Broadcasting Corporation³ and Qantas⁴.

At Worrells, we’ve dealt with several external administrations where the entity has:

• An existing underpaid wages liability

• Allegations of underpaid wages

• Or we’ve identified an underpaid wages issue, and calculated the underpaid wages owing to the affected employees.

So, where do businesses go wrong with paying wages to their employees?

Whilst this is not an exhaustive list, we’ve found that some potential causes of underpaid wages include:

Classifying an employee under the incorrect award

In Australia, there are over 100 awards across various industries and awards which may overlap in certain industries or jobs. Awards set out various terms and conditions of employment for employers and employees, including ordinary hours, ordinary hours of work, minimum pay rates, overtime, penalty rates, weekend and public holiday rates and allowances, which may differ depending on the industry and/or job.

Businesses that employ employees under awards need to ensure they have applied the correct award or the business may be incorrectly paying its employees.

In an external administration involving an entity which operated a timber logging and transport business, the entity employed its truck driver employees under the Road Transport and Distribution Award. However, given the truck drivers predominantly transported timber logs, they may be more appropriately classified under the Timber Industry Award. As these awards contain different employment terms and conditions, employees can mistakenly be paid incorrectly depending on which award should apply.

Failing to pay employees in accordance with the applicable award

The terms and conditions set out in awards can be complicated. Even when a business is applying the correct award, the business may not be paying its employees correctly under the award.

In matters we’ve dealt with, we’ve found that under each applicable award there are several considerations to be given in respect to overtime and when penalty rates apply for overtime hours worked. This can be hours worked above ordinary weekly hours, hours worked outside of ordinary hours of work and breaks between shifts being less than the required number of hours. Incorrectly applying the applicable overtime penalties can result in employees being paid incorrectly.

Inadequate employment agreements

Not all businesses employ their employees under awards and rather the terms and conditions of employment are set out in registered agreements. If so, then the terms and conditions set out in the applicable award are not relevant. However, if the terms and conditions under the registered agreement result in the employee being paid less than what they would be if they were paid in accordance with the applicable award (e.g. base rate in the registered agreement is lower than the base rate in the award), then the award will apply. If this is the case, then employees may have been incorrectly.

Additionally, whilst some registered agreements may include an offset clause in respect to overtime, whereby the employee is getting paid a higher base rate in lieu of being paid at penalty rates for overtime worked, if the offset clause does not clearly articulate this position and/or if the employee is being paid less than what they would be paid if overtime was paid in accordance with the applicable award, then the business may not be paying its employees correctly.

When businesses don’t get it right, there are several risks or consequences of incorrectly paying employees. These include:

Underpaying employees

Firstly, businesses risk underpaying employees, which can result in a significant underpaid wages liability depending on the extent of the underpayment (e.g. how many employees are affected and over how many years, which is capped to a 6-year statutory time limit pursuant to the Fair Work Act 2009).

Depending on the quantum of the underpayment, businesses may not have funds readily available to pay the underpaid wages to the affected employees in a lump sum and/or timely manner and may have to pay the underpayment over several pay cycles. Nonetheless, any significant underpaid wages liability will likely put financial pressures on the business and in particular, cash flow pressures and pressures from employees to be paid their underpaid wages.

Additionally, this may cause stress on the business and its employees. This could result in employees leaving, as well as reputational damage to the business and responsible parties (e.g. directors).

Significant costs

Calculating the underpaid wages liability can be time consuming and incur significant costs, especially given the complexities with employment law and awards. Therefore, a business may be required to seek legal advice and engage an external consultant to conduct an audit to quantify the underpaid wages liability. We have seen many examples of where these costs are in the hundreds of thousands of dollars just to quantify the amount of the underpayment.

Additionally, the Fair Work Ombudsman may commence an investigation potentially resulting in legal proceedings which can be costly and time consuming.

The process and costs of determining the underpaid wages liability and any legal proceedings can put financial pressures on the business.

Penalties

Where it has been identified that a business has underpaid its employees, the business and the responsible parties can be fined. Additionally, where it is found that the underpayment was intentional, the penalties on the business and responsible parties can be more severe and responsible parties may face a maximum of 10 years imprisonment.

Therefore, underpaying employees can have the effect of piercing the corporate veil creating a significant personal risk to directors.

Any fines imposed on a business and responsible party will likely result in financial pressures and potentially further action being taken if the fine is not paid.

Failure of the business

Given the potential financial consequences and pressures from underpaying wages, businesses may ultimately fail due to becoming insolvent. Where businesses are insolvent and there are no prospects of restructuring the business, the entity should be wound up.

Additionally, the financial consequences and pressures on responsible parties may result in the bankruptcy of those individuals.

Considering the potential causes, consequences and risk discussed, here are some ways which businesses can avoid underpaying wages:

• Seek legal advice to ensure businesses are compliant and employees are being paid in accordance with the applicable award or the terms and conditions of employment in registered agreements are adequate.

• Conduct regular reviews (e.g. annually) to ensure the business remains compliant with employment laws and awards.

• Conduct regular reviews of payroll systems and processes to ensure these are up to date with correct employment data.

If you have concerns regarding unpaid wages, or wages paid under the wrong award and insolvency could be on the horizon, reach out to your local Worrells principal.

[1] Woolworths admits to underpaying staff by $1.24m, could face a hefty fine - ABC News

[2] CBA to pay back staff $53m in botched pay with 41,000 affected (smh.com.au)

[3] ABC reimburses $12m to nearly 2,000 staff underpaid over seven years | Australian Broadcasting Corporation | The Guardian

[4] Qantas pays back more than $7 million in wages and entitlements to staff underpaid for eight years - ABC News