Unpaid Wages and a Fully Funded Wage Cop – Another Dimension to the Benefits of Legal Professional Privilege

Many employers will be interested to note that this year’s Federal Budget included an additional $28 million in funding for the Fair Work Ombudsman (FWO) – the office responsible for creating a fair and complaint workplace environment (including compliance with workplace laws). 

With Commonwealth ‘wage theft laws’ set to commence in January 2025 employers can expect the FWO’s enforcement and compliance activities to be laser focused on wage theft and underpayment in the year ahead. 

Amendments to the Fair Work Act 2009 (Cth) via the Closing Loopholes Act in December 2023, introduced a criminal offence for intentional underpayment of employee wages and certain other entitlements. At the time of their introduction, the Government reasoned that despite years of action taken to address underpayments, non-compliance remains a persistent problem. 

Under the new provisions, individuals found to have been involved in an intentional breach of the Fair Work Act obligation to pay wages and entitlements can be subject to criminal prosecution, upon referral from the FWO. 

What is wage theft? An employer commits the offense of wage theft, if they’re required to pay an amount to an employee or on behalf of an employee under the Fair Work Act or under an industrial instrument (an Award or Enterprise Agreement), and they intentionally engage in conduct that results in a failure to pay those amounts on or before when they’re due to be paid. 

The key element is that the conduct must be intentional, proved to the criminal standard, beyond reasonable doubt. That’s a high standard. The financial penalties for conduct proved to this standard, will be the higher of three times the underpayment or (a) for an individual over $1.5 million, or (b) for a body corporate over $7.8 million. Clearly these are large numbers. In addition, an individual faces a maximum of 10 years imprisonment if convicted of the wage theft offence. 

The Fair Work Ombudsman will be responsible for investigating these offences (guidance about this is yet to be released by the FWO however we’re keenly following developments and will keep you updated), and will decide when to make referrals of criminal matters to the Cth DPP or the AFP for prosecution. 

Is voluntary disclosure ‘still a thing’? 

As an alternative to referral for criminal prosecution, the FWO may elect to enter into a cooperation agreement with the employer. That step is premised on an employer making voluntary disclosure of conduct that could amount to wage theft.  

Whether or not the FWO will enter into a cooperation agreement depends on a number of factors (all within the FWO’s discretion), such as the extent to which the employer cooperates (although we would have through self-disclosure is the ultimate form of cooperation), the gravity of the conduct, and whether there a history of non-compliance.   

There remains no certainty (on a case-by-case basis) about how the FWO will weigh these factors, and clearly a great deal of discretion in the FWO’s decision making around cooperation agreements.  

Consequently, the decision to disclose is one that requires careful consideration and should be the subject of advice obtained with the benefit of legal professional privilege.   

Legal professional privilege protects all communication between solicitor and client for the purpose of obtaining advice, from disclosure to authorities. This means a decision to engage your trusted legal advisors (those with expertise in industrial relations law) for all aspects wage compliance advice (from wage audits to remediation strategy) will be more beneficial than opting for a financial advisor, accountant or consultant.  

What about unintentional errors 

We anticipate there will be no material change to the FWO’s treatment of accidental or inadvertent underpayment, based on a genuine mistake. Underpayment of those kinds won’t be caught by the wage theft provisions. 

For example (take from the explanatory memorandum to the Closing Loopholes Bill), a failure to make a correct payment because the employer has wrongly classified the employee wont amount to wage theft. However, it is still a civil contravention of the Fair Work Act. 

The FWO will remain interested in taking civil penalty proceedings against Employers and individuals involved in ‘unintentional’ wage underpayments.  

The prospect of individuals (such as a Director, Payroll Officer, Manager or advisor) being penalised under the Fair Work Act’s civil accessorial liability provisions remains.   

Civil penalties under the Fair Work Act will significantly increase from January 2025 – from $460,000 per contravention and up to $4.6 million for serious contraventions (those that are caused by systematic failings). 

Common reasons why for unintentional wage underpayments include: 

1. Industrial instruments are complex. 

2. The requirement to reconcile salary against award entitlements annually is often overlooked or time keeping records are poorly kept. 

3. Loaded rates which may start out as generous, over time fall below award minimums if they’re not regularly reviewed and increased, or don’t account for all entitlements such as loadings and allowances. 

4. Awards contain annualised salary provisions, which require an annual reconciliation of entitlements against salary. 

5. Rostering systems that do not identify when an employee becomes entitled to a loading, allowance or penalty rate. 

Common mitigation strategies include: 

1. Regular audits that cover a range of issues including Award/Agreement application and interpretation, engagement terms, rostering practices, rates of pay and entitlements. 

2. Flat rates should be tested annually against all available Award/Agreement entitlements.  

3. Prioritise a system of record keeping for engagement documents (offers and contracts), rosters, timesheets and payslips.  These all become essential to respond to a FWO enquiry about underpayment. 

4. Training for managers who are dealing with making offers, appointments and establishing entitlements and rates of pay so that they are aware of which Award/Agreement applies and what wages and entitlements are payable.