Three recent court rulings have highlighted the risks employers face in breaching civil remedy provisions of the Fair Work Act 2009 (Cth) (FW Act), with penalties of $77,000, $124,000 and $335,000 being imposed on employers who underpaid their employees’ statutory and award-based entitlements.
Under the FW Act, courts have the power to order a person who has contravened a civil remedy provision to pay a penalty that the court considers appropriate.
There are many civil remedy provisions in the FW Act, some of which have a very broad scope. In particular, contraventions of the National Employment Standards (NES), a term of a modern award, or a term of an enterprise agreement can all result in the imposition of a penalty.
The current maximum penalty for breaching a civil penalty provision is $10,200 per breach for an individual and $51,000 per breach for a company.
In this article, we bring you an overview of three recent decisions.
Webb v Stratton Finance Pty Ltd1
In this case, a dismissed employee successfully sued his former employer for various breaches of the FW Act, including non-payment of leave entitlements, and underpayment of superannuation.
In assessing the appropriate penalty to impose on the employer, Judge Raphael of the Federal Circuit Court considered a number of factors, including:
- the fact that the Fair Work Ombudsman had investigated the matter and told the employer it was underpaying the employee;
- the employer’s failure to keep adequate payment records;
- the significance of the underpayment;
- whether the employer had a history of contraventions of the FW Act;
- the size of the employer’s organisation (approximately 100 employees);
- the deliberateness of the breaches (Judge Raphael suggested that they showed “wilful blindness” on the employer’s part towards its obligations); and
- the involvement of senior management in the breaches.
Having considered these factors and in exercising the court’s discretion as to whom the penalties should be paid, Judge Raphael ordered the employer to pay the dismissed employee approximately $124,000. His Honour acknowledged that this represented a significant windfall gain to the employee, who had been underpaid approximately $27,000 in statutory entitlements. However, his Honour noted that the employee had undertaken a significant amount of work in order to recover his underpayments and had incurred legal fees.
Rocky Holdings Pty Limited & Another v Fair Work Ombudsman2
We initially reported on this decision in our summer 2014 Bulletin. The employer then appealed to the Full Court of the Federal Court against the penalties imposed on it by the Federal Circuit Court. The employer was found to have contravened three different terms of the NES on multiple occasions, and six different terms of a modern award also on multiple occasions.
The appeal centred on a section of the FW Act, which provides that multiple contraventions of certain civil remedy provisions will be taken to constitute only one contravention if they were committed by the same person and “arose out of a course of conduct” taken by that person (s557(1)).
In essence, the employer argued that all breaches of the NES should be treated as one contravention and, similarly, all breaches of the modern award should be treated as one contravention.
A Full Court of the Federal Court found that the wording in this section was ambiguous in this regard. In reaching a decision, it considered, among other things, the Explanatory Memorandum to the FW Act. The Explanatory Memorandum explained the operation of this section as follows.
“[I]f a company contravenes a single term of a modern award in respect of ten employees, these ten contraventions are taken to be a single contravention. This means that the maximum penalty that the Court can impose for the contravention is 300 penalty units.
“Similarly, if a company contravenes five separate terms of a modern award in respect of ten employees, these 50 contraventions are taken to be five contraventions. This means that the maximum penalty that the Court can impose is five times a maximum penalty of 300 penalty units” [i.e. 1500 penalty units].
The judges held that it could not have been the intention of the legislature that an employer who contravenes a range of provisions in respect of numerous employees should be subjected to the same maximum penalty as an employer who contravenes one provision affecting only one employee.
Ultimately, the Court rejected the employer’s argument and upheld a penalty of approximately $77,000 on the employer and penalties of approximately $15,000 each against two directors of the employer.
Fair Work Ombudsman v Zillion Zenith International Pty Ltd & Another3; Fair Work Ombudsman v Bound for Glory Enterprises Pty Ltd & Another4
This case saw the Fair Work Ombudsman initiate proceedings against the operators of La Porchetta restaurants in regional Victoria, who had underpaid 111 employees to the value of approximately $263,000 between July 2009 and February 2012.
While the primary respondents in each proceeding were distinct, both were wholly owned and operated by Mr Ruby Chand, who was the second respondent in both proceedings. In this article, we will refer to Mr Chand and his two companies as the Restaurant Operator.
The Restaurant Operator had failed to pay the correct minimum rates of pay, casual loadings and accrued leave upon termination. It also failed to keep adequate records.
Both proceedings were heard together and resulted in Judge O’Sullivan of the Federal Circuit Court ordering the Restaurant Operator to pay approximately $335,000 in pecuniary penalties, while also ordering that all underpayments be rectified.
In deciding the appropriate penalty to impose on the Restaurant Operator, Judge O’Sullivan took into account a number of factors, including:
- the contravening conduct was widespread and persistent, and would most likely have continued had it not been for the Fair Work Ombudsman’s intervention;
- the vast majority of the employees who were affected by the contraventions were young and vulnerable;
- the Restaurant Operator knew there was a collective agreement in place which applied to the employees, and was aware of the obligations it imposed;
- the Restaurant Operator had been investigated by the Ombudsman as early as 2007 and was well aware of the obligations to meet minimum entitlements;
- the Restaurant Operator admitted underpaying employees and offsetting this against free and discounted pizza and soft drink (Judge O’Sullivan found that this particular conduct “belongs in the dark ages”);
- the Restaurant Operator’s contraventions were part of a systematic business practice;
- the Restaurant Operator’s record keeping practices were seriously deficient, meaning the proper calculation of underpayments was severely hindered; and
- evidence showing that the Restaurant Operator had continued to underpay employees even after proceedings had commenced, which demonstrated lack of contrition.
This decision is also noteworthy for Judge O’Sullivan’s rejection of an argument by the Restaurant Operator that the penalties imposed should be reduced on the basis that the two companies were essentially being penalised for the same conduct across two restaurants. Judge O’Sullivan made clear that both proceedings involved separate contraventions, separate businesses and separate employees, and it was inappropriate to reduce the penalties imposed on each merely because they shared a common owner and director.
On a subsequent note, La Porchetta has since signed a Proactive Compliance Deed with the Fair Work Ombudsman. Under the terms of the Deed, La Porchetta will conduct a three year self-audit of wages at 24 of its 65 stores and will work with franchisees to ensure prompt repayment where irregularities are found.
It has also agreed to provide new franchisees with employment induction training and employment packs covering key aspects of workplace laws.5
Bottom line for employers
These cases demonstrate that underpaying employees can result in very serious penalties, which may in fact exceed the amount by which an employee has been underpaid in the first place.
In situations involving multiple breaches and/or multiple affected employees, penalties may also be multiplied, resulting in a significant financial exposure.
Employers should also remember that the courts’ power to order payment of civil penalties to employees presents an added incentive for employees to pursue their entitlements through to a final hearing, despite orders for payment of legal costs not being available.