The role of a director is getting increasingly difficult and onerous. There is a tension between allowing management to address and deal with the operations of the business and the legal obligations imposed on directors which require that they sometimes delve deep into operational matters. This can cause conflict with management but also with the director who may perceive their best contribution differently.

The obligations of directors when it comes to safety are well known but those associated with the engagement of a workforce for the business are not so well known but increasingly the focus of regulators.

This article looks at some of the key areas that boards need to focus on including through recent changes to the Fair Work Act 2009 (FW Act) by means of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017.

Safety governance

The uniform safety legislation now introduced in most states and territories contains a useful framework for directors to follow when it comes to safety governance. It can also be applied to other areas of workplace governance.

Under this legislation directors have a duty to ensure a corporation complies with its obligations. The standard of this duty is to exercise due diligence. In turn, for example, section 27(5) of the Work Health and safety Act 2011(NSW) provides a definition of due diligence which contains six key elements and requires taking reasonable steps to:

  1. acquire and keep up-to-date knowledge of work, health and safety matters
  2. gain an understanding of the nature of the operations of the business and generally of the hazards and risks associated with those operations
  3. ensure that there are available for use, and used, appropriate resources and processes to eliminate or minimise risk to health and safety
  4. ensure there are processes for receiving and considering information regarding incidents, hazards and risk and responding in a timely way to that information
  5. ensure that there is, and its implemented, processes for complying with any duty or obligation under this Act
  6. verify the provision and use of the resources and processes referred to in points (c) – (e).

This definition of due diligence provides a guide for the approach and systems that a board needs to adopt in relation to safety. It is also a helpful guide when dealing with broader governance issues in the workplace area.

There are four key words in the above definition: acquire, gain, ensure and/or verify. These translate into six key qualities for the board to demonstrate.

  1. Directors must acquire relevant knowledge of their obligations and what they need to do to comply. This includes equipping them with questions to ask, issues to focus on and how to assess the effectiveness of organisational compliance systems.
  2. Directors must be inquisitive. The director cannot be passive in their interaction with relevant reporting. They need to critically assess whether any relevant information is accurate and complete.
  3. Directors must be facilitative. They cannot be a road block and must ensure that the business has the right resources to meet its obligations.
  4. Directors need to be responsive. They must ensure there is a process for receiving and considering information in a timely manner. This means that directors can react in a timely manner.
  5. Directors also need to be systematic. They need their own processes for managing their obligations in order to compliment what the business does.
  6. Directors need to be critical of the information they do or do not receive. They have to turn their minds to the information in a meaningful way to ensure that the business is complying with its obligations.

Workforce governance

The board must focus on a range of workplace practices including the support of anti-discrimination prohibitions and diversity. In the current environment, one key area is also workforce composition.

The status of those who work has changed and will continue to change. Many workplaces comprise different categories of employees as well as contractors. The employees can be engaged as casuals, permanent or on fixed terms. There may also be a significant number of interns working in the business. Further, some of the workforce may be employees of contractors or labour hire providers engaged by the business. This provides a complicated web of compliance and risk for the business and the board.

Consideration is required as to whether the internal structures of the business can properly cope with this complexity and ensure all the relevant areas of risk for the interaction between the business and each category of worker have been worked through and assessed. One key area of risk is the wrong classification given to particular workers in the circumstances they are undertaking work.

This can expose the business to a range of underpayment and other claims.

Casual v Permanent. Often a business can miss the transition of an employee from casual to permanent or to having the right to request permanent employment. If the transition is missed there are a range of underpayment or risk exposures that an employer may face:

  • Leave entitlements
  • Redundancy pay
  • Access to the unfair dismissal regime.

Contractor v Employee. Often a business can misclassify a worker as a contractor and pay them as such, even though other relevant indicia suggest that they are employees. Just because an individual agrees to be a contractor and is paid as such does not prevent the worker being deemed to be an employee at law. Where this type of worker is misclassified there are a range of risk exposures:

  • Leave and other entitlements under the National Employment Standards
  • Underpayment of minimum Award or other statutory entitlements
  • Failure to pay superannuation
  • Exposure to penalties for failure to comply with the National Employment Standards
  • Underpayment of Workers Compensation premiums
  • Redundancy pay
  • Access to the unfair dismissal regime.

Employee v Third Party. The modern workplace may now include workers sourced through a third party such as a labour hire provider. They may also be from an outsourced business or sourced from third party referrers or introduction platforms.

These require careful consideration of the structural interaction of each type of worker within the business and whether this exposes the business to the risk of liability. Where this type of worker is misclassified there are a range of underpayment or risk exposures that arise:

  • Leave and other entitlements under the National Employment Standards
  • Underpayment of minimum Award or other statutory entitlements
  • Notice and redundancy pay
  • Access to the unfair dismissal regime.

Drawing on the same framework as for safety, the key questions that each director needs to be asking are the following:

  • Do I know the legal tests for how workers are categorised? (Knowledgeable)
  • Do I know the different ways in which work is performed in and around the business? (Inquisitive)
  • Do I support reviews and assessments of the workforce arrangements in the business to ensure proper compliance with classification obligations? (Facilitative)
  • Does the board have in place a system for receiving and considering information around the classification of workers and workforce composition? (Responsive)
  • Is the board systematic in its own deliberations and processes concerning workforce composition and compliance with legal duties in this regard, including in respect of downstream supply? (Systematic)
  • Is the board critical of the information it receives on workforce composition and is it constantly reviewing the information it requires? (Critical)

Regulator activity concerning workforce composition

The Fair Work Ombudsman (FWO) has been active for some time in examining the supply chain of labour connected with business and prosecuting breaches of the Fair Work Act 2009 (Cth) (FW Act). While the FWO has taken action against the immediate parties to any specific breach, they have also examined whether others in the relevant supply chain of labour were involved in the breach.

A key concern is that in a number of structures the cost pressures have been driven from the top down with the result that middle entities, such as labour hire companies, subcontractors or external payroll entities, underpay their workers. The question that the FWO has asked is whether the top tier entity in the supply chain is liable for downstream breaches of minimum entitlements by reason of the commercial terms they set.

In addition to high profile investigations where publicity has been a powerful tool in initiating corrective behaviour, the FWO has also examined accessorial liability under section 550 of the FW Act. Under this provision a person involved in a contravention is taken to have also contravened that provision. It states:

“(2) A person is involved in a contravention…if, and only if, the person:

  1. has aided, abetted, counselled or procured the contravention; or
  2. has induced the contravention, whether by threats or promises or otherwise; or
  3. has been in any way, by act or omission, directly or indirectly, knowingly concerned in or a party to the contravention; or
  4. has conspired with others to effect the contravention.”

An example of how this provision works in the context of the labour supply chain can be seen in the decision of Fair Work Ombudsman v Al Hilfi [2015] FCA 313. This decision concerned trolley collection services for Coles supermarkets. Mr Al Hilfi was held to have contravened the FW Act by underpaying his workers. However, the sole director and the general manager of the intermediary operator who contracted with Coles and in turn with Mr Al Hilfi were found to have been involved in the breach. The reasons included that they had knowledge of the relevant Award conditions and were responsible for setting a contract with Mr Al Hilfi where the rates of pay were not sufficient to enable payment in accordance with the applicable Award. In those circumstances, by taking no action to ensure compliance they were inducing the breach and were also liable.

But the FWO has reported on the limitations of this provision to reach and influence the top tier entities in any labour supply chain. As a result the FW Act has been amended by the passing of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Vulnerable Workers Act). It has introduced a range of changes to the investigative powers of the FWO and has also increased the penalties for serious breaches. Further, in the context of workforce composition and business structures the Vulnerable Workers Act also introduced a new provision which is aimed directly at the top tier entity in the labour supply chain, in circumstances where a franchisor or holding company is involved.

For franchisors and holding companies there is now a new breach of the FW Act where either “knew or could reasonably be expected to have known” that the contravention would occur or that a contravention “of the same or similar character was likely to occur”. In the case of the franchisor it must have a significant degree of influence or control over the franchisee’s affairs.

There is an exemption where the entity has taken “reasonable steps to prevent a contravention” of the same or of a similar character. It is at this point that further guidance on the governance requirements for franchisors or holding companies is provided. At the same time it also provides good general guidance for the Board on the overall governance of workplace compliance issues.

Section 558B(4) of the FW Act as introduced by the Vulnerable Workers Act provides that the following are relevant considerations in respect of “reasonable steps”:

  1. the size and resources of the franchise or body corporate;
  2. the extent to which the person had the ability to influence or control the contravening employer’s conduct (Systematic);
  3. any action the person took directed towards ensuring that the contravening employer had reasonable knowledge and understanding of the requirements under the applicable provisions of the FW Act (Knowledge);
  4. the person’s arrangements (if any) to assessing the contravening employer’s compliance with the applicable provisions in the FW Act (Inquisitive/ Critical);
  5. the person’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions of the Act (Responsive); and
  6. the extent to which the person’s arrangements (whether legal or otherwise) with the contravening employer encourage or require the contravening employer to comply with the FW Act (Facilitative).

A relevant quality has been nominated above for the six factors to be considered in determining whether a franchisor or holding company has ‘taken reasonable steps’.

As referenced in the above summary, the same six key qualities that are contained in the approach to due diligence for safety are also present in this approach.

In light of the above, directors are faced with a conundrum. What ought they to know about the operations of subsidiaries? In one sense, the more active they are the more knowledge they can gain and the more they may expose the holding company to risk. However, the fact that there is a definition of “reasonable steps” strongly suggests that a holding company must at least be undertaking active steps to meet the “reasonable steps” test. If this is how the “…could reasonably be expected to have known” test is interpreted, boards of holding companies will need to ensure that management are actively taking action to a level that will meet the “reasonable steps” threshold.

These steps will need to be aimed at ensuring compliance within the group of minimum terms and conditions of employment in the context of the actual workforce composition as well as the labour supply chain used and the risks that arise in this context. It will not relate to compliance by non-related third parties but the FWO will be active in using its new powers to explore the application of the existing accessorial liability provisions as discussed above.

Overall comment

When it comes to boards exercising supervision over workforce issues, their role is much broader than just in respect of safety. One key area is in respect of workforce composition as well as labour supply chain issues and compliance with minimum terms and conditions. There are six key qualities for a Board to demonstrate in these areas. They are: knowledgeable, inquisitive, facilitative, responsive, systematic and critical.

* This article was first published in the December 2017 issue of Governance Directions, the journal of Governance Institute of Australia.