Do you pay your employees above the minimum base award rates? Do your employees work through their breaks, more than 38 hours per week, on weekends, public holidays or outside of ordinary hours of work? If so, you may be underpaying them.

Most businesses have some employees covered by an award. Awards typically contain a base rate of pay plus additional entitlements for things such as overtime, penalty rates and allowances (award entitlements). Generally speaking, employers and employees may agree to offset some award entitlements in exchange for a higher base rate of pay or ‘salary’. However, many employers miscalculate the offset, resulting in underpayments to employees. This can, and often does, trigger an investigation by the Fair Work Ombudsman and possible prosecution leading to significant penalties. Corporations can face penalties of up to $51,000 (and $10,200 for individuals) per breach if they underpay their employees.

What goes wrong and what should you do?

In our experience, employers often don’t appreciate each award entitlement and therefore over-estimate the flexibility that a ‘salary’ gives them.

It is important that an employer understands that an employee must be paid at least the amount they would receive if they were paid strictly in accordance with the award (e.g. the base rate of pay plus any applicable award entitlements). When setting a pay rate or salary to offset award entitlements, employers need to consider which entitlements will apply to the particular employee’s work pattern. For example, if an employee typically works through their breaks, in excess of 38 hours per week or on weekends, the employer should factor into the salary any applicable overtime, penalty rates or allowances that would otherwise apply.

Further, if salary arrangements are not implemented and recorded properly, a dispute may arise about which award entitlements (if any) are intended to be included in the salary. An employee, the Fair Work Ombudsman or a union may assert that the employee is entitled to payments in addition to their salary for things such as meal or travel allowances and weekend penalty rates. To avoid such a dispute, any salary arrangement should be appropriately agreed to and documented to ensure that it is clear which award entitlements are intended by both parties to be offset by the salary.

Finally, employers should keep good time and wage records to ensure that the employee continues to be paid enough to avoid underpayment and satisfy the employee, Fair Work Ombudsman, court or tribunal that this is the case. Corporations can face penalties of up to $25,500 for failure to keep proper time and wage records for their employees.

Do you know your award?

It is important that employers have a good understanding of the terms and conditions of each of the awards that apply to their business. Underpayments and breaches of an award often arise because employers are not aware of each and every entitlement contained in the award. Some awards contain complex or unusual clauses that are not obvious.

Examples of some unusual award clauses to look out for are:

  • Industry specific redundancy schemes that exclude or alter the redundancy provisions under the Fair Work Act and may:
    • entitle employees to a redundancy payment when their employment is terminated for any reason (including resignation) regardless of length of service;
    • require ‘small business employers’ to pay redundancy to their employees; or
    • increase redundancy benefits.
  • Notice periods that are different to the notice periods in the Fair Work Act. For example the Air Pilots Award 2010 requires the employer to provide the employee with two weeks’ notice if they have less than one year’s service and four weeks’ notice if they have more than one year’s service.

Cases highlight that penalties can be substantial

A pizza and pasta franchise operator has recently been penalised $335,000 for underpaying more than 100 of its employees over a period of three years and failing to keep accurate wage records.¹

This included a $56,000 penalty against the owner of the company that operated the franchise.

The franchise was also ordered to locate each of the underpaid employees and pay the balance of the $258,000 underpayments that remained outstanding.

The franchise operator had provided some employees with free and discounted pizzas and soft drinks instead of their full wages. The Court described this practice as belonging ‘in the dark ages’.

In another case involving a security company², an employer paid each of its award covered employees a flat rate that was a few dollars above the minimum hourly award rate. The employees were not paid any shift allowances, overtime or penalty rates, regardless of when or how much they worked, on the assumption that the higher flat rate sufficiently compensated them. The employer was wrong.

The Fair Work Ombudsman conducted a random audit of the business and discovered that 32 of its employees had been unpaid a total of $46,205 over a period of two years. The Court ordered penalties of approximately $17,000 against the corporation and $3,500 against the director for the breaches.

The Fair Work Ombudsman pursued penalties against the employer despite the employer promptly rectifying of the underpayments when it was drawn to their attention and despite the fact the underpayment was not deliberate.