The Federal Circuit Court has applied a strict interpretation of the accessorial liability provisions in the Fair Work Act 2009 (FW Act) to find a director to be personally liable for the underpayment of approximately 150 employees.
In summary, Judge Manousaridis found the director to be personally liable for wage underpayments despite the fact that the director:
- did not know their relevant decisions would result in wage underpayment;
- did not prepare, and did not ask to be prepared, the financial analysis that resulted in a wage underpayment; and
- did not fully appreciate what a modern award was, or the ramifications of non-compliance.
1. In 2013, the director attended a meeting with the Chief Financial Officer of Chatime in which employee costs of the business were discussed. Two employee costing models were presented on a PowerPoint slide to the director:
- Costing Model A – which specified paying employees ‘minimum award rates’, ‘uniform allowances’, ‘casual rate’ loading, and ‘weekend penalty (Saturday & Sunday)’. Costing Model A would add $887,690 to Chatime’s annual employee costs; and
- Costing Model B – which specified paying employees the ‘minimum award rates’, and ‘uniform allowances’ but none of the other entitlements. Costing Model B would add $341,213 to Chatime’s annual employee costs.
2. The director’s evidence was that: there was no discussion about which costing model was the lawful or compliant model; no questions were asked about the costing models; and the director trusted the CFO who said ‘you have two options… one is obviously cheaper than the other’. The CFO recommended that the director approve Costing Model B.
3. Costing Model B resulted in about 150 employees being underpaid more than $160,000.
4. Finally, the Court accepted that the director did not know that Costing Model B would result in a contravention of the relevant modern award.
Directors’ accessorial liability
The key question in the case was whether the director held the requisite level of knowledge to be said to be “involved in” the contravention of the relevant modern award.
A long line of case law establishes that for a person to be “involved in” contraventions as an accessory, they must have “knowledge of the essential elements of the contraventions”.  In an award compliance context, it must be established that the director knew:
- A modern award applied to an employee; and
- A term of the modern award had not been complied with.
The Court in this case made it clear that it is irrelevant whether the director believed or knew that costing model decision was unlawful (the director claimed he did not know the model was unlawful).
Crucially, the Court found that the director acquired knowledge by inference of the relevant modern award, and the terms of the modern award through the text used in the costing model slide. Specifically, the expressions “minimum award rate”, “uniform allowance”, “casual rate” and “weekend penalty” used in the costings models were unmistakeable references to underlying terms of the relevant modern award, and sufficient to imbue the director with the requisite knowledge. Accordingly, the director was found to be involved in contraventions of the modern award.
This case is significant because of the degree to which the Court was willing to infer from surrounding circumstances the director’s knowledge when determining their accessorial liability. The case affirms the notion that accessorial liability does not require actual knowledge or intentional wrongdoing.
- The test for accessorial liability under the FW Act is exactly the same as under the Corporations Act 2001 (Cth).
- The decision illustrates that knowledge can be inferred from circumstances, and ignorance as to the effect of decisions is irrelevant to directors’ liability.
Directors should ensure that wage compliance solutions presented to them are subject to sufficient test and challenge, and verification from management that the proposed solutions are lawful and compliant with the expectations of regulators.