Thought Leadership

Spotlight on Regulatory Activities: the Fair Work Ombudsman in 2021-2022 & underpayment claims

By Vanessa Andersen, Katie Kossian, Grace Turner-Mobbs

• 07 December 2022 • 5 min read
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In 2021/2022, the Fair Work Ombudsman (FWO) has recovered $532 million in unpaid wages and entitlements on behalf of 384,805 people. More than half of this amount was recovered from large corporate employers. In an increasing trend, 68% of these large corporate employers voluntarily self-disclosed non-compliance to the FWO.

The FWO continues to uncover large-scale underpayments and non-compliance. Common issues are inadequate annualised salary arrangements which do not compensate employees for their actual hours of work, and a failure to implement enterprise agreement obligations. Root causes are commonly ineffective governance and a lack of investment in payroll systems, record-keeping and internal auditing.

While no industry is immune, the FWO has announced that in 2022-2023 it will be prioritising compliance reviews of fast food, restaurants and cafes, agriculture, sham contracting, large corporate and university sectors and contract cleaning.

Self-reporting non-compliance may not be sufficient to avoid enforcement action including infringement and compliance notices, enforceable undertakings and penalties. In choosing its course of action, the FWO will assess the reasons for non-compliance, the attitude of the employer as to non-compliance and its level of confidence that the systems (or absence of systems) which have led to underpayment have been sufficiently rectified and that any underpayments to staff have been appropriately calculated and repaid in a timely way.

Tip 1: If your organisation uses annualised salaries to remunerate award-covered staff, ensure that those salaries sufficiently compensate them for the work they do

Annualised salary arrangements are very common. They allow an employee to be paid a particular annual salary, which is intended to compensate them for all hours which they are required to work. Certain awards include prescriptive arrangements for annualised salary arrangements with the aim of ensuring that the payment of an annualised salary (rather than a weekly or hourly wage) does not result in underpayment when compared with an employee’s minimum entitlements under an award, including minimum rates of pay, overtime, penalty rates, loadings and allowances.

Some employers set annualised salaries having regard to the market only rather than considering or reviewing applicable minimum entitlements. For new roles, annualised salaries are always going to be based on a series of assumptions, including the hours (and the span of hours) during which an employee is projected to work. It is when these assumptions or projections do not reflect the reality of an employee’s work arrangements that risks of underpayment arise. Consider the following examples:

  • An employee has accrued a substantial amount of annual leave and decides to take that leave all at once, but the employee’s annualised salary is insufficient to properly satisfy the 17.5% annual leave loading the employee is entitled to under the relevant award.
  • Your organisation has an unexpected influx of work, which requires employees to undertake significant amounts of overtime. Some of this overtime is done at the request of the business, but some is done at the employee’s own initiative (and performed remotely).
  • Your organisation encourages flexible working practices to facilitate employees undertaking work when it best suits them; however, an employee may work in a manner that inadvertently attracts significant penalty rates. This problem may be further compounded if the work is undertaken remotely so that the organisation has limited visibility around the hours of work being performed.

While each of the above scenarios gives rise to a risk of underpayment, with appropriate review and control measures such risks can be mitigated.

Tip 2: Control measures - ensure that your employment contracts and policies are fit for purpose

There are a number of ways in which employers can minimise the risk of underpayment claims, including:

  • Ensuring that employment contracts include effectively drafted set-off provisions, which state that any payments made to the employee over and above their entitlements under an applicable industrial instrument can be used to offset any entitlements an employee may have under that instrument. To be effective, such a clause will need to specifically identify what entitlements are intended to be set off, including, for example, minimum rates of pay, overtime, penalty rates, allowances and loadings.
  • Set clear expectations around approval processes when employees work overtime or outside of the organisation’s ordinary hours of work (including, for example, the need for an employee to get approval to work past a particular time of day).
  • Develop policies and systems which enable the organisation to capture and review employees’ work arrangements and working hours (particularly in remote or hybrid work arrangements), and
  • encourage employees to take their annual leave in the year that it accrues. This may assist with mitigating the risk of underpayment of leave loading but is also likely to be beneficial in improving employee wellbeing.

Tip 3: The proof is in the payslip - do not forget your employee record keeping requirements!

Statutory record keeping requirements can easily be forgotten or overlooked. Non-compliance can lead to prosecution and penalties and, if an employer is audited or investigated by the FWO, the lack of records will be an aggravating factor when the FWO is assessing enforcement action.

Read more articles from the Employment, Safety & People, 2022 Year in Review

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