From fine to felony: The looming criminalisation of wage underpayments

The obligation for employers to pay their people correctly is not new. However, the consequences of getting it wrong are about to get dire. Whether your company or organisation employs one person or 10,000 people, it’s now more important than ever to review your processes, controls and risks related to payroll and get ahead of criminal sanctions coming soon.

The law has changed

The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth) (Act) amended the Fair Work Act 2009 (Cth) (FW Act) to introduce a new federal criminal offence of ‘wage theft’ related to the underpayment of wages.

The offence will commence on the later of 1 January 2025 or earlier if the Minister for Employment and Workplace Relations makes a particular declaration which will have the effect of enlivening the new criminal offence.

The Fair Work Ombudsman (FWO) will be responsible for investigating the new criminal offence. The FWO will then refer matters to the Commonwealth Director of Public Prosecutions (CDPP) or the Australian Federal Police (AFP) for consideration, and prosecution where appropriate.

There is a six-year limitation period for commencing any prosecution. The new criminal offence will operate alongside the current civil offences in the FW Act related to breaching minimum pay, award and/or enterprise agreement obligations.

What is criminal ‘wage theft’?

The criminal offence of ‘wage theft’ will apply to employers (either a body corporate or a natural person) who engages in conduct that results in a ‘failure to pay the required amount, to or on behalf of, or for the benefit of, the employee in full on or before the day when the requirement amount is due for payment’. The amount must be required to be paid under the FW Act or a particular instrument (eg. award or enterprise agreement). Also required to be proved is that there was an intention to engage in the conduct.

Certain types of payments are not covered by the new criminal offence. They are:

1. 1. superannuation fund contributions;
   2. payment for leave as a result of being a victim of crime;
   3. payment for long service leave; and
   4. payment for jury service or emergency service duties.

The level of proof that must be met is beyond a reasonable doubt.

While some commentary suggests that accidental, or inadvertent mistakes or miscalculations will not be caught, it can be expected that the level of corporate knowledge and action (or inaction) to ensure pay accuracy at all times will be the source of some uncertainty to come.

In assessing intent for a body corporate, it will be relevant to determine if the body corporate ‘expressly, tacitly, or impliedly authorised or permitted’ the conduct which led to the offence. The relevant criminal code, which deals with corporate criminal responsibility, provides that such ‘authorisation’ or ‘permission’ can be established by proving that:

1. 1. the body corporate’s board of directors intentionally or knowingly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence;
   2. a high managerial agent of the body corporate intentionally, knowingly, or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence;
   3. a corporate culture existed within the body corporate that directed, encouraged, tolerated, or led to non-compliance with the relevant provision; or
   4. the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

‘Get out of jail card’: Self-disclosure and cooperation agreements

The new changes also encourage employers to ‘self-report’ to the regulator with the inclusion of ‘safe haven’ provisions.

The Act provides a narrow window of immunity from criminal prosecution where an employer self-reports and enters into a ‘cooperation agreement’ with the FWO. The FWO will have complete discretion about whether it will enable an employer to enter into a cooperation agreement.

In exercising this discretion, the FWO must have regard to the following non-exhaustive list of factors:

1. 1. the extent to which the employer has made a ‘voluntary, frank and complete’ disclosure of the conduct, and the nature and level of detail of the disclosure;
   2. the employer’s cooperation with the FWO in relation to the conduct;
   3. the nature and gravity of the conduct;
   4. the circumstances in which the conduct occurred; and
   5. the person’s history of compliance with the FW Act.

While a cooperation agreement is in force, the FWO is prohibited from referring the conduct for prosecution by the relevant agency. However, a third party can decide to refer a matter to the prosecuting agencies, and/or a prosecuting agency (CDPP or AFP) can decide to prosecute notwithstanding the cooperation agreement. Further, it does not stop the FWO from taking non-punitive action (such as issuing a compliance notice) or instituting civil proceedings.

Criminal penalties

The maximum penalty for an individual is 10 years’ imprisonment.

The maximum fine for an offence is the greater of:

1. 1. three times the amount of the underpayment, if the court can determine that amount; or
   2. for an individual, 5,000 penalty units ($1,565,000); or for a body corporate, 25,000 penalty units ($7,825,000).

An individual may be subject to a combination of a term of imprisonment and a fine.

Changes to civil penalties and ‘serious contravention’ provisions

In addition to the new criminal penalties, the changes will see a substantial increase to the existing civil penalties for employers. Unlike the criminal offence, these penalties can apply even if the conduct is accidental or as a result of a mistake.

The new maximum penalty for body corporates would be the greater of 1,500 penalty units, which currently is $469,500 (up from $93,900), or three times the amount of the underpayment.

Further, the changes impact the existing criteria for determining whether a ‘serious contravention’ has occurred. Currently, for an employer to have committed a ‘serious contravention’, it must have formed part of a ‘systematic pattern of conduct’. The new definition would remove this requirement, and only require that the conduct was done knowingly or recklessly.

The new maximum penalty for ‘serious contraventions’ will be the greater of 15,000 penalty units (currently $4,695,000), or three times the amount of the underpayment.

The increases to civil penalties and changes to the ‘serious contraventions’ provisions took effect from 1 January 2024.

Getting ready in 2024

While most employers strive to pay their employees correctly at all times, mistakes happen. The mistakes can be small and isolated or significant and widespread.

The criminalisation of underpayments is a clear signal to all employers that more must be done. The last few years has seen many large employers come forward with significant underpayments. Once the criminal offence starts operating, it is expected that some employers will face serious criminal consequence for their failure to pay their people correctly. Employers should note that while the new offence is set to commence on 1 January 2025, it is possible intent may be established before 1 January 2025 and therefore trigger liability for any underpayments that occur prior to 1 January 2025. For example, employers who are currently, or were recently, on notice for either deliberate or accidental underpayment of employees, may be found by to have knowingly continued a practice in contravention of the new legislation.

Employers are encouraged to get ready for these changes including by reviewing pay rules, process controls and systems that support pay outcomes.

Want to hear more?

If you want to find out more about what can be done to get ready, the Gadens Workplace Advisory and Disputes team is hosting a webinar, ‘Under Investigation: Workplace investigations: when, who and how?’ on 30 April 2024. This webinar will cover commonly asked and complex questions, including when to investigate, how to investigate internally, and when you need to provide a report.

Read our other articles in the Let’s chat: Work series:

• Change at pace: What you need to know about recent changes to the Fair Work Act 2009 (Cth) | Gadens
• Restructuring and downsizing: Tips and traps | Gadens

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Authored by:

Amanda Junkeer, Partner
Vishmitha De Alwis, Lawyer