Fair Work Ombudsman takes holding company to court for alleged underpayments of subsidiaries

The Fair Work Ombudsman (FWO) has issued proceedings against a large, national retailing holding company and four of its subsidiaries in the Federal Court of Australia for alleged underpayments that occurred between January 2017 and March 2019.

A refresher on the relevant law

The Fair Work Act 2009 (Cth) (Act) makes it unlawful for employers to breach workplace laws including by underpaying employees. Employers found to have underpaid staff may be subject to prosecution resulting in orders for backpayments and civil penalties.

In 2017, the Act was amended to provide a tenfold increase in civil penalties (currently up to $825,000 for companies and $165,000 for individuals per contravention) in the event of a ‘serious contravention’ – a contravention where:

• the person knowingly contravened the provision; and
• the person’s conduct constituting the contravention was part of a systematic pattern of conduct.

At the time, the Act was also amended to include provisions making holding companies and certain franchisors liable for breaches of certain contraventions of the Act by their subsidiaries and franchisees respectively.

The current FWO proceeding

In 2018, the holding company initially identified widespread underpayments and self-reported to the FWO. This then led to an internal audit and back payments exceeding a reported $50 million across the group.

The FWO’s case relates to a sample of 146 employees across the group’s well-known retail brands. The group includes employees in store management, store set-up, retail, and administrative roles.

It is alleged that the sample of 146 employees were underpaid approximately $1.14 million between January 2017 and March 2019, with some employees underpaid up to $34,500 individually. This is believed to have occurred as a result of salaried employees being paid an annual salary that was insufficient to cover their minimum entitlements having regard to their actual hours of work. This included items such as overtime pay, allowances, and weekend and public holiday penalty rates. The FWO alleges that the methodology used in its remediation program has resulted in only partial back payment of the sample employees.

Of these underpayments, the FWO alleges that those relating to overtime worked by employees who were involved in setting up and refurbishing stores amount to ‘serious contraventions’ under the Act (which attract higher penalties under the Act as explained above). Under the Act, the serious contravention provisions apply to conduct occurring on or after 15 September 2017 and the holding company provisions apply from 27 October 2017.

Importantly, this case is the first time that the FWO has taken action against a holding company for the alleged contraventions of its subsidiary companies. The FWO alleges that both the holding company and its subsidiaries knew (or could reasonably be expected to have known) that employees were not receiving sufficient entitlements under their applicable modern award, the relevant enterprise agreement and/or the National Employment Standards and that no action was taken to address the overtime contraventions until January 2018.

Fair Work Ombudsman, Sandra Parker, stated “we expect that holding companies have thorough governance measures in place to promote compliance across their subsidiaries, and that they act immediately to rectify any problems found“.

Ms Parker warned that “every employer should be clear that if annual salaries do not cover all minimum lawful entitlements for all hours actually worked, the results can be substantial back-payment bills, plus the risk of significant court-ordered penalties“.

Actions for employers – including those operating under larger group structures

It has always been important for employers to monitor their compliance with the relevant laws and regulations regarding employee pay and entitlements. This includes correctly calculating and paying overtime, weekend and public holiday penalties, and leave entitlements. It is equally important to comply with statutory obligations to maintain accurate records of these payments.

Where employees are paid on an annualised salary basis, monitoring and recording hours worked and understanding the minimum entitlements that apply to each employee remains crucial. This includes assessments at the time that the annualised salaries are set, but also:

• regular reviews to ensure that annualised salaries remain set at a lawful level as minimum pay obligations increase; and
• systems to allow employers to identify temporary and permanent changes to working hours or practices which may affect an employee’s minimum entitlements.

This proceeding brought by the FWO also emphasises the importance of holding companies and franchisors having thorough governance measures in place to promote compliance across their networks, and to carefully consider the level of support provided to their wider network as a result.

Where a holding company or franchisor can show that they have taken reasonable steps to prevent a contravention of the kind engaged in by their subsidiary or franchisee (as the case may be) the holding company or franchisor has a defence under the Act. However, what is considered reasonable will depend on all the circumstances including:

• the size and resources of the holding company or franchisor;
• the extent to which the holding company or franchisor had the ability to influence or control the contravening employer’s conduct in relation to the contravention;
• any action the holding company or franchisor took directed towards ensuring that the contravening employer had a reasonable knowledge and understanding of their legal obligations;
• the holding company’s or franchisor’s arrangements (if any) for assessing the contravening employer’s compliance with the relevant provisions of the Act;
• the holding company’s or franchisor’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions of the Act within the network; and
• the extent to which the holding company’s or franchisor’s arrangements (whether legal or otherwise) with the contravening employer encourage or require the contravening employer to comply with the Act or any other workplace law.

The good news is that there are a range of practical steps that holding companies and franchisors can take to minimise the risk that they may be held liable for breaches of the Act across their network.

If non-compliance is identified, employers should act immediately to rectify any problems found, including seeking independent expert legal, accounting and/or payroll advice.

If employers have concerns regarding their payroll and HR processes, advice should be sought from legal and HR experts.

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Authored by:

George Haros, Partner
Louise Rumble, Partner
Sarah Saliba, Associate
Leo Rodrigo, Lawyer