Underpaying Employees

Underpaying Employees

Dealing with Employee Underpayments: A Comprehensive Guide

If you've discovered that your business has inadvertently underpaid its employees, then it's best to get professional legal assistance. We have helped businesses who've done exactly that.

Underpayments can occur in a variety of different ways. We've seen businesses who were unaware that an award applied to them and paid employees a flat rate. Therefore, the employees missed out on award entitlements such as overtime and penalty rates.

However if an underpayment occurred, it doesn't have to be the end. If you get professional advice and the situation is carefully managed, it can result in a positive outcome (e.g. your business can emerge stronger from a workplace compliance point of view).

Here are some ways we can assist your business if you believe an underpayment occurred.

Comprehensive Review and Award Interpretation

One of the first things that we do is a comprehensive review of everything, including reviewing the relevant award(s). This can be a challenging step because some awards can be difficult to interpret.

It's important to get the award interpretation right because that dictates how much you have to pay back the employees.

For example, we had a situation where a client calculated how much they believed they needed to pay based on their interpretation of the award. However, after we did a comprehensive review of their pay methodology, it turned out that their underpayment calculations were higher than required. This error occurred because the award was difficult to read and the client reached an incorrect award interpretation.

Getting the award interpretation done correctly means that you're not paying too much to rectify the underpayment issues.

It’s even possible that we might find situations where you’re overpaying employees for award entitlements or allowances - so we can save your business money in the long run.

Identifying Employment Law Breaches

Another crucial step is to have a professional advisor conduct a check and review your entire business to find all possible employment law breaches.

Often an underpayment is coupled with other workplace breaches such as failing to follow the casual conversion procedures or failing to follow unique provisions in the award.

For example, many awards contain provisions where a copy of the award and the National Employment Standards has to be made available to employees. This is a simple example of an award breach many businesses get wrong. This simple breach will incur a fine for breaching the award.

Compliance with the Fair Work Act

We help make sure you're compliant with your obligations under the Fair Work Act.

The Fair Work Act has many provisions which businesses can often fall foul of.

This is also a good opportunity to update your contracts and your policy documents. Having good policies in place helps protect a business from claims such as discrimination, sexual harassment, bullying, general protections and unfair dismissal.

For example, there is a positive duty for the business to take steps to make sure their employees don't commit sexual harassment and discrimination acts. If a business doesn’t take reasonable steps, the business can be liable if one of its employees commits those acts. Policies help set expectations regarding employee behaviour and are often a minimum requirement to meet this obligation.

Communicating with Employees

If employees get wind of an underpayment issue, they can become unsettled and agitated. We can help you effectively manage your communication with them to keep them updated and to manage the messaging.

Calculating Underpayment and Setting Off Entitlements

We will assist you with calculating the underpayment correctly as it's a fundamental step to pay back employees what they're lawfully owed.

As part of this underpayment calculation, there might also be some ability to set off some entitlements that employees are owed against any additional financial benefits they receive for other areas.

For example, if an employee is receiving an above-award rate, then the portion in excess of the award can be used to set off other entitlements such as overtime pay.

Self-Reporting to the Fair Work Ombudsman

Once we've analysed everything, determined the underpayment, fixed the breaches and communicated with employees, then the next step to consider is whether to self-report to the Fair Work Ombudsman.

The Fair Work Ombudsman has self-reporting guidelines and generally encourages reporting if there has been more serious contraventions such underpayments going back many years or if many employees are affected.

The Fair Work Ombudsman does generally not require self-reporting for smaller payroll errors over a shorter period of time e.g. less than 12 months.

Serious consideration needs to be given to self-reporting if:

  • the underpayment is significant, for example in the hundreds of thousands of dollars,
  • it affects a large number of employees, or
  • it's been happening for a long period of time e.g. more than 12 months.

It's our practice generally to self-report (provided it’s required) once you have a full understanding of the errors and have fixed them. If you're taking active steps to rectify the errors, and not simply “kicking the can down the road”, then a delay in self-reporting may be understood by the Ombudsman.

Once you self-report to the Ombudsman, it opens the floodgates. This is why we generally recommend you fix everything before self-reporting.

It’s important that you first comprehensively review all the issues before self-reporting.
If you lodge a “half-baked” self-report to the Ombudsman, and the Ombudsman later finds many other breaches, then you might get a more heavy-handed approach from the Ombudsman. You might get a Fair Work Inspector attending the business premises - and they have many powers including interviewing employees, taking copies of records and taking samples of goods.

Benefits of Self-Reporting and Potential Outcomes

The benefit of self-reporting is that it starts a dialogue with the Fair Work Ombudsman with a view to reach a resolution.

If you fail to self-report and the Fair Work Ombudsman catches the breaches later on, the Ombudsman will likely be more aggressive and there's a higher chance of litigation being commenced against the business.

However, when self-reporting happens there's a better chance of reaching a non-litigious outcome such as the Ombudsman issuing a compliance notice or entering into an enforceable undertaking with your business.

A compliance notice forces a business to take specific steps to remedy situations. This may include making back payments, fixing processes or undertaking more training.

In more serious cases, an enforceable undertaking is appropriate. An enforceable undertaking is a contract between the business and the Ombudsman agreeing to certain terms such as:

  • regular audits being conducted,
  • employees being paid, usually with interest,
  • staff being required to undergo training to avoid errors in the future,
  • the business may also be required to pay a “contrition payment”.This is an alternative
  • to a penalty under the Fair Work Act.

Risks of Getting Underpayment Issues Wrong

If you get an underpayment issue wrong, there is a risk that the business can be prosecuted by the Ombudsman.

The Fair Work Ombudsman, as well as affected employees, can commence legal proceedings against the business seeking compensation and pecuniary penalties.

A pecuniary penalty is a fine designed to punish the business and to deter others from engaging in similar behaviour.

It's also possible that any individuals within the business such as directors, members of the board, managers or human resource professionals who were involved in the contravention can also be personally liable for the business’s contraventions. Remember, proceedings are not limited to the company.

Our Approach to Assisting You

We can assist you deal with the underpayment issues in a sensible and practical way that maximises your chances of getting a good outcome.

If you believe your business underpaid its employees, give us a call. We can have a no-obligation confidential discussion with you to discuss the best way forward.