Underpayment of wages revelations are coming thick and fast from the most unlikely sources – the big employers. Woolworths, Wesfarmers, Qantas, Commonwealth Bank, Super Retail Group and Michael Hill Jewellers to name a few. How can this be happening in the technologically savvy world of 2019? There is no one reason why underpayments occur. In our experience the below are the main risk areas for employers, regardless of business size.
Modern Award coverage
Many employers are still unaware that Awards apply to most industries and occupations as a matter of law. That is, employers in the covered industries or employers who employ people in the covered occupations are legally required to comply with the Award no matter what. For example, clerical employees will be covered by an Award no matter where they work. Some will be covered by the occupational award which is the Clerks Private Sector Award 2010 and others will be covered by a specific industry Award. Therefore, any employer who employs clerical employees must comply with an Award in terms of the minimum employment conditions including pay rates, overtime and allowances for such employees.
Other occupations which are generally covered by Awards include retail employees, hospitality and restaurant employees and employees who would generally be considered blue collar workers. However, this is by no means an exhaustive list and it is very important that every employer understands if their employees are covered by an Award, and if so, which Award that is. If an employer gets this wrong, they are at high risk of underpaying their employees.
Classification of positions under an Award
Awards set pay rates on the basis of classifications and these are contained in each Award. This allows the Award to apply to a range of roles and functions within an organisation and provide wages on the basis of the relativity between the classifications. The classifications in Awards are often drafted very generally and it can be a challenge to correctly determine the classification which applies to a particular role.
Given that minimum wages and conditions are determined by classification, it is easy to see that if an employer gets the classification wrong they may be underpaying (or overpaying) an employee. Further, the classification for a role may change over time as an employee is requested to take on additional responsibilities or duties. If the nature of the work changes so much that the role should be classified at a higher classification level, the employer is then legally obliged to pay the employee on the basis of this higher classification. Employers can inadvertently underpay an employee if they are not regularly assessing if the current classification for a position remains correct.
Misapplying the terms of the Award
It would appear from the media reports that this is the area where the large employers are mostly getting it wrong. Although they may know which award and classification applies to the positions, they make an error in applying the terms of the Award, particularly in relation to how hours of work and rostering arrangements are to be applied. The most frequent mistake appears to be in seeking to average hours over a period of time to reduce the amount of overtime which needs to be paid. Many Awards do provide for averaging of hours, however, if this is not implemented carefully and accurately, underpayments (or overpayments) will occur.
If for example, a model for averaging of hours is established which correctly pays employees for the time worked but then, due to organisational issues which arise, the employee actually works a different roster pattern, it should be no surprise that they may be underpaid (or overpaid). It is also not unusual for employers to make mistakes about when overtime and allowances are to be paid when averaging hours over a period of time. There is often a misconception that averaging overrides other provisions of the Award, when this is not always the case. Where averaging arrangements are in place, it is very important that employers monitor actual hours worked to ensure that the rate being paid is correct.
Assuming Award coverage has been ‘bought out’
In our experience this is the cause of many underpayments, particularly for smaller and medium sized employers. It is a fallacy that if an employee is paid more than the Award rate of pay then the Award no longer applies to them. If an employee is engaged in a position which is covered by an Award, then there is no way to avoid such Award coverage. There are limited instances where Awards themselves exempt employees from some provisions of an Award based on how much they are paid, but these are the exception. It is possible to pay employees more than the hourly rate of pay contained in an Award and then offset that over Award payment against other entitlements such as overtime, penalties and allowances. However, this does not mean that the employee is not covered by the Award. Where offset arrangements are utilised, this does not change the underlying legal entitlements set out in the Award. That is the employee remains entitled to be paid, as a minimum, exactly what they would have been paid if they had been paid strictly in accordance with the Award – including overtime, penalties and allowances.
Further, offset arrangements can only be effective where they are entered into by agreement between the employer and the employee. This is usually achieved by including a well drafted offset clause into an employment contract or employment agreement. Paying employees above Award rates with an effective offset clause is very popular with both employers and employees as it evens out variations in wages from week to week. However, where such arrangements are entered into, employers are accountable for ensuring that the over Award payment is sufficient to cover the actual Award entitlements. This can only be achieved by keeping accurate records and doing a reconciliation of Award entitlements against actual wages. For details on what records are needed, please see our recent blog on record keeping. If it is found in a reconciliation that an employee would have been paid more if the Award had been applied to the hours worked then they are entitled, as a matter of law, to be paid the difference. In the absence of a reconciliation, there is no way for an employer to confidently know that they have not underpaid an employee. If there is no offset provision in place, or it is not an effective offset provision, it may well be that it is not possible to offset the over Award payments against unpaid Award entitlements.
Your next steps
If any of the above situations apply to your business, you may be at risk of underpaying your employees. Although self-identification of errors and rectifying them is not a get out of jail free card, it is certainly a mitigating factor which the regulator the Fair Work Ombudsman (FWO) would take into consideration in determining if a civil penalty (fine) should be applied. Given the very public focus on underpayment of wages, we encourage all employers to take the opportunity to review their arrangements and make sure that they have not been inadvertently underpaying their employees. It is too late once a complaint is made or an FWO audit is conducted.
If you require assistance in auditing your current practices to ensure you are paying your employees correctly or you wish to put effective offset arrangements in place please contact us on email@example.com or 07 3218 3919.
Published: 7 November 2019
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.