The Labor Government is pushing ahead with its promise to criminalise “wage theft”, but what does this mean for directors?
As part of its Secure Australian Jobs Plan, the Federal Government is proposing to legislate amendments to the Fair Work Act 2009 (Cth) (“FW Act”) to help curb the widespread problem of so-called “wage theft”. The proposed reforms will have significant implications for directors, including the exposure to criminal liability.
In April this year, the Government called for submissions on the topic of greater penalties for wage underpayments. The consultation paper issued by the Department of Employment and Workplace Relations - Criminalising wage underpayment and reforming civil penalties in the Fair Work Act 2009 (see here) - indicates the Government is considering several different proposals for new wage underpayment offences, as well as the circumstances in which ancillary liability may apply to company directors.
Regardless of the ultimate form of the wage underpayment laws, the expectations on company directors have evolved. Boards must proactively oversee wage compliance and elevate non-compliance as a risk governance issue.
Wage underpayment offences under consideration
The consultation paper considers three potential approaches for the underlying wage underpayment offence:
- A knowledge-based wage underpayment offence only: the offence would cover employers who know they are not paying an employee an amount to which the employee is entitled. Proving this type of offence is set at a reasonably high bar (actual knowledge of the underpayment) and would likely only capture conduct that is deliberate and dishonest. This is broadly consistent with the wage underpayment offences already in place in Queensland.
- A recklessness-based wage underpayment offence only: the offence would cover employers who, despite being aware there is a substantial risk that adequate entitlements are not being paid, proceed anyway. Little information is provided in the consultation paper to reveal how broadly this offence may apply, particularly in the case of difficult modern award or enterprise agreement interpretation matters where more than one possible interpretation is available.
- A two-tiered approach: under this third proposal, two offences would be inserted into the FW Act; both a knowledge-based offence and a recklessness-based offence, with different penalties available for each offence based on the severity of the conduct.
For a recklessness-based offence, the consultation paper also seeks views on whether a statutory defence should be available.
Potential director liability – two potential approaches
The consultation paper contemplates two potential approaches to personal liability for directors, described in detail below. The first approach applies existing ancillary liability provisions and is unexceptional. The second approach would make directors criminally liable for a contravention by the employer, without any need to prove knowledge or involvement by the director, unless the director proves that they took reasonable steps to prevent the contravention.
The first approach is to utilise the existing ancillary liability provisions of the Criminal Code Act 1995 (Cth) (“Criminal Code”). These provide that a person who is found to have “aided, abetted, counselled or procured the commission of an offence” by another person is taken to also have committed that offence unless, before the offence was committed, the person terminated their involvement and took all reasonable steps to prevent the commission of the offence. This section of the Criminal Code will have the potential to enable the prosecution of individual directors for their involvement in the company committing a wage underpayment offence.
The significance of the potential application of the ancillary liability provisions in the Criminal Code will greatly depend on which approach is adopted by the Government when legislating the underlying offence. In the case of a knowledge-based wage underpayment offence, the requisite mental element of the offence - actual knowledge - would likely prove a high bar for an individual director to be charged under the ancillary liability provisions of the Criminal Code. However, a recklessness-based wage underpayment offence (where actual knowledge is not necessary for the offence to be committed) is a lower bar which in turn means the potential for directors to be pursued for their involvement is likely to be higher.
The second approach raised by the consultation paper would involve a much greater likelihood that individual directors could face prosecution. The Government has sought comments on whether it should adopt the same approach as the Victorian Wage Theft Act 2020, which provides that where a company commits an offence, each officer of the company must be taken to have also committed the offence, unless the officer can prove they exercised due diligence to prevent the offence occurring. Directors can be pursued under this section irrespective of whether the company has been charged or convicted. Again, much depends on the nature of the underlying wage underpayment offences that are legislated, however clearly the ‘default’ nature of director liability under this second option would provide a more direct path to prosecution of an individual director compared with the ancillary liability regime in the Criminal Code. It would, at a minimum, require directors to approach wage compliance in a similar fashion as the due diligence duty imposed on directors under work health and safety law.
Ever-increasing expectations for boards
The consultation paper raises complex and challenging questions for companies and directors alike. Directors, particularly those sitting on the boards of listed companies, are facing ever-increasing expectations from regulators, shareholders, the business media and the community.
It is no surprise that the Government’s proposal for directors to be criminally liable for wage underpayments is generating debate. The Australian Institute of Company Directors (AICD) has submitted that the introduction of a deemed liability offence is not consistent with the Personal Liability for Corporate Fault: Guidelines for applying the COAG principles (COAG Guidelines) agreed at the Council of Australian Governments meeting in 2012. Under the COAG Guidelines, the default position is that there should be no criminal liability for a corporation’s conduct attached to directors, except where special circumstances justify it. The AICD has also argued that the law already creates sufficient personal exposure for directors and that wage underpayments, while serious, are not in the category of matters which justify a departure from the position set out in the COAG Guidelines. In its submission in response to the consultation paper, it points to the existing potential for a director to be personally liable for breach of the duty to act with care and diligence under s 180(1) of the Corporations Act, as well as accessorial liability provisions already in force for breaches of the FW Act.
The Ai Group has suggested that the proposal will discourage companies from self-disclosing underpayments to the Fair Work Ombudsman, a trend which has become par for the course among corporate Australia.
Other stakeholders have argued the complexity of Australia’s workplace relations system makes director liability inappropriate. In particular, the complex application and operation of modern awards which regularly lead to contested interpretations, even amongst employment lawyers. The same may be said for the potential misapplication of pay rules in an enterprise agreement, which are documents often drafted by non-lawyers in circumstances where the parties, eager to finalise enterprise bargaining, allow ambiguities and drafting errors to remain in the agreement, leading to disputes about the proper interpretation of its terms. Unfortunately, there seems to be no appetite from the Government to tackle the overdue task of simplifying the modern awards system to make wage compliance easier.
What does good governance look like?
Regardless of the path ultimately taken by the Government, boards and companies must make the transition from reactively dealing with underpayments to proactively preventing them, with a mature and sophisticated governance framework to ensure end-to-end compliance and ongoing vigilance. Wage compliance needs to be approached with the necessary investment in resources and expertise to address the complexity and magnitude of the risk.
We have previously published on why wage compliance should be treated as a risk governance issue here. By using conventional risk management practices, boards should ensure they receive information about the wage compliance systems and processes, including:
- the identification of key risk factors, such as annualised salaries;
- the identification of where further resources and capabilities are required to ensure functions operate effectively; and
- the results of monitoring and audit activities, and assurance that wage compliance systems actually work in practice.
In our view, the role of both internal and external audit and assurance processes is key. Without regular testing of wage compliance by people with appropriate expertise, companies and their directors may be sitting on an undetected compliance error, with the damage multiplying each day.
