Wage underpayments – to err is human, but to forgive is not the policy of the Federal Court

Background

A judge of the Federal Circuit Court of Australia imposed penalties on Yooralla in respect of 4 contraventions of the Fair Work Act 2009 (Cth) (Act) involving underpayments on account of ordinary hours of work, annual leave, annual leave loading, and personal leave that were payable to an employee of Yooralla and member of the Australian Education Union (AEU).

The Yooralla Society of Victoria (Yooralla) employs 1,963 employees, serving 26,000 clients. Its operations are substantial in the disability sector.

The employee worked at a Yooralla Day Service, with her rate of pay set by the Social, Community and Disability Services Industry Equal Remuneration Order 2012, which consisted of 2 parts:

1. a Transitional Minimum Wage pursuant to clause 5.3 of the Order; and
2. an Equal Remuneration Payment pursuant to clause 5.5 of the Order.

The amount of the Transitional Minimum Wage depended upon whether under the terms of two pre-modern awards the employee was an “instructor” under the Disability Services Award (Victoria) 1999 (Disability Award), or an “attendant carer” under the Attendant Care – Victoria Award 2004 (Carer Award).  The entitlement to, and the amount of, the Equal Remuneration Payment turned on whether the employee should be characterised as a “Social and community services employee level 2”, or a “Social and community services employee level 3” under the applicable modern award, the Social, Community, Home Care and Disability Services Industry Award 2010 (Modern Award).

The primary Court held that the employee was an “instructor” for the purposes of the Disability Award, but rejected the AEU’s submission that the employee was a level 3 employee for the purposes of the Modern Award, holding that she was a level 2 employee.

The primary Court observed that the matter was a “finely balanced” and “somewhat complex case”, observing that there was a potential for overlap between the two awards, and that how the 2 awards were to be read together remained unclear.

The primary Court found that Yooralla had contravened sections 44, 45, and 305 of the Act, and that each instance of underpayment should be aggregated pursuant to section 557 of the Act. A maximum penalty of $216,000 applied.

Yooralla had obtained legal advice from specialist industrial lawyers once the proceeding had commenced that its approach was to be preferred. The primary Court found it was understandable that Yooralla may have made an error when it applied the applicable award to the work performed by the employee, but this did not in any way excuse the error, or the seriousness of it.  Further, the root cause was the failure by the relevant person at Yooralla to observe the work being performed by the employee, and to visit her place of work.

The primary Court considered the subjects of contrition and corrective action. It accepted that no apology had been given by Yooralla but noted that Yooralla’s actions spoke louder than words.  The primary Court found that Yooralla had remedied the underpayments to the employee and had also made further payments to the employee in respect of the entire period of her employment, including that period not covered by the AEU’s claim.

However, the primary Court stated that the making of payments to a person in the employee’s position pursuant to a Court order was not conduct that would be regarded as contrition. Nor did the primary Court place significant weight on the fact that Yooralla had also rectified underpayments to the employee for the duration of her employment, notwithstanding it extended beyond the claim made in the proceeding.  His Honour stated that these payments were simply rectifying what should have been the case had Yooralla paid the employee correctly in the first place.

The primary Court noted that Yooralla was undertaking an independent audit for the previous 6 years. This was held as appropriate and taken into account in assessing the appropriate penalties.

In respect of deterrence, the primary Court (at [14]):

“…accepted that there was a need to send a message to the public at large that the underpayment of wages to any employee, but particularly low income employees, was completely unacceptable in the modern age.”

The AEU submitted to the primary Court that the penalties should be in the range of 60% to 70% of the maximum. Yooralla’s position was that no penalty should be imposed, or alternatively that a single penalty in the very low range of 5% to 10% of the maximum should be imposed.

The primary Court found that the penalty should be $14,850 after the application of a 50% reduction on account of totality.

The AEU appealed on 5 grounds being:

1. the penalties imposed by the primary judge were manifestly inadequate and not of appropriate deterrent value;
2. the primary judge misunderstood, or misapplied the totality principle;
3. the reduction of 50% on account of the application of the totality principle was manifestly excessive;
4. the primary judge gave “undue weight” to the fact that Yooralla had sought professional advice; and
5. the primary judge erred by failing to have adequate regard to Yooralla’s lack of apology.

Manifestly Inadequate

The Appeal Court found that the penalty was not manifestly inadequate although it “might have imposed higher penalties having regard to the size of Yooralla’s total payroll, the sources of its funding, and the need to induce compliance with Awards in the disability and non-profit sectors of the economy”(at [23]).

Totality Principle^[1]

The Appeal Court found that the primary Court did not misunderstand or misapply the totality principle. The primary Court did not err in assessing appropriate penalties by taking account of the circumstances of the contraventions, and in particular of the fact that there appeared to be one cause of all the contraventions.

Was the reduction of 50% on account of the application of the totality principle manifestly excessive?

The Appeal Court did not accept that the 50% reduction was an appealable error. The penalties, although low, were not outside the appropriate range.

Did the primary judge give “undue weight” to the fact that Yooralla had sought professional advice?

The Appeal Court did not find the primary Court had made a double reduction in appropriate penalties because Yooralla obtained legal advice about the employee’s claims of underpayment. The claim that the primary Court had placed weight upon Yooralla’s seeking of professional advice in its assessment of the nature and extent of the breaches, and again when reducing the assessed penalties by 50% on totality, were not sustained.  The primary Court discussion of the advice issue was merely part of the explanation as to why there was a common cause of the breaches.

Lack of Apology

The Appeal Court found that it would not upset the primary Court’s determination, as it did not involve any error of fact or principle. The Appeal Court noted that (at [40]):

“[T]he weight to be given to the absence of contrition will vary according to the circumstances of the case. The absence of contrition may carry less weight in a case like the present, where Yooralla was initially successful on liability, and where the issues in dispute were described by Steward J on appeal, as “finely balanced” and “somewhat complex”. An “apology” in those circumstances might sound a little hollow, and may not be called for.”

The appeal was dismissed.

Implications for employers

No employer ever wants to be accused of “wage-theft”. Yet the Yooralla case highlights just how easily an employer can inadvertently underpay employees.  This is particularly the case for employers covered by the Social, Community, Home Care and Disability Services Industry Award (SCHCADS Award) because of the impact of the various state and federal equal remuneration and transitional pay equity orders and determinations aimed at addressing gender pay imbalances in that sector.  The overlay of those instruments on the SCHCADS Award has made determining appropriate classification and pay rates to apply an extremely complex and confusing exercise so it is little wonder that many SCHCADS sector employers are getting it wrong.

This case also highlights that whether inadvertent, deliberate or the result of carelessness, Courts are ready to impose penalties for underpayments and other payroll discrepancies. Unions and the Fair Work Ombudsman also stand ready to call out “wage theft” when they see it and regardless of how an underpayment has come about, the effect can be the same – hefty penalties with real reputational damage and potential flow-on issues for funding arrangements.

This means that employers, particularly those covered by the SCHCADS Award, should:

• ensure that that they are applying any necessary equal remuneration or pay equity orders in addition to the Award;
• ensure that all employees are correctly classified, both on commencement and throughout their employment by undertaking a regular review of the work being carried out by each employee. This will avoid “classification creep” – a situation where employees are given greater responsibility and/or gain greater skills over time and so are actually undertaking work at a higher level whilst formally remaining (and being paid) at a lower classification;
• consider undertaking an audit of the pay and classification rates applied to all employees (over the previous 6 years); and
• where necessary, take immediate action to rectify any current and historical underpayments.

[1] The totality principle is a ‘principle of sentencing formulated to assist a court when sentencing an offender for a number of offences’. It operates to ensure that the sentence reflects the overall criminality of the offending behaviour, as opposed to a linear, mathematical cumulation of the penalty for each offence.