What Boards need to know about wage compliance

02 February 2021

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The introduction of the Fair Work Amendment (Supporting Australia’s Jobs and Economic Recovery) Bill 2020 into Federal Parliament late last year is likely to change the way that Boards of Directors respond to reports of non-compliance or ‘wage theft’.

Because of their concurrent obligations under the Corporations Act 2001 (Cth) (Corporations Act), this cohort has been particularly at risk of regulatory action taken against them in a personal capacity. The introduction of this new legislation may close a perceived ‘safe harbour’ against criminal prosecution where a Director did not personally cause a contravention of occur.

This article explores the duties of Directors in responding to reports of wage non-compliance, and how these may change subject to the passage of this new legislation.

Duties of Directors

Currently, there is no positive obligation under the Fair Work Act to report wage non-compliance to the Fair Work Ombudsman or any other regulatory body. While some businesses have elected to self-disclose, this decision should not be taken lightly or without the benefit of fulsome legal advice.

However, if your business is required to lodge financial reports with ASIC or publish annual reports, these amounts may need to be reported as a liability. While the Corporations Act does not require Directors to possess any specific skill or expertise in financial management, it does require them to discharge their financial reporting responsibilities by exercising due diligence in relation to financial matters.

It is generally not sufficient for a Director to solely rely on other members of the Board who may have specific skill or expertise. As will be returned to, this creates a situation whereby ‘wilful blindness’ of financial management affairs will not operate as a defence to any action commenced against a Director.

The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2018 commenced in 2019 and affirms that the obligations imposed on “officers” of companies under the Corporations Act may also extend to wages and entitlements.

The Corporations Act makes it a criminal offence punishable by up to 10 years’ imprisonment for officers of companies to enter into an agreement or transaction which has the result of preventing or reducing employee entitlements.

To be found guilty of this offence, a person need not have intended this result; it is sufficient if the officer was reckless in entering into the agreement or transaction. This offence always requires some form of positive step to “enter into” the offending agreement or transaction.

There exists, however, a separate civil penalty provision under the Fair Work Act for situations of ‘wilful blindness’.

Accessorial liability

Under section 550 of the Fair Work Act, Board Members may be held accessorily liable for the contravention of a company where they were “involved in” the contravention.

To be “involved in” a contravention, a person must generally have:

intentionally participated in the conduct; and
have actual knowledge of the essential facts of the contravention.

However, participation is not limited to aiding, abetting, counselling, procuring, inducing or conspiring to commit the contravention, and may also include omissions or ‘wilful blindness’.

In Fair Work Ombudsman v Priority Matters Pty Ltd & Anor (No 4) [2019] FCCA 56, the Federal Circuit Court held:

“Where a person does not know because he does not want to know, where “the substance of the thing is borne in upon his mind with a conviction that full details or precise proofs may be dangerous, because they may embarrass his denials or compromise his protests” he has that knowledge, but deliberately refrains from asking questions or seeking further information in order to maintain a state of apparent ignorance. That is wilful blindness.”

This matter involved two directors of the company advising employees that they had insufficient cashflow to pay their wages, however allowing them to continue to work regardless. It was held that in making the decision to continue operations, the directors had become “involved in” the contraventions. Further, the court held that it was unnecessary for the directors to be aware of the details of any underpayments for them to be found accessorily liable.

From this case, two elements of wilful blindness may be derived: the presence of suspicious circumstances. and a failure to make enquiries into these circumstances. In the context of Board Members, this may commonly arise where complaints are received, and yet not acted upon. There has yet to be a significant test case involving non-executive Directors who do not exercise a high degree of control over the company.

Best practice

With the passage of the proposed amendments to the Fair Work Act to criminalise breaches of that Act, it is critical that Board Members take an active interest in the management of a company’s financial affairs. This may include:

investigating any complaints of wage non-compliance;
undertaking training in Australian workplace laws; and
commissioning regular payroll audits.

Indeed, many Directors should already be familiar with similar obligations in the context of WHS matters and modern slavery, and this list should now be expanded to include wage compliance. Given the rapid rate of development in this area over the last few years, it is recommended that Boards consider due diligence workshops with professional advisors to assist in ensuring oversight of and compliance with their obligations.