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Australia’s underpayment ‘epidemic’ raises alarm for SMEs

On Friday, Australia’s industrial relations watchdog, the Fair Work Ombudsman filed a court case against Woolworths for underpaying its salaried employees.

The country’s largest supermarket operator is the latest addition to a lengthy list of Australian firms that have underpaid their employees, including Wesfarmers, Super Retail Group, Michael Hill Jewellers and retailer Coles Group, among others.

The issue stems from the Woolworth Group’s admission to Fair Work Ombudsman (FWO) in 2019 that it was not fully compliant with the general retail industry award and had underpaid thousands of its employees.

FWO’s allegation: 

The FWO is seeking court orders for Woolworths Group Limited to rectify the total outstanding underpayments in relation to the 70 managers whose records were assessed.

According to a statement, Woolworths Group allegedly underpaid its employees by a total of $1.17 million between March 2018 and March 2019. Despite back payments by the company, the FWO asserts that $713,395 in underpayments has still to be paid.

“We allege that Woolworths failed to ensure that annual salaries were sufficient when compared to the actual hours worked, leaving their salaried managers significantly underpaid,” FWO executive Sandra Parker said. 

“We also allege that significant underpayments have not been fully back-paid, and we will seek court orders for Woolworths to recalculate and rectify all underpayments for all affected employees.

“This court action highlights that large employers face serious consequences if they do not prioritise workplace law compliance among other aspects of their business.”

The watchdog is seeking penalties against Woolworths Group Limited and Woolworths (South Australia) Pty Limited. A direction hearing in the Federal Court in Sydney is still to be scheduled.

Woolworths’ response:

Woolworths CEO, Brad Banducci provided assurances that the retailer’s highest priority since 2019 had been fixing the wage problems and preventing them from happening again.

“We welcome the opportunity for further clarity from the court process on the correct interpretations of the relevant provisions,” Mr Banducci said.

To date, more than $370 million has been paid to current and former salaried team members across Woolworths group, with work continuing to remediate affected members, the company said in a statement.

Complex structure

While some business groups blame Australia’s wage system — which they say is complicated– others have blamed software or technical errors for underpayment problems.

For instance, the National Minimum Wage Act (NMW) in Australia – which establishes a legal wage floor — has different minimum wages depending on an employee’s age, skill, industry and location. 

James Bishop, Research Manager at Reserve Bank of Australia, in a study called the operation of Australian minimum wages “notoriously complex”. 

In contrast to most other nations, which have a single minimum wage, Australia has a comprehensive system of award wages built on top of the NMW.

Hence, an employee who supervises lift operators at a ski resort is entitled to receive $23.80 per hour, 30% above the NMW.  As such, while many employees are paid the NMW, others are entitled to a higher wage. 

Following the Woolworths admission, Business Council of Australia, CEO Jennifer Westacott called out to ease the complex industrial relations system, 

“We do need to make sure we aren’t creating a system that is so complex – 122 awards, multiple agreements, multiple clauses – that is vulnerable to inadvertent payroll mistakes.”

Pending dues

In recent years, a slew of companies have reported underpaying their employees, particularly within industries that have been heavily hit by the COVID-19 pandemic.

A 2017 Government report reveals that:

  • Between 2013 and 2016, 79% of hospitality firms in Victoria did not comply with the national award wage system.
  • One in every two hospitality jobs were paid illegally across the country, with similar estimates available for the retail, beauty, and fast-food industries.

In June this year, international fashion retailer Zara revealed $2.6 million in underpayments affecting its in-store workers.  Prior to that, in February, Super Retail Group — the parent company of Rebel Sport and Supercheap Auto — revealed its staff underpayment bill reached $61.2 million. 

A year before that, Celebrity chef George Calombaris’s hospitality empire back-paid $7.8 million in wages and superannuation after admitting to underpaying more than 500 employees. Then Michael Hill’s jewellers admitted that it underpaid its staff by up to $25 million.

In 2020, retailer Coles said it underpaid around 600 workers since 2014 by about $20 million.

So, what does it mean for SMEs?

The situation is especially alarming for small businesses when large companies with substantial HR resources are making inadvertent mistakes in paying their employees. 

Small business owners are concerned that the country’s complex award system makes it easy for them to unknowingly underpay their employees.

David Eaton, Commissioner at Small Business Development Corporation (WA) notes that employing a dedicated HR specialist is neither practicable nor financially viable for many SMEs. Many depend on external payroll agencies, which leads to communication gaps resulting in errors. 

“Even large organisations with access to human resources teams have made well-publicised mistakes. 

“For small businesses, it is not necessarily employees’ hourly rates that catch out employers, but the multitude of start times, break times and the number of penalty rates that also have to be calculated,” David said. 

In 2019, MADE Establishment, a Melbourne restaurant company, back-paid workers over $7.8 million in wages and superannuation and faced regulatory scrutiny after entering into an undertaking with the FWO. 

Inspectors found that significant underpayments at the MADE group of companies occurred because they failed to apply annualised salary arrangements for some staff correctly.

They also found that the MADE group companies did not pay some staff at the correct classification level for their duties under the Restaurant Industry Award, which particularly affected casual employees.

The same year, the FWO fined the owners of various retail fruit and vegetable and flower outlets in Melbourne $243,000 in 2019 for underpaying workers, maintaining non-compliant documents, and falsifying employment records.

More recently, a Federal Circuit Court slapped a $240,000 fine on a Melbourne-based small business Rhino Grass for underpaying a teenage worker.

Although employers who made genuine mistakes are exempt from the punishment of criminal law, it is hard to ignore the impact that underpayment has on the image of such businesses.

Negligence or wage theft?

The Australian Industry Group, a group representing more than 60,000 businesses in a discussion paper, emphasised the distinction between employers that have made genuine mistakes and the ones that deliberately underpay their employees.

“Many instances of incorrect payment are a result of misunderstanding or error. Employers should not be at risk of being labelled a thief for such mistakes.

“Lowering the test to one of recklessness rather than actual knowledge would be unfair given the extreme complexity of Australia’s workplace relations system, with thousands of pages of relevant legislation, regulations and award provisions. 

“It is very challenging for large businesses and HR professionals to navigate the workplace relations system successfully, and even more challenging for SMEs,” the Ai group noted. 

Way ahead for employers

Arthur Hambas, a Lawyer at McDonald Murholme, said that businesses need to be proactive and careful in paying wages and not wait to be audited before rectifying underpayments.

Employers must also ensure that their employees are paid for all time worked, including training in team meetings, opening and closing the business and working unreasonable trial shifts.

According to Fair Work Australia, employers must follow the below steps if they find that they have been paying their employees incorrectly:

  • Step 1: Work out how long the employee has been underpaid
  • Step 2: Work out how much the employee was paid
  • Step 3: Work out how much the employee should have been paid
  • Step 4: Calculate how much the employee has been underpaid
  • Step 5: Back-pay, the employee
  • Step 6: Keep up-to-date with future wage increases

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