Why every employer needs to consider the implications of modern award coverage

“If I pay above minimum wage, does the modern award still apply”?

Many employers struggle with the complex myriad of legislative and regulatory requirements surrounding the employment and remuneration of workers. The role of modern awards and how they apply are one of the most misunderstood aspects of the Australian industrial landscape. Many employers do not properly understand their obligations and the requirements imposed on them by the operation of modern awards that cover their employees.

It is our experience that employers hold many misapprehensions surrounding their employment obligations. For instance, it is common for employers to hold the misconception that if they are paying above minimum wage or if they are paying above the modern award rate, then the modern award does not apply. Both these concepts are incorrect and usually means the employer is likely incurring an ongoing liability and may be exposed to an underpayment claim. Ignorance of modern award coverage can mean the business may be subject to very significant backpay claims, penalties and scrutiny by the Fair Work Ombudsman, not to mention potential adverse publicity and reputational risks.

Accordingly, in this week’s article we review the basics of modern awards, how to know when a modern award applies to your employees and why every employer should ensure they understand the importance of modern awards and how they may affect their business.

Modern Awards Introduction and Coverage

Modern Awards were implemented in January 2010 and replaced the various State and Federal Awards. There are now 122 Modern Awards which apply across Australia and almost every industry.

A modern award is a legally binding instrument that establishes the minimum wages and working conditions for employees in a particular industry or occupation. Each modern award operates in conjunction with the National Employment Standards under the Fair Work legislation and applies to all employees covered by the ‘national workplace relations system’, who are captured by the scope of the relevant modern award. If the business employs people and the employer is not a State or local government entity, then the national workplace relations system and modern awards will apply to your workplace. The only exception to this is private individuals or partnerships who may employ people in Western Australia.

In addition, every modern award contains classifications for employees within a particular industry according to their skill level and/or qualifications and each of the classifications has a corresponding minimum wage. Modern awards also set a range of other employment terms and conditions such as:

• Penalty rates – this is for work performed on weekends, at night, on public holidays and the like;
• Overtime rates – this is for work in excess of an employee’s ordinary hours of work;
• Allowances which are to be paid to employees for performing certain tasks or having a particular skill or for using their own tools (for example a travel allowance, first aid allowance, dangerous heights allowance); and
• Breaks such as when employees should receive rest or meal breaks and the minimum period allowed for such breaks.

Virtually every non-government employer in Australia will have employees who are covered by a modern award, unless they have an enterprise agreement in place. It matters not that the employer pays their employees above the requirements of the modern award. It is therefore vital that employers correctly identify the modern award that may apply to their employees as it is possible and very common for employers to be subject to two or more modern awards in relation to different kinds of employees. For example, a construction business may have qualified carpenters as well as office staff who complete administrative work. As such, the Building and Construction Award 2010 will apply to the carpenters and the Clerks Award 2010 will apply to the administration staff.

The cost of getting it wrong

Failing to understand the requirements of a modern award, assuming that because you pay your employees significantly more than the modern award may require or incorrectly determining modern award coverage and/or incorrectly classifying an employee can create an array of problems, including significant financial costs to the employer. There can also be serious ramifications for employers if the Fair Work Ombudsman investigates the business as a result of underpayment claims. Not only is it time consuming and daunting to have the Fair Work Ombudsman audit your entire business with a fine-tooth comb, there can be serious ramifications if the Fair Work Ombudsman finds that the business has not been compliant. These ramifications may include:

• Infringement notices – even the smallest mistakes such as not providing pay slips in accordance with the Fair Work Act 2009 (Cth) can see an employer incur on the spot fines;
• Backpay to underpaid employees – if the Fair Work Ombudsman detects an underpayment to employees, they can order the business to backpay all unpaid employee entitlements including to employees who may have already terminated their employment. In these circumstances, where an employer has incurred an underpayment liability over a number of years, the amount of backpay which the business will be required pay can be significant and even financially crippling;
• Proceedings and penalties – the Fair Work Ombudsman is able to bring proceedings against an employer when there has been a contravention of the workplace laws. There have been numerous decisions where not only has the business been severely penalised for non-compliance of workplace regulations but also the individual involved in the contravention has been personally penalised under the accessorial liability provisions. For instance, in FWO v Blue Impression Pty Ltd & Ors [2017] FCCA 810, the Court penalised a Japanese restaurant for deliberately underpaying two employees and as a result, imposed a penalty of $116,250 om the business, $20,000 to the Director and part owner as well as $7,000 to the former internal payroll and account manager. The business was also required to pay back $18,000 to the employees who had been underpaid whilst working for the business;
• Negative media attention and reputational harm – negative media attention and potential harm to the business name and reputation can be severe. Company’s such as 7-Eleven, Donut King, Dominos, Caltex and George Calombaris’ Hellenic restaurant have experienced significant financial impact as well as the unavoidable lasting reputational damage as a result of underpaying their workers and the conduct being highly publicised in the media; and
• Cultural damage – underpaying employees can create a negative culture and low morale. Staff who feel they are not being financially compensated and appreciated generally do not work productively which can often create a high staff turnover.

In addition, the underpayment of workers’ entitlements undermines the trust of customers and demoralises workers, which can ultimately lead to an array of issues for stakeholders. This was unfortunately the very real experience for 7-Eleven and its Board.

More recently, an example of the severity and seriousness involved when a business incorrectly pays staff can be highlighted by the recent media release from Lush Cosmetics. Lush Cosmetics has now launched a $2 million backpay scheme after admitting it underpaid as many as 5,000 employees due to a payroll error. Specifically, as Lush Cosmetics grew they did not invest in appropriate payroll infrastructure to support their growing business. Lush will be concentrating on the backpay scheme for the remainder of the year and will now be investing $1.5 million into upgrading their payroll system which will involve scanning and re-entering 200,000 handwritten paper timesheets dating back to 2010. The complexity of this process as well as the time and money involved to correct the company’s failure to audit their workplace practices and upgrade their payroll system has had huge consequences for this business and their brand.

The Fair Work Ombudsman has also launched a campaign targeting the restaurant industry and as result published the fact that it has already recovered over $400,000 in backpay from employers in this industry. In addition, celebrity chef, Neil Perry and his Rockpool Group are facing significant reputational damage and financial pain as a result of their alleged failure to pay employees in accordance with modern award requirements.

Finally, we often hear our clients tell us that they do not need to worry about underpayment liabilities as they are paying their employees well above what the modern award requires. This itself will be insufficient to protect the business from underpayment claims, especially if contracts of employment are not expressly drafted to state that the over award payment sets off any modern award entitlements. In this regard, a business in the Gold Cost was required to pay its employee, who was covered by the Clerks Private Sector Award, backpay despite the fact that she earned over $400,000 per annum, merely because there was not provision in her contract setting off the overpayments against the modern award entitlements.

Lessons for employers

We understand that determining which modern award and/or which classification may apply to your business and/or employees can be confusing and time consuming. However, as foreshadowed, the ramifications of getting it wrong can be far more costly to your business. Employers should consider and review the following within their business:

• Review whether you are applying the correct modern award or legislative instrument to your employees – we suggest seeking appropriate legal advice if you are unsure;
• Conduct an audit of your current hourly rates, penalty rates, overtime, loadings, applicable allowances and ensure annualised salaries are sufficient to cover all employee entitlements – we suggest seeking appropriate legal advice if you are unsure;
• Ensure your contracts of employment properly and correctly allow for the set-off of over award payments;
• Ensure you have appropriate and adequate payroll systems in place to support your workforce and business needs; and
• Develop and ensure you have robust employment practices in place regarding record keeping, payslip dissemination and employment contract administration.

Authored by Keypoint Law’s Employment Law group

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to modern award compliance or an employment law matter generally, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.