Underpayments meet class actions and litigation funding: a perfect storm?

2020 saw a significant upswing in the identification and disclosure of significant and systemic underpayments across a range of companies, many of which are household names. The list and quantity of underpayments identified continues to grow. But the identification and rectification of underpayments is now not solely the purview of unions or the Fair Work Ombudsman. Employees are now using class actions with the support of litigation funders to seek compensation. But what does this mean for employers and is it likely to increase or decrease the pot for employees?

The regulatory landscape

Of the 97 Representative Proceedings (ie. class actions) currently in progress across Australia, about 20% fall within the Employment and Industrial Relations National Practice Area. As class actions are increasingly used to drive underpayment claims, we can expect to see additional complexities develop resulting from the significant role litigation funders play in these proceedings.

The Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) introduced on 24 July 2020 were designed to provide regulatory oversight of litigation funders operating in Australia, and required litigation funders to comply with requirements of Australian Financial Service Providers.

The Amending Regulations were intended to subject litigation funders to increased regulatory supervision in the interest of improving accountability, disclosure, conflict management and protection for group members while stemming the tide of class action filings. But in terms of underpayment claims, it is the requirement for Court approval prior to settlement that is of most interest. Recent requirements to approve settlements identify discrepancies in the amounts ultimately to be returned to employees part of a class action (or "group members"), and raise questions about the ability or appropriateness of litigation funders to negotiate unpaid statutory entitlements on behalf of group members.

Current trends in employment-related class actions

Justice Michael Lee noted a proposed settlement would leave group members with "diddly squat" in an ongoing sham contractor class action this year, Bywater v Appco Group Australia Pty Ltd [2020] FCA 1537. UK-based Harbour Litigation Funding had proposed a settlement agreement whereby it would receive 50% of the settlement sum of $1.9 million, which would result in the group members receiving between $770 and $2,320. Justice Lee's "difficulty" with the proposed settlement was that the proposed return to group members was "derisory" and that the settlement offered "virtually no return to group members." On the basis of Justice Lee being "very far from satisfied that the proposed settlement, on the current state of the evidence, is fair and reasonable and in the interests of group members," the settlement approval hearing was adjourned to give the group member's legal representative an opportunity to assess a more reasonable settlement sum.

A different issue was considered on 10 November 2020 in Augusta Ventures Limited v Mt Arthur Coal Pty Limited [2020] FCAFC 194. Augusta involved two class actions for alleged unpaid wages and entitlements arising from mischaracterisation of employees as casual employees. The Full Federal Court overturned an order that Augusta Ventures (another UK-based litigation funder) provide in excess of $3 million in security for Mt Arthur Coal's legal costs on the basis that requiring the litigation funder to provide security may "impede the funder’s participation in the applicant’s proceeding" to the detriment of the group members.

It can be observed from the two above cases alone that the Court's desire to ensure group members' interests are protected has led to an almost hot and cold reception of litigation funders. As concerned as Justice Lee was in Bywater about the percentage of the settlement sum the litigation funder was seeking to retain, the Full Federal Court would not put Augusta Ventures in a position which would result in it being unable to pursue the claim on behalf of the group members.

The decision in Augusta has been hailed a win for litigation funders as it provided them with significant relief – employers have now likely all but lost the ability to apply financial pressure on litigation funders through seeking security for costs. It is expected this will significantly increase the investigation and prosecution of proceedings under the Fair Work Act 2009 (Cth) (FW Act) by litigation funders. However, whether or not employees will be similarly rejoicing is yet to be seen.

In the meantime, the Parliamentary Joint Committee on Corporations and Financial Services' Report, released on 21 December 2020, included two recommendations (Recommendation 1 and Recommendation 20) for legislative and procedural reform to promote the proportionality of costs incurred in litigating a class action, taking into consideration factors such as potential return to group members, impacts on court resources, regulatory outcomes and the public interest.

Potential risks to both employers and employees arising from the use of litigation funders

The Full Federal Court found that requiring Augusta Ventures to provide security for the employer's legal costs was "in substance a condition, or the threat of a condition, being imposed on Mr Turner’s [the group member who commenced the two class actions] right to proceed with a bona fide claim." Despite the fact the order for security was made against Augusta Ventures and not the group members, the Court considered the fact that the consequences for failing to put up the security included dismissing the proceedings "could not possibly be just." It does not take a long draw of the bow to imagine there may soon be other instances where litigation funders are protected from interlocutory applications on the basis of negative flow-on effects to group members, to the detriment of employers.

Additionally, as seen from Bywater, the Federal Court is increasingly analysing what group members will actually receive after litigation funders take their cut. This may lead to higher settlements being paid out by employers to satisfy courts that group members are receiving a "fair" final sum. The observation in Augusta that the litigation funding agreement was "freely bargained for and entered into" offers some comfort that employers should not be expected to wear the full brunt of litigation funder involvement, but the use of litigation funders in employment class action filings, will almost certainly lead to greater risk of reputational damage to employers, and increased legal costs.

Recovering costs – a more promising position

Finally, the decision in Augusta was not all good news for litigation funders. While there are public policy grounds for rendering the Fair Work jurisdiction a "no costs" jurisdiction for parties to FW Act proceedings, there is a compelling argument to be had for holding a commercially interested third party liable for costs. Chief Justice Allsop confirmed that section 570 of the FW Act, which provides that parties to FW Act proceedings bear their own costs and do not bear the risk of the costs of each other, does not apply to third parties, including litigation funders.

Consequently, litigation funders may be required to pay costs if an employment class action is ultimately unsuccessful. This will likely serve as an important check on litigation funders prosecuting FW Act proceedings.

Conclusion: a continued upswing, but employers have some reassurance

We expect to see a continued upswing of employment-related class actions in the future, with an increasing number of these class actions having litigation funders at the helm. As litigation funders can be sheltered by the protected litigation environment of group members' (employees) interests during proceedings and group members are free to benefit from the funding provided by litigation funders, they make for a relatively potent match. However, employers should take some reassurance from the Court's frank criticism of litigation funders seeking significant percentages of settlement sums, and by the fact litigation funders can be required to pay costs of an unsuccessful employment class action claim.

As always, however, undertaking regular payroll compliance checks, managing and addressing early any identified underpayments and having a proactive communication strategy with employees remains the most effective way to manage this potentially complex litigious issue.

Thanks to Zaide Harker for his help in writing this article.