Underpayments – the three questions for directors to ask to uncover the hidden risk

Recent headlines demonstrate that even highly sophisticated and well-resourced companies have been rocked by significant wage underpayment issues.

Wage underpayments are not only an issue of concern for employees and boards, but one that directors consider seriously in terms of personal liability.

Directors are exposed to risk not only under the existing Fair Work Act requirements (and hefty potential fines), but also:

• criminal liability under incoming legislative amendments to address underpayments, leaving directors exposed to potential jail terms;
• personal liability for breaches of directors duties arising in relation to the underpayments;
• personal liability for insolvent trading, as directors who have not met employee entitlements are unable to rely on safe harbour as a defence to any claim of insolvent trading; and
• reputational damage from being linked to "wage theft".

The seriousness of the consequences raises the question – why are wage underpayments so prevalent in Australia's corporate sphere now?

The answer lies in a combination of legislative and technological change as well as inadequate investment in payroll functions.

Identifying historical and current underpayment issues is difficult, because of the complexity of Australia's employment laws and the changes which have been made to various employee entitlements and awards over time. At present there are some 120 Modern Awards and even more enterprise bargaining agreements in place across Australia. Each award or EBA contains complex and sometime ambiguous provisions for penalty rates, rostering requirements and other entitlements which must be interpreted and applied to the changing circumstances of the employee each week.

And while technology has made pay roll functions more efficient, it has also caused underpayment issues to arise and often in a way that is difficult to detect. For example, in companies that have regularly invested in new technology, employee data in historical systems may be lost or not have been properly migrated across and integrated to the new system, resulting in incorrect entitlement calculations which are almost impossible for the business to identify without external audit assistance.

In companies that still carry the cost of the significant capital expense from when the payroll function was initially automated (sometimes as late back as the 90s) the aging payroll system may simply not be capable of correctly applying the number of variables contained in modern awards correctly. Further, the automation of pay roll functions can result in a single coding or data entry error (for example, inputting an award rate in) to be applied across entire workforces undetected.

While technology has sometimes been part of the problem in this area, advances in AI and data science are enabling detailed audits to be undertaken. The ability to undertake a detailed and reliable audit is being embraced by some boards who wish to comply with the governance aspect of ESG, while others are finding out about the power of data science led audits only when they are led by the Fair Work Commission or a class action plaintiff.

The prevalence of underpayments in corporate Australia combined with the corporate and personal risk faced by boards, means that Australian companies must consider:

• forward-looking compliance: do board reporting methods allow directors to be satisfied that they are meeting their directors' duties relating to the proper discharge of the pay roll function within the business;
• historical compliance: has a sufficient audit been completed to identify any underpayment issues have been identified and rectified;
• if an underpayment issue is identified, whether the board is satisfied that the liability does not create a solvency issue for the company and if it does, are the directors satisfied they will be protected from insolvent trading liability?

To explore how Clayton Utz can assist your team with our combined teams of lawyers, data scientists and analysts to produce audit reports that a board can rely upon, please contact us.