Can in-house counsel be held liable for their employer’s sins? Accessorial liability under the Fair Work Act

 In October 2016, the Fair Work Ombudsman (FWO), Natalie James, warned lawyers against being the first among their peers to be found accessorily liable for breaching workplace laws. Ms James told the Law Institute of Victoria that lawyers should be careful not to “facilitate or involve yourself” in contraventions of the Fair Work Act 2009 (Cth) (FW Act); or if the matter ends up in court, “you may become liable for the sins of your clients”.^[1]

 So when there is a breach of governance, where do your responsibilities begin and end as a lawyer and as an organisation?

In the two years to December 2016, the FWO sought orders for breaches of the FW Act against “accessories” in 92% of cases. The courts have recently held that accessories to FW Act breaches can be directors, human resources advisers, accountants, recruiters, head franchisors, and potentially, as Ms James has warned in late 2016, lawyers. Ms James also stated that: “We have been adventurously testing the limits of accessorial liability provisions to ensure someone is held responsible for breaches of the Fair Work Act.”^[2]

We are in a new era of accountability in which organisations and the actions of their suppliers are inextricably linked — whether it’s wages compliance, safety or an environmental breach. Think 7-Eleven, Coles and Dominos, to name a few. Turning a blind eye or pleading ignorance does not wash.

In this article, we will discuss relevant case law, the potential implications for you as a lawyer (more far reaching than you may think), and importantly, what you can do to protect your organisation and your own reputation.

What is accessorial liability?

Accessorial liability is based on the principle that you may share responsibility for the wrongdoing of someone else if you have a sufficient practical connection to the wrongdoing. Section 550 of the FW Act provides that a person is taken to be involved in a contravention of the FW Act where they have done any of the following:

• aided, abetted, counselled or procured the contravention;
• induced the contravention, whether by threats, promises or otherwise;
• been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
• conspired with others to effect the contravention. In Yorke v Lucas^[3], the High Court of Australia determined that in order to have accessorial liability, a person:
  • must have knowledge of the essential facts constituting the contravention;
  • must be knowingly concerned in the contravention;
  • must be an intentional participant in the contravention based on actual and not constructive knowledge, other than in the case of wilful blindness where constructive knowledge may be sufficient; and
  • ·need not know that the matters in question constituted a contravention.

This is a high threshold for liability, but the FWO has been increasingly creative in pursuing advisers and upstream companies for breaches of the FW Act.

What are the consequences?

The consequences of a finding of accessorial liability can include personal financial penalties (up to $10,800 for an individual and $54,000 for a corporation), enforcement investigations and legal proceedings with the accompanying costs, as well as reputational damage. The FWO is also becoming increasingly creative in the range of orders it is seeking, including injunctions against future contraventions, freezing orders to prevent the shifting of assets to defeat employee creditors, and orders against upstream companies and directors to audit their entire payroll and provide training for workplace obligations at their own expense.

Even if legal liability cannot be established, it is important to consider matters beyond pure legal risk to also include the damage that may occur to a company’s brand and reputation as the result of any supplier or contractor flouting their legal obligations.

Spreading the blame (and liability)

Directors

A 2016 case, Fair Work Ombudsman v Step Ahead Security Services Pty Ltd^[4], was hailed by the FWO as setting an important precedent for accessorial liability, particularly where proceedings aren’t able to be brought against the primary wrongdoer. That case involved a security company that failed to pay penalty rates to its casuals, leaving eight employees underpaid by more than $20,000 over a 3 month period. The company subsequently went into liquidation.

Given the company’s demise, the FWO pursued its director personally. In the Federal Circuit Court, both Step Ahead and the director were found jointly liable, and with the company insolvent, the director was ordered to personally repay the outstanding amounts. Jarrett J pierced the corporate veil and found the director liable after noting that the director was the company’s “controlling mind”, had been a director of two other failed security companies, had received 37 FWO compliance notices, was fully aware of the employment obligations and had failed to show any contrition for the contraventions.

In addition to rectifying the underpayments, Jarrett J imposed a penalty of $51,400 on the director personally, with 25% suspended if he was not involved in any further underpayments of employees for the next 5 years. Further, in an example of how the FWO is working with other agencies, it recently provided information to the Australian Securities and Investments Commission (ASIC) that has led to the charging of a former director for breaching section 1308 of the Corporations Act 2001 (Cth) by providing ASIC with a false statement that the company of which he was a sole director had no outstanding liabilities, when in fact the FWO had obtained an order against the company for outstanding employee entitlements in 2015.

HR managers

A recent Federal Circuit Court case^[5] established accessorial liability by a human resources manager for a company’s unlawful deductions from employee pay. The HR manager denied any involvement or knowledge, despite admitting that he knew about the practices and processes for payment of wages to employees, including the unlawful deductions. The court found he knew the deductions were unlawful due to his interactions with FWO inspectors in 2012 and 2013.

Burchardt J did not accept that a person managing HR activities and being intimately involved with award matters was unaware that not only were deductions being made, but that the records provided to the FWO were false and misleading. The judge importantly held that the HR manager did not need to know exactly which sections of the FW Act he contravened.

The HR manager was found to have knowledge sufficient to constitute involvement for the purposes of s 550 of the FW Act. He was held liable along with the director and the company itself, and was awarded a penalty of $9920.

Ms James said in relation to this case that:

"We are prepared to use the accessorial liability provisions of the Fair Work Act, where it is in the public interest, to hold anyone to account for their involvement in exploiting workers … This can include human resources and payroll officers, line managers, accountants and advisors and this means that even if a company is liquidated, it’s no guarantee of avoiding the consequences of non-compliance with the Fair Work Act."^[6]

In November 2016, the FWO announced that it is also prosecuting another HR manager of a large restaurant franchise who it alleges was involved in creating a fictitious set of accounts presented to the FWO.

Accountants

True to Ms James’s word, the FWO launched proceedings against Blue Impression, the operator of a Japanese restaurant in Melbourne, and also its accountants, EZYAccounting, for the underpayment of employees and other breaches of the FW Act.^[7] The accountants were included in the proceedings because they were responsible for Blue Impression’s payroll services. Their client had previously been audited by FWO and the accountants were aware of minimum payment obligations as part of assisting the company to rectify shortcomings in payments identified by the audit.

The FWO has said this is the first case to its knowledge where an accounting firm is being sought to be held liable for its alleged involvement as an accessory in workplace breaches. The matter is listed for hearing later this month.

Lawyers?

In Fair Work Ombudsman v Jooine (Investment) Pty Ltd^[8], the Federal Circuit Court considered a sham contracting arrangement which involved a foreign national being underpaid by a cleaning company. The company and its director were held liable for contraventions of the FW Act. Ominously, the judge in that case cited the need to deter advisors from helping clients evade their obligations under the law:

"The deterrent should also extend to the advisors who have facilitated the orchestration of these scams, to prevent their further proliferation of such advice and facilitation. From a limited examination of the contract material and associated documentation, it appears to have been prepared by someone who was familiar with employment law within this country and with a deliberate intention to circumvent the legislative framework that has been put in place to protect vulnerable individuals from exploitation in a labour environment."^[9]

Ms James has warned that this is precisely an example of where a lawyer may be pursued in court as an accessory to a breach of the FW Act. She emphasised this again in a 2016 speech to the Law Institute of Victoria, where she warned lawyers of the risk that they could be found accessorily liable for breaching workplace laws. The FWO’s actions against EZY Accounting and HR managers demonstrate that advisors need to be increasingly vigilant that they do not enable wrongdoing by companies, particularly those who rely on their advice, or they may personally face the consequences.

Franchisor held responsible for misdeeds of franchisees

Yogurberry

In Fair Work Ombudsman v Yogurberry World Square Pty Ltd^[10], a master franchisor has, for the first time, been found liable for the contraventions of its franchisees, after a Yogurberry franchisee underpaid several Korean workers a total of $17,827. The court imposed $146,000 worth of fines using accessorial liability provisions.

Importantly, almost half of those fines were imposed on companies in the Yogurberry group, including the master franchisor, as well as CL Group, the payroll company, for its participation in the underpayment. Flick J, in finding these companies liable, stated that the head franchisor and the payroll company “had knowledge of, and participated in establishing rates of pay, making payment of wages, determining hours of work, and dealing with employment-related matters” for the employees.^[11]

7-Eleven

7-Eleven also made news after the FWO launched proceedings against a number of its franchisees^[12] for systematically underpaying their employees. As a result of these actions, seven matters were filed before the Federal Circuit Court, one Enforceable Undertaking was made, 20 Letters of Caution were issued, 14 Infringement Notices were issued, three Compliance Notices were issued and over $293,500 was recovered for workers.

However, the FWO was unable to establish that 7-Eleven as head franchisor was liable for the breaches of its franchisees as it could not prove that 7-Eleven was “knowingly concerned” in the breaches. 7-Eleven nonetheless faced a deluge of adverse publicity and recently entered into a 3 year proactive compliance deed that the FWO described as the “most robust and comprehensive [deed] that any franchise brand has in place in Australia”. This deed imposes onerous obligations on 7-Eleven including biometric time recording, electronic wage payments, and a suite of strengthened auditing and compliance measures such as hotlines, facilitating FWO access to franchises and an internal investigation unit.

Future reforms

In response to the failure to establish 7-Eleven’s liability as an accessory for the contraventions of its franchisees, the Government promised in a 2016 election policy to introduce new provisions that would impose liability on franchisors and parent companies that “should have reasonably been aware of the breaches and could have reasonably taken action to prevent them from occurring”. This represents a lower threshold than the current accessorial liability provisions and would be more likely to capture companies that claim to be unaware of the misdeeds of their franchisees or downstream operators but should reasonably have been aware of these.

The Government also promised to introduce compulsory evidence gathering powers for the FWO, similar to those held by the ATO, ACCC and ASIC, as well as deliver a $20 million funding increase for the capabilities and workforce of the FWO.

These reforms are likely to render a defence of blind ignorance even more unlikely to succeed and will mean companies, and their advisors, will need to be more vigilant than ever in monitoring the compliance of entities in their supply chain and their businesses.

Take home points

The FWO is becoming increasingly creative both in terms of the orders it is seeking as well as the individuals it is seeking them against, such as HR managers, accountants and potentially, lawyers. These are practical steps to ensure that you and your client (the company you work for) are not next:

• know your obligations and educate staff about their responsibilities;
• familiarise yourself with pay rates of downstream workers and perform regular workplace audits to ensure hours are recorded appropriately and pay rates match the legal requirements;
• address suspected or identified breaches promptly, but with care. You will need to balance your visibility in addressing wrongdoing without assuming additional liability;
• ensure contracts cover any remedial action required — for example, your ability to terminate if someone in the supply chain is doing the wrong thing;
• do your due diligence. If a supplier’s price seems too good to be true, it probably is. Ask yourself why and carefully consider and document the response and impact;
• check how many layers you have in the supply chain (if there are too many suppliers and they are all taking a cut, there is a chance workers may be being underpaid);
• ensure you have an appropriate paper trail documenting your compliance measures — policies, complaint procedures and audits;
• manage any issues identified proactively — better systems drive better behaviours;
• rewards compliance by your suppliers and downstream companies by appropriate KPIs; and
• lastly, consider if there was an investigation, how will you advise the steps you’ve taken? What story will your documents tell?

This article was first published in Inhouse Counsel, Vol 21 No 1, March 2017