Personal liability of directors – Underpayment of wages is a substantial issue to consider and act upon

As directors, business owners and those with key decision making responsibilities the management of staff comes with several difficult issues involving personal liability of directors.  Underpayment of wages is one major factor and a number of clients have sought advice from NB Lawyers – lawyers for employers on undertaking an audit of the wages paid to staff to:

  • Mitigate the risk of personal liability for directors
  • Ensure interpretation of awards or industrial instruments is correct
  • Improve or add value to due diligence
  • Ensure inherited problems around personnel systems can be identified
  • Avoid expensive litigation proceedings

Here are 4 Major cases all employment lawyer for employers ensure their clients understand and are aware of:

First Case – Priority Matters Pty Ltd (Professional Services)

Priority Matters a patent application processing firm lost a major decision against the Fair Work Ombudsman which found personal liability for the directors.  What is interesting in this case was that the directors were not involved in the day to day running of the operation of the business. The underpayments:

  • Were not deliberate
  • There were cash flow problems in the business due to delayed payment expected from the ATO
  • Soon after the nearly $1.9 Million in underpayments occurred (or were revealed) the directors took active steps to rectify

Although the reasoning for the “hold up” in payments was accepted – the Courts found that the following factors did not void the Directors from personal liability (and of course liability for the business):

  • the employees had previously received salaries well in excess of their entitlements
  • the employees were repaid all monies they would have been entitled to

The main point was that there were non-payments and the directors had knowledge of such.  In practical terms, the intention and wilful ignorance may provide some basis to reduce liability, however the personal liability for directors exist all the same and directors must be across the prime issue of ensuring their staff are paid correctly and on time.

Second Case – Metro Petroleum (Petrol Station)

Metro Petroleum a petrol station operated in New South Wales and were owned by two (2) directors who amongst other things:

  • failed to identify the correct award coverage for employees
  • refused to pay minimum award rates for employees for ordinary hours
  • failed to pay penalty rates for:
    • overtime
    • weekend
    • public holidays
  • Avoided paying shiftwork loadings
  • Directed an employee to pay for petrol for a customer who left the petrol station without paying

The Fair Work Ombudsman sought penalties against individuals involved in the breach and were successful in establishing personal liability of directors.

The employees at the centre of the underpayment of wages were visa workers who in the Courts view were being taken advantage of – this (alongside an liquidation prior to the case) lead to a greater personal liability of directors.

The Courts awarded $210,000 in penalties against the directors.

Third Case – Matcraft Pty Ltd (Manufacturing)

Matcraft was a manufacturer of automotive custom car mats.

The Fair Work Ombudsman with the assistance of an effected employee found breaches of the relevant modern award and an estimated $52,000 in underpayments.

As part of the discussion with directors, the Fair Work Ombudsman issued a compliance notice and for a period of time this was complied with.  The compliance notice required repayment of the underpayment to the employee over a period of time, in practical terms a repayment plan.

However, after some time, the repayments ceased and it was found in evidence by the Courts that the directors made a concerted effort to utilise monies earmarked for repayments to be spent on products for the business.

The Courts took a very dim view of this thinking and did not view the directors actions to “see just how long they could continue” as positive in anyway.

This case really establishes a fundamental requirement that compliance notices need to be complied with – if you are not able to comply with the notice then this should be negotiated from the outset (or even renegotiated as it may be).

Penalties of $8,820 were levelled against the directors.

Fourth Case – Easttrac Pty Ltd and Klemtrac Pty Ltd (health and home care)

Major home care company, Eastrac and Klemtrac misidentified their workers as contractors as opposed to an employee.

As a result of the misclassification this led to non payment of leave entitlements.

$216,000 of penalties was awarded.

In addition, the personal liability of directors was also held and almost $15,000 was awarded against the directors for the breaches.

Bonus – Wage theft

Wage theft has also been criminalised and in particular Queensland and Victoria have led this change. Deliberate breaches of underpayment can lead to criminal sanctions for directors.

What steps should be taken?

Above is a snapshot of personal liability of directors when it comes to underpayment of wages.  Our previous articles on underpayment of wages 3 Tips For Minimising Risk In Underpayment Of Wages and “We Have Never Had An Issue Before” – How Masterchef And Chatime Have Showed The Perils Of Underpayment Of Wages and Top 3 Tips – Employers Can Avoid A $1.34 Million Underpayment Claim and How Employers Can Learn From 5,700 Employees Underpaid By Woolworths – Top 4 Tips For Employers

 are quire helpful.

Best practice is to:

  • Obtain definitive advice on award coverage of employees working for the company
  • Ensure you receive definitive advice on liability and risk for any contractor arrangements
  • Undertake an audit of payment of wages – a small sample can be initially started – ensure you have legal professional privilege over the audit
  • When undertaking an audit, legal advice should be sought in communications with any third parties or regulators such as the Fair Work Ombudsman
  • A strategy should be developed in dealing with any potential underpayments which should include personal liability of directors

Unsure of any underpayment of wages? Has it been checked? Do you need definitive legal advice?

NB Lawyers – Lawyers for Employers undertake and offer an obligation free consultation – we are happy to help.

Reach out via service@nb-lawyers.com.au or +61 (07) 3876 5111 to book an appointment.

If you got value out of this article email service@nb-lawyers.com.au or click on this link to subscribe to our value added newsletter. 

Written By 

Jonathan Mamaril 

Director

NB Lawyers – Lawyers for Employers 

jonathanm@nb-lawyers.com.au 

+61 (07) 3876 5111 

Jonathan Mamaril, Director, NB Lawyers – lawyers for employers

Jonathan Mamaril leads a team of handpicked experts in the areas of employment law and commercial law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability.  With a core value of helping first and providing practical advice, Jonathan is a sought after advisor to a number of Employers and as a speaker for forums and seminars

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