Let’s get started by having me make a clear declaration that I am not a lawyer. Before you act on any of my explanations regarding the regulations and how they apply, always consult a legal professional. Some of what follows may seem daunting, but please understand that it might well be presenting a "worst-case scenario” in some situations.
With that said, my understanding is that the intent behind the law is to prohibit organisations from knowingly creating systems that underpay people. This can include underhand approaches by which companies deliberately try to deceive their employees. However, it also includes negligence by an organisation with respect to failure to implement improvements based on feedback.
In other words, if someone has told you that your system isn’t paying employees properly and you don’t take any action, the Fair Work Commission can take that as evidence that you actively made the decision not to fix it.
To my knowledge, no one has ever been incarcerated in Australia for this and that’s probably because it’s difficult to show corrupt intent. Having said that, no one wants to go through very costly legal action.
Legal Action Sucks
When CFOs or CEOs are taken to court, the impact often has little to do with whether you are right or wrong, or whether you win or lose. Many of the people who’ve been fined have been able to afford it. Even if worse comes to worst and you’re incarcerated, it’ll probably mean being sentenced to home detention - which might not seem too horrifying in the current age of lockdowns and quarantining!
It’s much more about the emotional impact. It’s almost impossible to explain how draining it is to stand up in a courtroom and be subjected to a metaphorical microscope and potentially with insulting inferences being made against your character.
Those who find themselves in court also have to spend all of their time defending themselves, taking their focus away from the business. It’s a huge opportunity cost.
How People in the C-suite Become Personally Liable
In one of our previous articles, I explained, “It’s the responsibility of every board member and senior business leader to engage in a thorough payroll risk and business audit. Every responsible person is required to ensure their current payroll system is adhering to Fair Work Act legislation and Modern Award regulations. We most often see customers realising they are underpaying staff because their payroll technology is out of date or prone to human error.”
This is reflected in the recent news that the Fair Work Ombudsman has launched legal action against a Melbourne bar operator for failing to make and keep proper records. J. D. Chapel Nominees Pty Ltd is facing court, as are its former director and general manager, as well as its accountancy firm and their director.
Ultimately, the CFO is accountable for the business's finances and a CEO might be able to get away with pleading ignorance even though they hired the CFO and received their reports but that’s a pretty big “might”.
Plausible deniability is often the defense used. However, Fair Work is unlikely to accept that as a valid defense. They’ll argue that, when you hold a position in a company, you have a responsibility to do your job correctly - and that includes obeying all the relevant legislation.
Ignorance isn’t bliss because it’s your responsibility to find out whether your business is compliant or not. If you’re not compliant, you have a responsibility to do something about it. It is important to show that you are actively looking for possible errors in payroll and you need to show that you’re proactively addressing them. In many ways, the most important thing is to take action because even if you do the wrong thing, you can still argue that at least you tried.
One of the major challenges is that when you live in Rome, you might do as the Romans do. In this context, it means that, if you join a company that’s non-compliant, the organisation might start to weigh you down. What would have made you wince and take immediate action when you first joined might become just background noise.
Situations like these can grind you down.
That’s why it can be so useful to bring in an external pair of eyes. They won’t look at the problems inside your company like an overwhelmed employee. They'll compare it with what’s going on in the wider industry and tell you exactly what you’re doing that does not conform with the regulations.
The Penalties That Can Be Incurred
Right off the bat, the single biggest risk is that the maximum penalties include up to ten years in prison. Then there are the huge fines and the damage that can be incurred to your personal and professional reputation.
A case in point is George Calombaris, the superstar chef who lost a fortune because he underpaid people by nearly $8 million. He was required to pay them back and incurred a $200,000 fine on top of all that.
Then there’s the cost of the court case itself. It’s likely that, on top of your own legal fees, you'll be required to pay those of the prosecution. All of these different costs come into play and it’s not just the monetary cost. It’s also the social and the opportunity costs.
There’s nothing more damaging to your psyche than to have messed up and to have failed to take action to correct your mistakes. If this happens in private, you can reflect on it and think about how you could have done better. When it happens in public, it takes on a whole new dimension.
We all know that newspapers love reporting on this kind of stuff and, once it comes out in the papers, everyone in your social circle is going to know about it. Suddenly your entire life will come under scrutiny. All will feel as if they have the right to judge you without knowing the context - such as the budgets you had or the pressure you were under. All of that is irrelevant because they’ll just see you as the person who underpaid employees.
So, when you consider all of these costs, the investment it takes to stop underpayments from being a problem starts to seem like the deal of the century. And yet, people will still try to cut corners to save costs. It’s like haggling over ten cents on the cost of admission to a lifeboat when your ship could already be sinking.
How the C-suite Can Protect Themselves
For the C-suite, protecting themselves from litigation comes down to demonstrating that they’ve taken the correct steps to secure the integrity of the payroll.
The first of these steps is to ensure that there’s a mechanism in place where people can report problems about payroll.
These problems should be collated in an issue tracker that allows priorities to be set and progress tracked.
It is also important for the C-suite to encourage their staff (and even reward them) for reporting discrepancies and errors, rather than ignoring or failing to act upon them - which often happens.
Another aspect of this is bringing in external auditors. If you’re doing everything correctly, then this will just provide you with some additional assurance and validation. In the vast majority of cases, however, they’ll find important holes that need patching.
These audits can be carried out by people who work within the company, but they need to be independent (i.e. from a separate department) and be given the resources and the authority to carry out a full audit.
Ultimately, the C-suite needs to show that it’s actively managing payroll issues and investing in perpetually improving processes. Note: Investing doesn’t necessarily mean spending money. We’re talking about investing time and effort.
Finally, you need to have a process in place for reporting. Fair Work requires companies to self-report and inform their employees within five days, even if it’s just to say that they’ve discovered a problem and they’re in the process of fixing it.
While this might seem like an exhausting list of problems and solutions, once the appropriate processes are in place, the C-suite can feel reassured that they have acted professionally and there are unlikely to be any nasty surprises in store for them – at least in the area of payroll!