Directors of companies that underpay their workers are at risk of being personally liable for breaches of the law. This could include personal liability of directors for the entire amount of underpaid entitlements, as well as significant penalties. Directors could soon also face the risk of jail time for deliberately and systematically underpaying employees.

The recent case of Fair Work Ombudsman v Priority Matters Pty Ltd & Anor (No 4) [2019] FCCA 56, is an important reminder of the personal risks for directors when employees are not paid in accordance with the law.

• The Federal Circuit Court of Australia (‘FCCA’) held that two directors of five separate companies should bear some personal liability for contraventions of the Fair Work Act 2009 (‘FW Act’) involving over $1.9 million in employee underpayments.
• The companies had experienced cash flow problems and had insufficient financial resources to pay wages and entitlements to their employees. The directors advised employees of these issues, and permitted the employees to keep performing their duties in the hope that the cash flow problems would be resolved.
• The two directors were found to be ‘involved’ in the underpayment of wages and entitlements due to their direct knowledge of the relevant circumstances.
• Penalties are yet to be determined, but this serves as an important reminder that directors who are ‘involved’ in any contravention of the FW Act by a company are likely to be found personally liable for such involvement and face penalties as a result.

Under FW Act, an individual will be ‘involved’ in a contravention if that individual has (amongst other things) induced the contravention, or was knowingly concerned in the contravention.

In this case, the FCCA held that some of key concepts in determining that the directors were ‘involved’ and, therefore, liable as accessories for the contraventions by the Companies included:

1. Controlling minds – as a corporate entity can only act through an individual, an individual who acts as the ‘controlling mind’ of a company will, in the ordinary course, be liable as an accessory for contraventions of the company;
2. Practical connection – in order to be knowingly concerned in a contravention, an individual must have a ‘practical connection’ to the contraventions by the companies, for example, by intentionally participating in the contraventions through positive acts;
   
3. Knowledge – while there is no requirement that an individual has knowledge that their conduct was unlawful or constituted a contravention, the individual must have actual knowledge of the essential matters that make up the contravention; and
4. Wilful blindness – an individual’s knowledge of circumstances can be inferred from the individual’s ‘wilful blindness’, including, for example, deliberately abstaining from asking questions or making enquiries (although more is required than just recklessness or negligence).

Directors may face significant penalties

If a director is found to be ‘involved’ in contraventions of the FW Act, they will be an accessory in those contraventions and can be personally liable for any penalties in addition to the amount of the unpaid entitlements (particularly if the company is unable to pay those amounts). In prior cases, directors have been ordered to pay in excess of $50,000 in penalties as a result of being involved in a contravention of the FW Act.

FWO continues to crackdown on directors

This case is also demonstrative of the FWO’s persistent crackdown on employers underpaying their employees and its ongoing commitment to litigate such matters as necessary. The FWO has publicly announced its intention to target directors and other involved parties in cases where employees are underpaid their entitlements. In 90% of the cases prosecuted by the FWO in 2016, at least one individual was also prosecuted as an accessory. The FWO’s 2017-18 annual report indicates that the FWO has continued to pursue its objective of targeting individuals involved in underpayment claims.

Directors could soon face jail time

In light of a report recently published by the Migrant Workers’ Taskforce in March of this year, directors of companies could soon face jail time for underpaying their employees.

In principle, the Government has accepted all 22 recommendations outlined in the report in relation to findings of deliberate and systematic underpayment of migrant workers, including jail time for employers involved in the underpayments.

If implemented, the recommendations will have significant implications for employers and their directors. Importantly, criminal acts of directors cannot be insured against, and directors will not be able to demand indemnification from their companies if they are involved in underpayments that are deemed to be criminal offenses.

KPMG Law’s Workplace and Employment team can advise you on legal compliance, risk management and strategic resolution relating to any underpayments and other obligations arising from applicable legislation, modern awards and enterprise agreements.

This article was first published to KPMG Tax Now. 

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