Underpayment claim for 4 months’ work results in $98,000 of penalties to employer and directors

A recent decision of the South Australian Employment Court (Court), Sohel Rana v We4Us Pty Ltd, Masudur Rahman and Tanvir Ahmed [2020] SAET 149 (Decision), is a timely reminder to employers and company directors of the risk of pecuniary penalties being imposed following determinations of underpayment of employee entitlements.

The Court ordered that We4Us Pty Ltd (Employer) pay Sohel Rana (Employee) $22,450 on account of unpaid entitlements and interest, in addition to $43,000 on account of pecuniary penalties. The Court imposed separate pecuniary penalties of $27,500 each on the Employer’s directors, Mr Rahman and Mr Ahmed.

Facts

The Employer provides IT services and solutions. The Court previously determined that the Employee was engaged by the Employer for a period of 4 months between 18 February 2019 and 21 June 2019 as an employee, although the Employer had paid the Employee as an independent contractor. The Employee was found to be classified as a Telecommunications Technician pursuant to the Telecommunications Services Award (Award).

The focus of the Decision was to determine the quantum of the underpayment of the Employee’s entitlements pursuant to the Award and the issue of pecuniary penalties for contraventions of the Fair Work Act 2009 (Cth) (FW Act).

The Employee claimed a total of $22,597.96, comprising of unpaid wages, first aid allowance, meal allowance, annual leave and annual leave loading, unpaid superannuation and reimbursement of expenses incurred by the Employee at the direction of the Employer.

The Employee also sought pecuniary penalties for various breaches of the FW Act by the Employer and its directors, including:

• Failing to pay the correct base rate of pay, weekend penalty rates, overtime, public holiday rates of pay, pay for all hours worked, first aid and meal allowances, reimbursement for out of pocket expenses, accrued annual leave and leave loading and superannuation;
• Requiring the Employee to spend his own money in performing work for the Employer;
• Failing to pay the Employee’s wages in full, and failing to pay at all on some occasions;
• Failing to keep required employee records;
• Failing to provide pay slips; and
• Misrepresenting to the Employee that he will be, or was, an independent contractor, and being reckless as to whether the Employee’s contract was a contract of employment rather than a contract for services.

The Employer submitted that it only owed the Employee $199 and continued to submit, even after the Court determined that the Employee was in fact an employee, that the Employee was engaged as an independent contractor.

Decision

The Court rejected the Employer’s calculations on the basis that it failed to consider the whole of the period of employment as previously found by the Court, failed to apply all relevant provisions of the Award, calculated entitlements by reference to the hours worked on each job as if the Employee was a contractor, and proceeded on the basis that the Employee was responsible for the payment of the training required of him.

The Court accepted the Employee’s calculations but made a slight adjustment to the interest calculation, determining a total underpayment sum of $22,450.

The Court was also satisfied that all the contraventions of the FW Act asserted by the Employee were made out, aside from ‘sham contracting’ and the requirement for the Employee to spend his own money in performing work for the Employer.

In respect of the sham contracting argument, the Court was satisfied that the Employer and its directors did not know that their engagement with the Employee was a contract of employment, rather than a contract for services within the meaning of section 357 of the FW Act. Further, it was determined that the Employer and its directors were not reckless as to whether that was the case. Therefore, the Employer and its directors did not engage in sham contracting.

The Employee asserted that the Employer and its directors breached section 325(1) of the FW Act, which prohibits an employer from requiring an employee to spend his own money in the performance of work. However, the Court noted that such a contravention would only be made out if the requirement for expenditure is unreasonable in the circumstances. Further, the payment must directly or indirectly benefit the employer or a party related to the employer. The Court held that this was not the case in the Employee’s situation.

In imposing the substantial pecuniary penalties on the Employer ($43,000) and its directors ($27,500 each), the Court was considerably concerned by the respondents’ failure to appreciate the seriousness of their actions. This included the complete failure to engage the Employee in accordance with the FW Act and Award. A key factor in quantifying pecuniary penalties was the need for individual deterrence.

Take Home Messages

Pursuant to section 550 of the FW Act, a person who is involved in a contravention of a civil remedy provision is also taken to have contravened that provision. Therefore, directors of companies that have engaged in contravention(s) of civil remedy provisions in the FW Act are exposed to significant risk of pecuniary penalties being ordered against them. Individuals may also be exposed to criminal proceedings for such contraventions.

Given the potential risk to company directors and individual employees, there is a greater incentive for employers to undertake an underpayment audit to ensure all employees are being remunerated in accordance with the applicable legislation and industrial instrument.

When engaging workers, employers must be aware of the differences between employees and contractors. Importantly, an appropriate contract reflecting the relationship should be executed before engagement.

For more information please contact Sathish Dasan on +61 8 8210 1253 or sdasan@normans.com.au or Ganesh Krishnan on +61 8 8217 1395 or gkrishnan@normans.com.au or Anastasia Gravas on +61 8 8217 1331 or agravas@normans.com.au.