‘Wage theft’ is a costly punishment for innocent business

Wrong payments need to be fixed by simplification, not cumbersome 19th-century levels of prescription.

Peter Richards
Nov 12, 2019

“Wage theft” is an easy and socially distasteful epithet to apply to businesses that fail to comply with the obligations to pay wages on time and accurately. But businesses can be victims too, especially of the regulatory maze that surrounds award salary arrangements.

Many federal awards, covering industries as diverse as restaurants, retail and hospitality, mining, maritime, rail and hydrocarbon industries and legal services, have long included variable annualised salary provisions, which enable employees and employers to cash out awards prescribed over time, penalty and shift rates and a range of other payments for a single line annual salary.

They were intended to be mutually advantageous, too. Employers escaped having to manage the transaction costs of updating payroll systems for the multitude of variable hours of work and overtime, penalty rates and other entitlements of every individual employee in their workplaces. Moreover, employees completed tasks much more efficiently and quickly when time is not a factor in their remuneration.

For employees, having a guaranteed all-in salary meant that they could have a predictable income stream, improve their credit ratings and obtain loan approvals for houses and cars etc. All up, annualised salaries were intended to be an unusual win-win in the industrial arena.

Yet far from being an escape from award prescription and high transaction costs, award-based salaried arrangements can open a door to even higher compliance risks. As Woolworths, MAdE Establishment Group and the Super Retail Group amongst others have found, salaried arrangements can unravel if there is not continuous auditing of each salaried employee’s timesheet against each and every underlying award entitlement. In the MAdE Establishment situation there was an initial mis-classification of staff which had a cascading effect on underpayments over time.

So, if it has been tough going for Australian businesses to make award-related salaries work so far, the future holds even less promise.

From March 2020, the Fair Work Commission will introduce new standardised award salary provisions aimed at improving procedural safety checks and ensuring they are effective for meeting the requirements of the Better Off Overall Test (BOOT), which is used to test if enterprise agreements are capable of approval.

After three years of submissions and hearings, the commission’s recent decision sets a new benchmark in prescription, and more akin to the Factory Act and Workshops Act of 1878.

Companies now have to make abstract comparisons of salaries with long-gone award conditions.

Employers must maintain a written record for every employee of the specific award entitlements which are incorporated into the existing annualised salary including any assumptions and calculations about the numbers of penalty rate or overtime hours to be worked.

Employers must also keep a record signed or acknowledged by each and every employee of the time he or she starts and finishes their work and any unpaid meal breaks. This record must be executed at the end of each employee’s pay period or roster cycle.

The task of modern policy is … to enable more flexible and global rules promoting both employer and employee benefits.

Employers must also conduct an audit every 12 months for every salaried employee. This means they must calculate for each employee the amount every employee would have been paid under the award compared to the annualised salary he or she received. Employers must also make restitution to every employee in the course of a given pay cycle for any hours worked in excess of the projected hours which comprise the annualised payment (presumably on a pro rata basis).

Of course, each employee will need to be audited at a different time depending on the date of their engagement relative to a pay cycle. For large employers the auditing process therefore will be a perpetual daily cycle. For middle-sized employers it will be only somewhat less, depending on job churning.

Contract variations will need to be drafted and renegotiated with many currently salaried employees across the workforce.

Though these new obligations serve as a direct and powerful disincentive to maintaining or entering into new salaried arrangements and make the wider enterprise agreement approval process even more daunting, the commission concluded that the standardised procedures would have a “neutral” impact on productivity.

But how do small, medium and large businesses absorb these additional administrative requirements in respect of each and every employee where salaried arrangements are in place, even if only at the level of updating HR software for new ways to monitor, record and report times and unpaid breaks? What are the direct, indirect and opportunity costs of compliance?

The commission concluded that additional costs were necessary to meet its goal to provide “appropriate safeguards to ensure that individual employees are not disadvantaged”. Costs are assumed to be common and not relative to different businesses in different industries. The commission also persuaded itself that in making its decision it had taken into consideration its other legislative obligation to consider the effects of its decision “on business, including on productivity, employment costs and the regulatory burden”.

Prescription always leads to non-compliance or avoidance.

There is a compelling need to reset the relationship between regulation and workplace productivity in Australia. But replicating prescriptive 19th-century health and safety legislation approaches in 21st-century awards in an effort to eliminate all risk, and characterising all business wage non-compliance as thievery, will achieve nothing.

The task of modern policy is not to suffocate salaried remuneration arrangements but to enable more flexible and global rules promoting both employer and employee benefits.

Peter J Richards is a former industrial registrar, commissioner and senior deputy president of the Australian Industrial Relations Commission and the Fair Work Commission.

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