Former company director held personally liable to compensate underpaid employees

On 17 June 2016, in a very significant decision, the Federal Circuit Court of Australia ruled that a former company director should be held personally liable to pay compensation to the employees of the company for unpaid wages, as well as being ordered to pay substantial civil penalties. 

The decision in Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & Anor¹ clarifies, for the first time, that the Courts have power to make compensation orders against an accessory involved in a contravention of the Fair Work Act 2009 (Cth).  

The decision is important as it is likely to herald an even more active and vigorous enforcement approach being taken by the regulator, the Fair Work Ombudsman, particularly in circumstances where:

• the corporate employer has been placed in liquidation; and/or
• wage underpayments arise out of a labour supply chain involving third parties such as a labour hire contractor or franchisee.

Senior Associate, Damon King discusses the reasons for the decision and its regulatory consequences for national system employers.

Regulatory background

Under section 550(1) of the Act, persons involved in a contravention of a civil remedy provision of the Act can be held liable as an accessory.  A person will be involved in a contravention if they have been, in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention.²

The Fair Work Ombudsman, Natalie James, has recently said that:

…the FWO is still exploring the boundaries of accessorial liability. Human resources staff, day-to-day managers, accountants, administrative staff and companies or individuals involved in a supply chain are all examples of accessories that have been found to have been involved in breaches of workplace laws.”³

Decision

In Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & Anor, the Court found that the employer, Step Ahead Security Services Pty Ltd (Step Ahead), had not paid its employees the minimum amounts to which they were entitled under the Security Services Industry Award 2010.  

Step Ahead had paid its eight employees a flat rate of pay, without regard to the various loadings, penalties and allowances prescribed by the award. As a result, Step Ahead was found to have underpaid its employees a total of $22,779.72.

In prosecuting the employer for breach of the award the Fair Work Ombudsman, unusually, sought payment orders against both Step Ahead and its former sole director to compensate each of the employees for the underpaid wages, in addition to more standard orders seeking the imposition of civil penalties (fines) for each contravention of the Act.

Penalties

The Court found that the former sole director was the controlling mind of Step Ahead and was well aware of the requirements of the award following previous business dealings with the Fair Work Ombudsman.  In light of those historical business dealings, the deliberateness of the contraventions and the failure to rectify the award underpayments, the Court considered that significant penalties should be imposed on both the employer and its director given the need for general and specific deterrence.  

The Court respectively ordered Step Ahead to pay $257,000.00 and the former director to pay $51,400.00 in civil penalties for multiple contraventions of the award.  

Compensation order

Section 545 of the Act set out the orders that can be made in circumstances where the Court is satisfied that a person has contravened a civil remedy provision, including where a person is held liable as an accessory. 

In the Step Ahead decision, the Court observed that section 545 of the Act was more broadly worded than the predecessor provision in the repealed Workplace Relations Act as it allowed the Court to “make any order the court considers appropriate” if satisfied that a person has contravened a civil remedy provision. 

To the contrary, however, the Explanatory Memorandum to the Fair Work Bill 2009 (Cth), states with respect to the statutory intention behind section 545: “where a company has failed to pay, or has underpaid, an employee wages under a fair work instrument, the director is not personally liable to pay that amount to the employee.”

The Court accepted that the Explanatory Memorandum was not consistent with a plain reading of section 545 of the Act but held that the Explanatory Memorandum could not be used to lead to a different interpretation from that which arose from the plain meaning of the text of the legislation.

Finally, the Court noted that its discretion to make a compensation order against an accessory under section 545 should be exercised judicially, taking into account factors such as whether the order is unnecessary given the capacity of an employer to make the compensation payments, the nature and extent of the accessory’s involvement in the contravention, the nature of the order sought and any other relevant public policy reasons.  

In the circumstances of that case, the Court exercised its discretion to impose a compensation order on the former sole director because there was doubt as to whether Step Ahead would be in a position to make the compensation payments and the evidence revealed the former director was plainly aware of the company’s industrial obligations given his previous dealings with the Fair Work Ombudsman.

Key takeaway points

• The Step Ahead decision is important as it clarifies that courts hearing Fair Work Act contravention proceedings have the power and discretion to make compensation orders against accessories to contraventions of civil penalty provisions in the Act.     
• Until the Step Ahead decision, the Fair Work Ombudsman had not traditionally sought compensation orders against accessories.
• The financial stakes for an individual who becomes involved in litigation with the Fair Work Ombudsman will be much higher than previously if, as expected, the seeking of compensation orders against an alleged accessory becomes the “norm” in terms of the regulator’s future enforcement policy.
• The Fair Work Ombudsman is also highly active and the agency has publicly stated on numerous occasions its willingness to litigate and test the bounds of the accessorial liability and other provisions in the Act.
• Individuals who might arguably be involved in a contravention – such as directors, human resources professionals, other senior managers and even professional advisers – can no longer simply rely on the “corporate veil” to avoid liability to pay compensation to persons who have been underpaid or otherwise treated unlawfully. 
• More than ever, national system employers, the senior individuals through whom they act and their advisers, need to be proactive and take reasonable steps from a due diligence perspective, to ensure that their workforce is being paid correctly and that any labour supply chain in which it is involved meets its obligations under any applicable industrial instruments, such as modern awards or enterprise agreements.

^{1 Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & Anor [2016] FCCA 1482
2 Section 550(2) of the Act
3 “The Changing Landscape of the Australian Workplace: The Modern Advisor”, Key note presentation, Law Institute of Victoria Workplace Relations Conference 2016, Natalie James, Friday 28 October 2016}