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Criminalising wage theft, civil penalties and sham contracting

The Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 amends the Fair Work Act 2009 to introduce a criminal offence for intentional underpayment of employees’ wages and certain entitlements and amends the civil penalties regime to provide for a graduated scale of penalties and enforcement tools.

Wage Theft

Employers who engage in deliberate conduct that leads to underpayment of their employees will face prosecution under the new law. The law will cover employee entitlements as per the Act but will not extend to contractual entitlements or superannuation since the latter falls under tax legislation.

The offence will carry a maximum of 10 years’ imprisonment, and/or a maximum fine of the greater of:

  1. 3 times the amount of the underpayment, if the court can determine that amount, or
  2. for an individual, 5,000 penalty units ($1,565,000), or for a body corporate, 25,000 penalty units ($7,825,000).

When an employer is convicted of 2 or more offences arising from a course of conduct, it will be considered a single offence for sentencing purposes.

The Fair Work Ombudsman (the FWO) will be responsible for investigating the new criminal offence. The FWO will then refer matters to the Australian Federal Police or the Commonwealth Director of Public Prosecutions for consideration, and prosecution where appropriate.

The proposed amendments will also include pathways to encourage employers to self-disclose conduct that may amount to wage theft such as intentional underpayment of workers. In return, employers would not be referred by the FWO for criminal prosecution for wage theft.

These pathways include:

  • A Voluntary Small Business Wage Compliance Code (the Code) will be developed by the government in partnership with employer and employee groups. Evidence of compliance with the Code will ensure that the FWO will not refer conduct for criminal prosecution.
  • The option for the FWO to enter into a cooperation agreement with a person, if the person discloses that they have engaged in conduct that may amount to the commission of the wage theft offence. The FWO may agree not to refer the conduct for prosecution, after assessing the employer against a non-exhaustive list of factors.

The FWO may still take non-punitive action (such as issuing a compliance notice that workers be re-paid), or it may take civil action, if that is appropriate. An employee or employer organisation may also take civil action in relation to a contravention.

Increasing civil penalties

The proposed amendments will increase the maximum civil penalties for standard civil breaches and serious contraventions of civil remedy provisions.

The suggested amendments modify the threshold for what constitutes a severe infraction. Previously, this was restricted to cases where the violation was knowingly and systematically committed.

Under the proposed changes, this threshold will apply to violations that are either knowingly or recklessly committed. This change ensures that civil violations that are considered severe are also applied to mid-tier violations. Additionally, these changes will operate in conjunction with the proposed criminal offence of wage theft, enabling more comprehensive enforcement of the law.

For civil contraventions related to underpayment (including sham contracting, unlawful job advertisements and records misconduct), maximum penalties will increase fivefold. Maximum penalties for these provisions will be the greater of:

  1. 300 penalty units ($93,900) for individuals (currently 60 penalty units or $18,780), or 1,500 penalty units ($469,500) for bodies corporate (currently 300 penalty units or $93,900)
  2. three times the amount of any associated underpayment, if the applicant seeks this kind of penalty.

For serious contraventions, maximum penalties will increase to the greater of:

  1. 3,000 penalty units ($939,000) for individuals (currently 600 penalty units or $187,800), or 15,000 penalty units ($4,695,000) for bodies corporate (currently 3,000 penalty units or $939,000)
  2. three times the amount of any associated underpayment, if the applicant seeks this kind of penalty.

Sham contracting

The proposed changes will make it harder for employers to misclassify workers as independent contractors when they’re actually employees, a practice known as ‘sham contracting.’

To prove they were not engaged in sham contracting, employers will need to show they genuinely believed the contract was for services. This is a more straightforward requirement compared to the current one, which simply requires that the employer didn’t know or wasn’t careless about whether the contract was for employment or services.

These changes are in line with recommendations from reviews of the Fair Work Act, a report by the Productivity Commission on workplace rules, and the findings of the Black Economy Taskforce. These reports found that the current defence of ‘recklessness’ is too lenient, making it too easy for employers to avoid penalties for sham contracting.

What does this mean for you?

If you make an honest mistake or miscalculate wages, you won’t face punishment under the wage theft law. However, if employers intentionally pay their workers less than they should, they could face criminal charges, including possible jail time.

The new rules aim to provide some comfort to small business owners who may have unintentionally underpaid an employee while genuinely trying to follow the rules.

If someone reports a potential violation to the Fair Work Ombudsman (FWO), there may be a chance to work things out through cooperation agreements. However the FWO will consider factors like the seriousness of the issue and the person’s cooperation before deciding. If an agreement is reached, the FWO won’t take legal action.

Civil violations that are considered reckless could result in more significant penalties, with no need for the violation to be part of a broader pattern.

For employers who wrongly classify employees as independent contractors, they now need to prove they genuinely believed they were right in doing so. Simply claiming ignorance or making unreasonable mistakes won’t protect them from liability for misclassification.

Small businesses have special exemptions under the proposed changes. You can view them here.

References: Department of Employment and Workplace Relations Factsheet

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