The future of underpayment proceedings

Recent Federal Court jurisprudence

While it is not an underpayment dispute, the recent decision of Justice Lee in Elliott-Carde v McDonald’s Australia Limited (Stay Application) [2023] FCA 1210 (McDonald's) and his Honour’s comments in Transport Workers Union of Australia v Qantas Airways Limited (NSD1309/2020) have clarified that proceedings under the Fair Work Act 2009 (Cth) (Fair Work Act) do not preclude class action proceedings under Part IVA of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) to recover employee entitlements. In fact, these decisions would appear to encourage unions to file Part IVA class actions when pursuing claims for employee entitlements.

In McDonald's, McDonald’s Australia faced allegations that it, and its franchisees, did not provide employees with 10-minute rest breaks. The Shop, Distributive and Allied Employees’ Association (SDA), the relevant union, conducted its own investigation and commenced an array of individual and representative proceedings against McDonald's in respect of the missed rest breaks. Simultaneously, a plaintiff law firm and litigation funder identified an opportunity and commenced class action proceedings under Part IVA against McDonald's (and not the individual franchisees), on behalf of affected employees. McDonald's is defending each of these proceedings.

Faced with multiple proceedings, Justice Lee was not prepared to stay the funded class action in favour of the SDA representative-type claims. Critical of the SDA’s unnecessary delay and “unwieldly hotch-potch of different actions”, the Court favoured a joint-trial approach allowing the proceedings to run together and for the Court to hear common questions. The approach will allow the SDA claimants to pursue compensation through those claims, whilst other group members (who do not opt-out) may recover through the funded class action including through any aggregate damages award.

The Court acknowledged that employees represented by the SDA would likely receive greater compensation, given there will be no deductions for legal fees or funding commissions, but was clear that this fact alone was not sufficient to persuade a stay of the funded class action. Likewise, the SDA would not be shut-out from seeking pecuniary penalties against McDonald's and its franchisees. The joint trial model is said to “better advance the just resolution of all disputes within the overall justiciable controversy according to law and as quickly, inexpensively and efficiently as possible”.¹

In a recent case management hearing in the action between the Transport Workers’ Union and Qantas Airways Ltd,² Justice Lee again focused on the benefit of Part IVA class action proceedings and was critical of the union’s decision to commence representative proceedings under the Fair Work Act instead. The Court focused on the flexibility provided under Part IVA as well as the ability for courts to transparently award damages to group members on an aggregate basis, rather than having to hear individual damages claims.

What about the FWO?

In addition to union proceedings and class actions, employers are also at risk of regulatory proceedings by the FWO. The FWO initiated 80% more proceedings in 2021-22, as compared to 2019-20,³ and returned six times the amount of underpayments in 2021-22 than in the previous financial year.⁴ The FWO has made clear that large corporate underpayments continue to be an enforcement focus for them in the new financial year.⁵

The FWO has broad-ranging powers to investigate underpayment allegations, request documents from employers, and enter into enforceable undertakings with employers or issue compliance notices as alternatives to prosecuting. Given the FWO’s powers under the Fair Work Act to seek penalties as well as remediation of the underpayments, and its inclination to do so particularly where there is deliberate or reckless non-compliance, these alternatives are often preferable to prosecution. Such alternatives to prosecution are not typically seen in class actions or union led proceedings where financial compensation remains the key focus.

However, a proceeding commenced by the FWO may not be the end of the matter. In 2022, the Federal Court decided to hear two class actions⁶ and two sets of FWO proceedings⁷  against Woolworths and Coles together. The proceedings alleged the underpayment of roughly 28,000 employees. Justice Perram deemed it necessary to case manage and hear the class actions and regulatory proceedings against both supermarket giants together as “the issues in all four proceedings substantially overlap[ed]”, specifically in respect of questions of law and the correct interpretation of the General Retail Industry Award 2010, Fair Work Act 2009 (Cth) and contracts of employment.⁸

For employers, a joint hearing can streamline proceedings and minimise risk of multiple disputes. However, it may also act as an incentive for litigation funders and class action firms to “shadow” the FWO and either get in front of, or fill the void left by a narrow FWO claim, by commencing a broader class action claim. If the court’s preference is to hear them together, the class action can “piggy back” off the FWO proceedings, whilst greatly increasing the employer’s exposure to damages and to adverse costs orders.

Closing Loopholes Bill

Wage theft and underpayment is a hot topic and key priority for the FWO, unions, as well as the Government.

The increased focus means organisations must prioritise compliance to avoid prosecution. If it is not already, this issue should be front and centre of board agendas. Employers must be continually and proactively auditing their systems and processes to ensure that inadvertent breaches do not occur. Employers must ensure they are able to quickly and meaningfully deal with any underpayment complaints, and if necessary, consider proactive engagement with the FWO and relevant unions.

As part of its Closing Loopholes Bill, the Federal Government is proposing to make underpayment a criminal offence.⁹ There will be a maximum possible penalty of 10 years imprisonment and maximum fines of up to $7.8 million - or three times the amount that was underpaid if that amount exceeds the maximum fine. Whilst not yet passed, this proposed offence demonstrates the weight that the Government gives the issue of wage and pay compliance, and the purpose and intent of the Bill is expected to be reflected in the priorities and approach of the new Fair Work Ombudsman, Anna Booth.

As part of the Closing Loopholes Bill, there will be clearer pathways for employers who self-report to the FWO and take reasonable steps to repay the correct amount. Employers will not be subject to criminal penalties for honest mistakes.

The Government has stated the importance of a strong and visible regulator and is providing significant funding to the FWO to implement their commitment to criminalise wage theft. With broad ranging powers prior to prosecution, the ability to resolve matters through enforceable undertakings and compliance notices, and an ability to seek compensation and penalties, if the FWO is able to commence proceedings early and in relation to the broadest group of employees, there may be little incentive for a funded class action, and no need for unions to commence their own proceeding.

However, if the FWO does not prosecute, the Federal Court has all but invited unions to commence class action proceedings under Part IVA of the Federal Court Act as a means of expediting employment-related group claims.

What next?

This remains a complex space for employers to navigate. Employers need to ensure they have robust processes for avoiding underpayment claims, including investing proactively in compliance, regularly obtaining legal advice and undertaking regular audits and investigations, and engaging in dialogue with employees, unions, and the FWO. When faced with proceedings, employers should assess risk broadly and engage litigation expertise early to develop an appropriate and robust defence strategy.

If you do not currently have your house in order, the time to do so is now. The Closing Loopholes Bill has now been referred to a Senate Committee, which will report back in early February 2024. Once the Bill passes Parliament, the increases to civil penalties and changes to the serious contraventions provisions may commence shortly afterwards.

Our Employment & Labour team has extensive experience in assisting employers with proactive pay compliance and reviews, addressing employee complaints and in responding to both union proceedings and class actions, as well as investigations or prosecutions by the FWO.