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Managing people

Was underpayment deliberate? Court decides

Making the penalty fit the offence was the focus of a case where the employer had failed to check its obligations in relation to payment of an employee for his accrued annual leave, on termination of his employment.

21 May 2024

The employee had spent most of his adult life working for a global provider of high-performance sports equipment and apparel, with a parent company based in Germany. He’d relocated first to Hong Kong then to the Australian subsidiary in Queensland. 

He was reportedly a very hard worker and a hard task-master, routinely swearing at his subordinates, banging his fist on the table when dealing with them, and being critical and insensitive to their personal concerns. He thought their job performance would not enable the Australian entity to meet German requirements.

His staff complained about him and several resigned in protest. His employment was terminated on the basis of his inappropriate conduct towards his subordinates.

He claimed he’d been dismissed by his employer for exercising a number of ‘workplace rights’. Among other complaints, he said he’d been expected to work an unreasonable number of hours and hadn’t been paid out his accrued, untaken annual leave when he was sacked.

The employer had eventually paid him his entitlement for accrued leave three months later, in March 2022.

At a previous hearing before the Federal Court of Australia, the worker was only successful with respect to one undisputed aspect of his claim, namely that the employer had failed to pay his accrued annual leave when the employment ended, as required under s 90(2) of the Fair Work Act 2009 (Cth).

A subsequent hearing was held to determine the appropriate penalty for the employer’s unlawful delay in paying his accrued annual leave entitlement.

Section 90(2) of the FW Act forms part of the National Employment Standards which must not be contravened: s 44. Where this is contravened, the Court can order a person to pay a penalty of up to $66,000.

The wider context of the hearing was that as part of the new ‘Closing Loopholes’ laws, a new criminal offence for intentional underpayments by employers will be added to the Fair Work Act. This change is expected to take effect on or after 1 January 2025.

In court

The former employee submitted that his employer had deliberately failed to pay his accrued annual leave when he was dismissed and that it had been recklessly indifferent to the question of payment, given no steps were taken to verify the purported basis upon which the payment was refused.

The employer argued that the decision not to pay the worker’s accrued entitlement at the time of termination was deliberate, but that the director who made the decision did so because he was unfamiliar with Australian law and had concerns about the accuracy of the worker’s leave records.

The Court heard that the director had relied on information from the company’s accountant that the worker was ‘rarely ever in the office on Fridays’ and consequently he believed that the worker’s ‘unapproved absence days’ (approximately 25 Fridays) far exceeded the claimed accrued annual leave.

The director accepted that he took no steps to verify the record, seek legal advice or consult with other Australian managers, before or after deciding to terminate the worker. He also conceded that he had no actual knowledge as to whether the worker had in fact been seeing clients or otherwise working on Fridays.

In determining the appropriate penalty, the concept of deliberateness is critical.

The director stated that his actions had been deliberate: he’d declined to approve payment of the entitlement due to his concerns regarding the accuracy of the leave records, believing payment was not justified.

The Honourable Justice Raper concluded that this was evidently not a case where the employer had deliberately flouted the law to avoid paying an employee entitlement. Rather, the employer had mistakenly believed that under the circumstances, payment was not necessary and failed to take adequate steps to verify the circumstances and understand its legal obligations.

Considering the need for need for specific and general deterrence, Justice Raper said a clear message needed to be sent to the company and the community ‘that ignorance (including mistaken belief) is no excuse’.

‘Further, an employer not only has an obligation to know and understand the law but also, if in doubt as to whether the entitlement is payable, to take adequate steps to interrogate the circumstances and seek advice,’ he said.

The Court imposed a penalty of $17,000 on the employer, payable to their former employee.

What it means for employers

When it comes to the risk of underpaying workers, employers would be well advised to double check the rules and take adequate steps to verify any assertions that payment is not required for certain entitlements. This will be even more critical in 2025 when the changes to the legislation make intentional underpayments by employers a criminal offence, for which individuals may face heavy fines or even imprisonment.

Read the judgment

Dorsch v HEAD Oceania Pty Ltd (Penalty) [2024] FCA 484 (9 May 2024)

Gaby Grammeno

Contributor

Gaby has extensive experience as a researcher, writer, editor and project manager on a wide variety of information products, including books, guides, reports and submissions.

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