How to avoid prosecution for the new wage theft offence.

KEY TAKE AWAYS:

• What is the new wage theft offence under the Fair Work Act 2009 (Cth)?
• How can employers avoid prosecution for the new offence?

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Following the lodgement of the Voluntary Small Business Wage Compliance Code Declaration 2024 (The Code) on the Federal Register of Legislation, the new wage theft criminal offence came into effect on 1 January 2025.

The new offence applies to employers who intentionally engage in conduct that results in the underpayment of their employees. If the non-payment is deemed not intentional, the existing civil penalties apply. This new legal framework has significant implications for employers, but there are steps they can take to minimize their risk.

What is wage theft?

Wage theft occurs when an employer fails to pay an employee the amount owed under their employment agreement, modern award, or the Fair Work Act 2009 (“ The FW Act”). If an employer intentionally withholds wages, they can face criminal charges.

Under the new section 327A(1) of the The FW Act , an employer commits an offence if it engages in intentional conduct to failure to pay an amount (“Required Amount”) due to an employee in full on or before the day when the required amount is due for payment.

Steps to Avoid Underpayment

STEP ONE: Understand and Implement the Correct Pay Rates

Employers should review the applicable award, enterprise agreement, and any relevant provisions of the FW Act. This includes understanding the nature of the business, employee roles, and ensuring correct classifications, pay rates, and entitlements (e.g., loadings, allowances, penalty rates, overtime). It’s essential to keep track of changes in legislation and employee circumstances, such as job roles or location.

Employers should only rely on accurate, up-to-date information about employees’ roles, qualifications, hours worked, and locations. Ensuring this information is correct helps in determining the proper pay entitlements.

Employers should consult reliable sources such as industrial lawyers, the Fair Work Commission, or the Fair Work Ombudsman for guidance on complex pay issues. This ensures the correct interpretation of pay-related obligations.

STEP TWO: Stay Informed on Legal Obligations

Employers should make a concerted effort to stay updated on changes to the FW Act and relevant awards or agreements to ensure compliance.

STEP THREE: Aware of Underpayment

If an employer discovers an underpayment, the risk of prosecution can be reduced by taking immediate and reasonable steps to rectify the situation:

1. Prompt Rectification of Underpayments
   Employers should promptly repay any underpaid wages to affected employees. The faster the correction is made; the less likely criminal prosecution will occur.
2. Proactive Measures
   Employers should implement proactive steps to prevent future underpayments, such as conducting regular payroll audits or seeking expert advice to address deficiencies in their systems.
3. Minimize the Impact
   If the underpayment resulted from a mistake or misunderstanding, the employer’s risk of facing criminal charges is reduced, particularly if the employer took steps to correct the error swiftly.

Reducing the Risk of Criminal Prosecution

While the risk of criminal prosecution is lower for employers who follow these guidelines, there are specific scenarios where the chances of facing criminal liability for wage theft are reduced:

• The underpayment occurred due to a payroll error or financial institution mistake.
• There was ambiguity or misinterpretation of pay obligations, and the employer made a reasonable but incorrect interpretation.
• The employer proactively conducted an audit and discovered the underpayment.
• The underpayment was corrected quickly, minimizing the impact on employees.

Penalties

The maximum penalty for an individual is either 10 years’ imprisonment, a fine, or both.

• Fines may be substantial, with the maximum fine for a company ranging in the millions. The Fair Work Ombudsman may enter into a cooperation agreement with employers in appropriate circumstances, which prevents the employer from being referred to the CDPP or the AFP.
• The Cooperation agreement is entered into between the FWO and a person and prohibits the FWO to refer the matter to the DPP or AFP for consideration of criminal prosecution. It only relates to criminal offences not civil remedy.

Civil penalty increases

• In addition to new criminal penalties, the existing civil penalties for underpayments will increase for non-small business employers. Unlike the criminal offence, these penalties apply even if the conduct is accidental.

Prosecutions for Wage Theft must be commenced within six years after the commission of the offence and can only be commenced by either the DPP or AFP. The Federal Court has been granted the jurisdiction to hear Wage Theft cases. As they are indicatable offences, they will only be triable by jury.

At a minimum, small business employers (employers with fewer than 15 employees) should comply with the Voluntary Small Business Wage Compliance Code to avoid being referred by the Fair Work Ombudsman to the Commonwealth Director of Public Prosecutions (DPP) or the Australian Federal Police (AFP).

The Voluntary Small Business Wage Compliance Code is available on the Federal Register of Legislation’s website.

Prior to these changes we look at Fair Work Ombudsman prosecutions as to what penalties can be dished out.

Fair Work Ombudsman v Foot & Thai Massage Pty Ltd (In Liq) (No 8) [2024] FCA 483 (penalty judgment)

Underpayment: AU$971,092.27

Total penalties: AU$966,890

Foot and Thai Massage Pty Ltd (FTM) was a massage parlour operating in Canberra and run by Mr Elvin, its sole director. Mr Elvin undertook recruitment in the Philippines, where he advertised massage therapist positions with reasonable working hours, an annual salary of AU$52,000, free travel to Australia and free accommodation. Several Filipino massage therapists subsequently accepted employment with Mr Elvin, moving to Australia on temporary visas sponsored by FTM.

Once in Australia, the massage therapists faced deliberate and systematic exploitation. FTM contravened various award provisions relating to hours of work, penalty rates, public holiday rates, and overtime rates. FTM contravened the record-keeping provisions of the FW Act by failing to keep accurate records of working hours and leave, and by creating misleading payslips.

In breach of more than just employment laws, Mr Elvin and the employees’ supervisor, Mr Puerto, threatened to return the massage therapists to the Philippines, or arrange for their families to be killed, if they were to exercise their workplace rights to make a complaint to the immigration authorities or the FWO.

“It is obvious that substantial penalties are called for. As the Ombudsman submitted, the imposition of penalties in the higher range is necessary to deter the respondents and others from engaging in conduct of this kind. The future of FTM — and hence the necessity for specific deterrence — is unclear. But general deterrence is unquestionably necessary.” [219] – [220]

In addition to rectification of the underpayments, interest, and payment for the non-economic loss suffered by the massage therapists, pecuniary penalties were imposed against each of FTM (AU$778,100), Mr Elvin (AU$150,140) and Mr Puerto (AU$38,650).

Fair Work Ombudsman v Sushi Bay Pty Ltd (In Liq) [2024] FCA 869 (penalty judgment) 

Underpayment: AU$653,129.97

Total penalties: AU$15.3 million

The Sushi Bay group of companies operated sushi restaurants in New South Wales, the Australian Capital Territory and the Northern Territory. Ms Yi Jeong Shin was their owner and sole director.

These companies and other entities associated with Ms Shin had, since before the introduction of the FW Act, been the subject of interest by the FWO for suspected (and demonstrated) non-compliance with workplace laws and minimum standards. Ms Shin had separately been fined AU$20,736 in prior proceedings for the intentional underpayment of employees.

This case involved the underpayment of 163 employees, most of whom were young and/or migrant workers. To adopt Justice Katzmann’s description at the outset of her Honour’s decision, this was “yet another case of the exploitation of immigrant workers and a shameless but ultimately unsuccessful attempt to conceal it”.

Sushi Bay’s conduct included the development of policies to classify some working hours as “cash hours” (which attracted rates less than the legal minimum), unlawful deductions through a requirement that employees re-pay a portion of their wages, failing to make and keep accurate records and payslips, and otherwise failing to comply with the terms of the relevant modern award.

The corporate entities making up the Sushi Bay group were collectively fined AU$13.7 million. Ms Shin was fined AU$1.6 million.

In this decision, Justice Katzmann noted that there is a level of similarity between the determination of a criminal sentence and civil penalties, both being reached by a process of “instinctive synthesis” – an evaluative, multifactorial exercise. We anticipate that this decision and the determinative process adopted by her Honour foreshadows the approach that Courts may take when grappling with the new offence.

Conclusion

With wage theft now carrying criminal penalties, employers must be vigilant in ensuring they pay employees correctly under the FW Act.

The Voluntary Small Business Wage Compliance Code offers a practical framework to avoid criminal liability, but all employers should take the necessary steps to understand their obligations and rectify any pay issues as soon as they arise. By staying informed, seeking expert advice, and taking proactive measures, employers can reduce the risk of facing severe penalties for wage theft.

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