18 July 2019

Pay your workers, you dodgy bastard!

We now know that when George Calombaris assaulted a teenager who called out, “Pay your workers, you dodgy bastard!” it likely touched a nerve because Calombaris was still ripping off his staff at the time.

In a deal struck with the Fair Work Ombudsman, Calombaris admitted to underpaying 515 of his former and current staff a total of $7.83 million. …

In 2017 Calombaris estimated that 162 workers had been underpaid $2.6 million because of “historically poor processes”, The Age reports.

But a four-year investigation by the Fair Work Ombudsman found he shortchanged 515 staff $7.83 million at the Press Club and Gazi in Melbourne’s CBD and Hellenic Republic restaurants in Kew, Williamstown and Brunswick.

A further $16,371 has been back-paid to nine employees of MAdE’s popular Greek food chain Jimmy Grants.

Inspectors found that significant underpayments at the MADE group of companies occurred because they failed to correctly apply annualised salary arrangements for some staff, including a failure to pay staff on annual salary arrangements for overtime and penalty rate hours worked.

A lot of media reporting today has suggested the Made Group was “slapped with a fine” and “ordered to pay”, but that’s not what happened at all. The hospitality company voluntarily agreed to make a $200,000 “contrition payment” and promised not to do it again, and in exchange the Fair Work Ombudsman agreed not to pursue financial penalties in court.

This is the equivalent of a robber making off with $7.8 million from the bank and, when caught red-handed, paying the police $200,000 to let it slide. We wouldn’t tolerate it in any other context, but when a boss rips off a worker our system turns a blind eye.

When asked by Neil Mitchell how much the company might have been fined if it went to court, the FWO avoided giving a straight answer and instead argued, “If we went to court it could be potentially higher, but it could potentially be lower.” Given some recent outcomes described in FWO press releases (a $243,000 penalty for a $132,956 underpayment; $124,418 for an $18,671 underpayment; $383,616 for $70,885) this seems disingenuous.

Two hundred grand for a rip-off on this scale is a joke.

Enforceable Undertakings are a cop-out

The FWO conceded, “I accept that $200,000 may seem low to some people but as I said it is the highest we’ve ever negotiated under an EU, an enforceable undertaking.” That is certainly the case, but it only serves to highlight the general weakness of the Ombudsman’s approach — and particularly its use of enforceable undertakings.

In considering the enforcement approach taken by other federal agencies, the Hayne Royal Commission was highly critical of enforceable undertakings:

Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose. … When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach.

The FWO appears not to have learned this lesson, as it continues to avoid court and instead agree to enforceable undertakings that include relatively tiny ‘contrition payments’. In this case, the payment was worth about 2.5% of the underpayment, which doesn’t even cover the interest — the message to employers is that dipping in to wages is a cheap line of credit. Shrewd business.

This undertaking is so outrageous that it’s hard to see how it even complies with the FWO’s internal Compliance and Prosecutions Policy:

The FWO will generally only accept Enforceable Undertakings in limited circumstances. These may include matters involving self-disclosure and where a person has demonstrated a willingness to rectify underpayments, address any other impact of their contraventions and fully cooperate with the FWO.

But the text of the Made Group enforceable undertaking says:

These contraventions occurred notwithstanding that on 16 October 2015 the FWO sent a Letter of Caution (LOC) to the directors of Press Club Restaurant & Bar Pty Ltd, indicating that … the FWO required Press Club to undertake annual reconciliations of all employees paid under an annualised salary arrangement…

On 30 October 2015, in response to the LOC, George Calombaris, on behalf of the Press Club, sent the FWO a letter, which stated that the Press Club would carry out reconciliations for each employee engaged on an annualised salary and rectify any identified shortfall. These reconciliations were not subsequently undertaken at the end of each year.

How on earth does that represent the “full cooperation” the FWO’s policy claims to require before accepting an undertaking as an alternative to prosecution?

And how does it square with the FWO’s comment: “We believe it was accidental, if we thought it was deliberate they would be in court today.” It’s hard to see how it was accidental from 2015 onwards, given the FWO’s official Letter of Caution and Calombaris’s broken promise to fix the problem.

Another part of the FWO enforcement policy includes a list of considerations that affect whether litigation should be pursued, and a number of these jump out as relevant: seriousness of the contraventions, prevalence in the community of the type of behaviour, evidence of deliberate or reckless conduct including omitting to take steps to ensure compliance, business experience and size, the special vulnerability of young and migrant workers, impact on business competitors, the need for general deterrence, and whether the proceedings are necessary to maintain public confidence in workplace laws.

With those factors in mind, consider what the FWO told Neil Michell:

We are investigating a number of other companies, a number of other hospitality businesses, and we are concerned that there is a bit of a cultural issue in the industry… they’re just not taking it seriously enough. …

It’s an industry with a poor compliance culture, it’s why we’ve put this as one of our key enforcement priorities for the next year at least… I’ll give you an example: it employs around 630,000 workers nationally, but it makes up fourteen per cent of workplace disputes, and that’s more than any other sector that we deal with…

What I would say is that, as I said before, there’s a culture in this industry where it’s almost like paying wages is a third-order issue. It needs to be a first-order issue. What we’re saying is we are going to be cracking down on this industry. We’re tired of it, the community’s tired of it, there does need to be a real focus put on people getting their house in order.

This is a sophisticated company, it turns over a lot of money, it employs a lot of staff, it’s just completely unacceptable for low-paid workers to be having to put up with this sort of treatment.

All of this — all of it! — points towards litigation. A sophisticated and successful business, systematically ripping off low-paid workers over years, failing to fix the issue for years after receiving a Letter of Caution, in an industry that has a poor compliance culture and needs a strong deterrent message. Allowing businesses to pay their way out of prosecution through a token ‘contrition’ payment just doesn’t cut it.

Put a broom through the Ombudsman

So, what needs to change if we are going to seriously tackle the issue?

First, the FWO needs structural reform. At present, it has both educational and enforcement responsibilities, and its KPIs require no more than 10% of complaints to be dealt with by enforcement action. This has produced a lax culture that considers “employers with a history of non-compliance” as “Customers” rather than systematic offenders. At the very least, the arbitrary cap on prosecutions must be removed, but ideally the education function should be performed directly by the Department of Employment, while the independent agency should be turned into a true wage inspectorate, properly resourced and with a mandate to take tough action to enforce the law.

Second, the recent watering down of the FWO’s internal policies must be reversed. In June, the FWO threatened a tough new approach supported by a revamped Compliance and Enforcement Policy. I was sceptical at the time, and now that the document has been released, we can see it’s not tough at all.

Previous versions of the policy stated: “Criminal prosecutions are initiated by the CDPP. Where the FWO becomes aware of offences having occurred it will, in the ordinary course of events, refer a brief to the CDPP.” The 2019 document has dropped this commitment. Instead, the FWO now has a statement on its website explicitly disclaiming responsibility for investigating crime: “We don’t investigate issues that are potentially criminal in nature. However, if these issues are brought to our attention, we refer them to the Australian Federal Police.”

It’s not clear whether this is something that occurs in practice, despite the fact that a significant number of the disputes the FWO investigates appear to involve criminal conduct. So-called “cash back” schemes — in which staff are paid legitimate wages to create a false paper trail, but then threatened with harm if they don’t hand back part of the money in cash — look very much like extortion or blackmail.

We need a new Wage Theft offence

But we also need to introduce a specific offence of “wage theft”, to reflect the fact that deliberate underpayment or non-payment of wages is as morally wrong as theft (dishonestly appropriating property belonging to another with the intention of permanently depriving the other of it) or fraud (by any deception dishonestly obtaining for himself or another any financial advantage).

The argument that this is an industrial relations issue and should not be subject to criminal punishment is specious — if an employee keeps their employer’s money, they not only face criminal prosecution, but ‘larceny by a clerk’ or ‘stealing by a servant’ is considered more serious than ordinary theft. But if an employer keeps their employee’s money, they get off scot free. The scales need to be balanced.

The details of how this new offence would operate need to be finessed. The Migrant Worker Taskforce recommended introducing a wage theft offence for “clear, deliberate and systemic” wage violations; the Victorian Young Workers Centre proposed an offence of “dishonestly withholding an employee’s wages”. The Victorian and Queensland governments have promised to introduce State-level wage theft legislation, but the Constitutional issues probably require it to be addressed at the Commonwealth level.

A common critique of wage theft laws is that it is hard to prove the mental element (such as dishonesty or intent) to the high standard required in a criminal courtroom. But this is true of a large number of financial offences, from tax to welfare fraud, and prosecutors successfully navigate this difficulty every day. For example, if an employer is keeping two sets of books and produces false records when confronted by wage inspectors, that can legitimately support an inference that they knew what they were doing was illegal.

Alternatively, a prosecutor might present evidence that the accused was aware of their obligations and the consequences of non-compliance, but chose not to comply. Consider this hypothetical: a company was issued a Letter of Caution by the wage inspectors and told to complete annual reconciliations; a director of the company wrote to the FWO in response, promising that the annual reconciliations would be completed; but the company subsequently failed to complete the annual reconciliations…

Sound familiar?

There are other ways to address this difficulty. One approach is to treat seemingly accidental wage violations as a civil matter, and allow the FWO to issue Compliance Notices giving the business time to make back-payments — but to treat breaches of a Compliance Notice as criminal wage theft. This is something that happens in Canada, and while it is rare, recalcitrant bosses do go to jail for non-payment.

It’s not foreign to the Australian system, either. Pursuing a criminal prosecution for breaching a compliance notice is something the ATO can do in relation to unpaid superannuation: “The employer must ensure that the amount of the unpaid liability is paid within the period specified in the direction. Failure to comply with the direction can result in criminal penalties including imprisonment.” But the FWO can’t do this in relation to ordinary wages.

… but other reforms are also necessary

A wage theft offence is not the only legal change that should be considered. This is a huge problem and we need to borrow ideas that work in other areas and jurisdictions. Company directors can face personal liability if their business doesn’t properly withhold PAYG tax or superannuation — why not extend this to unpaid wages, too, to overcome the scourge of phoenix companies?

In New Zealand, companies involved in flagrant wage theft (like Burger King) can be banned from hiring migrant workers, and directors or human resources managers who are persistently involved in wage violations can be issued with a banning order, preventing them from being “involved in hiring or employment of employees”. In Connecticut, the Department of Labor can shut down a business until it complies with requests for the production of employment records. A Canadian law professor suggests forcing employers to notify prospective employees about their record of wage violations. Governments could use their purchasing power to influence private sector behaviour, by making wage compliance a requirement under procurement policies.

We also need to make it easier for workers and their representatives to take action themselves. When an underpayment is identified, it needs to be much easier to take legal action. The Migrant Workers Taskforce was scathing of the current process:

First, there is an inherent problem of excessive legalism of process and procedure associated with the adversarial court and judge-based framework within which small claims procedure currently works. The relaxed procedural and evidentiary rules do not overcome the basic problems. For many people, accessing the court system — even using the small claims procedure — is a difficult and overwhelming prospect. … [T]he requirement to pay filing fees — while this varies between jurisdictions, in the federal courts this can be $210 for claims less than $10,000 and $245 for claims between $10,000–$20,000 — also serves as a disincentive to commencing a small claim. Finally, the time it takes for matters to be finalised mitigates the effectiveness of the small claims process. In 2016–17 the average time between filing a claim and finalisation was 4.3 months. During the same period it took on average 80 days for a matter to proceed to the first court date.

Labor’s election commitment to establish a low-cost, speedy tribunal [$] to handle wage disputes has clear merit. The cost of pursuing back pay can not be allowed to deter people from enforcing their rights.

Of course, even getting to that point can be difficult. A review of Commonwealth wage enforcement throughout the past century found that workers who complain are subject to victimisation, which is a major deterrent:

Shifts in inspection strategy from routine inspections to complaints-based investigation clearly allow the identification of the complaining employee to the employer. It is apparent that a strategy relying on a complaint being made to prompt enforcement agency activity can affect the prospects of continuing employment… The more recent strategy of employees having to take action themselves through small claims jurisdictions compounds the issues of identification and vulnerability, leaving this option really only open to workers who have sought other employment. Combined with an emphasis on individual contracts, lower union density rates and reduced union right of entry powers, complaints-based inspection practices make workers who question their entitlements more vulnerable to retribution and victimisation.

To combat this, unions also need to have their power to inspect time and wages records restored. Allowing unions to inspect all of the employment records in a business — where there is a credible complaint about violations — ensures that employers can not identify which employees are union members, thereby protecting them from victimisation and ensuring they are confident to speak up when there is a problem. This important function, which allows the resources of unions to bolster the efforts of government wage inspectors, was stripped under WorkChoices, but was only partially restored when that anti-union system was repealed.

We must also follow the UK and make pay secrecy clauses unenforceable, so that workers can discuss their pay with colleagues without fear of punishment.

Join your union and stand together

People need to join their unions. Workers who are members of their union are more likely to be aware of their rights, more likely to identify problems early, and more likely to be able to take shop-floor action to rectify the situation before lawyers need to be brought in. It’s no coincidence that the rise of widespread wage theft has come as union density and industrial action has declined.

Turning things around is not easy. Industries like hospitality are notoriously difficult to organise, but unions are testing new tactics and models. As Keelia Fitzpatrick explains:

Groups like [Victorian Trades Hall’s Young Workers Centre] and United Voice Victoria’s Hospo Voice project demonstrates a new approach to engaging young people working in award-reliant, non-unionised industries where wage theft is rampant. These new approaches to unionism are required in atomised industries where effective enterprise bargaining is near impossible.

Both groups are using traditional campaigning tactics like snap protests and recruitment blitzes of popular shopping and eating areas to build worker power and to target non-compliant employers. These tactics are successful in gaining media coverage about wage theft and growing community support for affected workers.

For example, the Young Workers Centre ran a public campaign against Calombaris while offering legal support to his underpaid staff, building pressure on FWO to take action. While there are limits on the effectiveness of this tactic while the regulator is constrained by its weak policy and limited resources, the creativity and agility of these new groups is promising. Victoria’s new Migrant Workers Centre is adopting a similar approach to another group vulnerable to wage theft, and the soon-to-be created United Workers Union is thinking outside the old paradigm.

But we are going to have to win some political battles to make a real difference to union density. As Jim Stanford observed, “in order to successfully rebuild union density, and obtain the resulting benefits for workers, Australian labour advocates must also win significant improvements in labour laws and basic union freedoms.” In the short term, that means fending off the Morrison Government’s attacks on the union movement. In the medium term, it means identifying ways that State Labor governments can support workers in their unions (through procurement processes, policy consultation, and investing in jobs). And in the long term, it means returning a progressive government to oversee the federal industrial relations system in a way that serves workers rather than bosses.