Friday, 1 July 2016

1  Introduction

The role of the Fair Work Ombudsman (‘FWO’) is to ensure compliance with Australian workplace laws. The FWO works with employees, employers and the community to educate and enforce compliance. The FWO has the power to take enforceable action against those who breach workplace laws.

Unlawful employment practices can give rise to significant costs. The previous KordaMentha Forensic article on FWO underpayment audits outlined some of these costs to employers; and discussed how the use of data analytics could help in quantifying underpaid wages1.

In this article, Jason Cheung, an Associate Director from our Sydney Office, provides an update on the results of further FWO audits from 2012 to 2015; takes a look at the recent inquiry into 7-Eleven’s non-compliance with the workplace laws; and outlines how to be proactive in resolving employee entitlement issues.

2  The cost of non-compliance

From 2013 to 2015 the FWO performed a further 14,806 audits and recovered $9,852,622 in underpaid wages for 15,045 workers. The audits were of businesses of all sizes and industries. The results show that underpayment is widespread in Australia: over a third of those audited were not complying:

Campaign audits finalised and money recovered for employees

The FWO took enforcement action 1,051 times, which included 69 enforceable undertakings:

Use of enforcement tools

Penalties of $7,081,588 were issued against employers:

Civil penalty litigations

These figures indicate significant non-compliance and that the issue of underpaid workers remains widespread and costly to both employers and employees.

But the costs are not only financial. The FWO can instigate further inquiries into a business to find the root causes of non-compliance; and can report its findings publicly. This can expose a business to reputational damage.

One business that the FWO has been looking at over the past two years is 7-Eleven.

3  Case study: 7-eleven

7-Eleven had a history of non-compliance with workplace regulations dating back to 2008. Since 2014, it has been in the public eye due to allegations of underpaid workers; falsification of employment records; and the termination of the Fels Wage Fairness Panel that had been overseeing the rectification of underpayments.

The FWO investigated 7-Eleven to understand its franchise operations; the role of the franchisor; 7-Eleven’s network operations model and culture; how the underpayment of employees occurred; and what changes would prevent future underpayment.

The FWO published its findings in April this year2.

The inquiry undertook the following key activities:
  1. Investigation of requests for assistance from employees.
  2. Testing of anonymous allegations.
  3. Engagement with 7-Eleven.
  4. In-depth forensic auditing of sample stores (conducting site inspections, and analysing the subsequent record-keeping of a sample of 20 stores).
The inquiry showed that there were ‘concerning’ levels of non-compliance, including instances of deliberate manipulation of records to disguise underpayment of wages. Some franchisees had created false employee records to satisfy the franchisor’s payroll auditing. The inquiry also found that the franchisor appeared to promote compliance with the Fair Work Act, but did not adequately detect or address deliberate non-compliance by its franchisees.

The FWO made recommendations in relation to:

  1. Implementing effective governance arrangements to ensure compliance.
  2. Reviewing the operating model for workplace compliance, financial viability and legal exposure of franchise arrangements.
  3. Identifying employees and maintaining employee records.
  4. Self-auditing and reporting to the FWO.
  5. Establishing an employee hotline for intelligence gathering.
  6. Rectifying underpaid wages.

Additionally, the FWO instigated the following enforcement actions:

  1. Seven matters filed before the Federal Circuit Court.
  2. An Enforceable Undertaking.
  3. 20 Letters of Caution.
  4. 14 Infringement Notices.
  5. Three Compliance Notices.
  6. Recovered over $293,500 in underpayments.
The inquiry discovered a broader range of workplace, competition and trading issues affecting the franchisor and franchisees. The FWO will be referring the matters to ASIC, the ATO, the ACCC and the Department of Immigration and Border Protection.

4  What can you do?

Being proactive in ensuring compliance with workplace laws will result in employees being paid their correct entitlements. It should also minimise disruptions to your business from audits and resulting remedial actions.

How can employers be proactive?

  1. Perform internal audits on the controls around payroll to ensure that employees receive their correct entitlements: Adequate controls need to be in place around all payroll aspects e.g. rosters, timesheets, payroll processes, pay slips. The records should also be tested periodically to ensure ongoing compliance (for example, by using data analytics).
  2. Ensure that the employee grievance process is adequate and that employees are aware of it: Any employee concerns about entitlements should be dealt with internally, prior to FWO being involved. Staff induction should make newcomers aware of the grievance process. This grievance process also needs to be periodically tested.
  3. Use data analytics: Conventional audit methodology using random sampling will often be timeconsuming and will inherently have a degree of inaccuracy. Using data analytics is highly beneficial as it deals with all of the data, quickly, to find underpayments and has minimal disruption to a business.
  4. Promote a culture of compliance: Management should demonstrate to everyone a culture promoting compliance with workplace laws.
Some of these actions may be simple enough for an employer. But in some cases, the volume of information involved can be large and difficult to analyse.

Our data analytics techniques allow us to detect:
  1. Overpayment and underpayment of employee wages and entitlements.
  2. Incorrect superannuation contribution payments, accrual of leave components or PAYG deductions.
  3. Falsified time records.
  4. Duplicated wage or entitlement payments.

Data analytics is not constrained by the volume of records, and can test years of transactions with minimal disruption to a business.

Additionally, our experience in accounting, auditing, corporate governance and investigations allows us to:
  1. Test controls around the payroll processes.
  2. Assess corporate culture.
  3. Engage with the business, its employees and government agencies in resolving inquiries.

5  Conclusion

Every business should aim for a culture that ensures compliance with Fair Work laws, and promotes the resolution of employee grievances.

Employers who don’t ensure that their employees receive correct entitlements may be liable to repay the underpaid wages; to pay penalties; to be subjected to enforcement actions; and to suffer public censure.

1. KordaMentha, Forensic Matters: A fair day’s wage for a fair day’s work, September 2012
2. FWO, A Report of the Fair Work – Ombudsman’s Inquiry into 7-Eleven, April 2016