What looks to be Australia’s biggest underpayment case demands we ask how things have gotten so out of hand.

This Wednesday Woolworths Group revealed that it had underpaid about 5,700 salaried supermarket and metro store workers by hundreds of millions of dollars. 

The realisation, it said, came during a review conducted after the implementation of its new enterprise agreement, which came into effect in January this year. According to the AFR, the review was launched when managers under annualised salaries compared their pay under the new agreement with what they were being paid before, and noticed a discrepancy.

In its press release, the company “unreservedly” apologised and promised to make up for it, including quickly actioning a pre-Christmas back-payment for the reviewed period (September 2017 to August 2019). 

But the bigger news was the total predicted size of the underpayment. “Using initial modelling across the Group” and assuming the problem goes as “far back as the implementation of the modern award in 2010” the company predicts the pre-tax payment owing to staff is “in the range of $200-300 million”.

So what actually happened here? Did the Fresh Food People™ get screwed, or did a legal oversight in 2010 spin out of control to the tune of a third of a billion dollars?

Complexity of system

Some were quick to argue it’s the latter. Staying true to his libertarian roots, in a column for AFR former NSW senator for the Liberal Democratic Party David Leyonhjelm, wrote, “The issue originates in Australia’s absurdly complex industrial relation system, with its mess of awards and agreements barely changed from the middle of the 20th century.”

In favour of this interpretation is Woolworth’s claim that the issue is as old as the revised industrial relation system (which came into effect 1 January, 2010). Another argument goes to motivation. If the company is paying back its workers with interest, what was the point of deliberately underpaying them in the first place?

Explaining what happened, the company wrote:

Annual salaries for store team members are set to cover ordinary working hours and reasonable overtime. However, team members are entitled to be paid the higher of their contractual salary entitlements, or what they otherwise would have earned for actual hours worked under the General Retail Industry Award. The review has found the number of hours worked, and when they were worked, were not adequately factored into the individual salary settings for some salaried store team members.

So a lot of staff worked more overall, and more during hours covered by a penalty rate, than was covered by their annualised salaries. Without reconciliations ensuring that hours are matching pay, this problem snowballs.

Annualised salaries

The appeal of annualising salaries for employers has always been that they make for less of an administrative headache. Overtime, penalty rates and other obligations can all be estimated rather than being adjusted on a week-by-week basis. For employees, the purported benefit is knowing what they’ll earn ahead of time. 

But ensuring annualised salary arrangements are airtight from a legal perspective is tricky. 

For example, set-off clauses in common law contracts have to carefully account for each award entitlement. As Partners from Corrs Chambers Westgarth write on the firm’s website, “Sometimes this can be done by listing specific award clauses by number and title. This has the attraction of clarity and certainty, but can become problematic if/when the award itself is amended, or more than one clause is (or becomes) relevant to the particular entitlement.”

Though Woolworths is guilty of the biggest underpayment – in February, Super Retail Group admitted to underpaying its staff by $32 million, so almost ten times less than the Woolworths estimate – it’s not the only one to have annualised salaries as the root problem. Made Establishment and George Calmobaris had the same issue.

“Eye off the ball”

But while nobody would call Australia’s industrial relations system simple, these are huge, well-resourced companies that are making mistakes worth millions of dollars. 

If they can afford to have one of the big four accounting firms audit them when there’s an issue (Woolworths used PwC), surely they can afford to hire experts to handle complexity in an ongoing manner. Nine years is a long time for a company the size of Woolworths to not notice it’s failing to meet an employment obligation.

This is the basis of a different theory for why we’re seeing more underpayment scandals. It suggests that larger organisations have not been giving necessary attention and resources to compliance – whether because of a cultural issue or a desire to keep costs low.

And there is some anecdotal evidence for this.

“Quite often we’ll deal with businesses and we’re staggered there are only two or three people looking after the payroll for several thousand staff – that’s not sustainable,” FWO director of knowledge Cletus Brown told an audience at The Association of Payroll Specialists’ (TAPS) conference according to the Australian Financial Review.

You could also argue that we’re only now seeing more companies coming forward because big changes are coming – the risks now make compliance worth the bother. 

The changes include awards that are being adjusted to address salary annualisation – including provisions that require detailed employee notification and regular pay reconciliations – and bipartisan support for criminalising deliberate wage theft.

In response to the Woolworth’s revelation, Fair Work Ombudsman Sandra Parker announced an investigation and suggested that companies have demonstrated deep levels of irresponsibility. She said many cases of non-compliance were due to “ineffective governance combined with complacency and carelessness toward employee entitlements.”

But what about the argument that it’s not just a lax attitude towards compliance? Afterall, this type of negligence is a sliding scale that begins at simple mistakes and finishes at malfeasance dressed up as a mistake. 

Parker’s colleague Brown suggested the latter has happened. Companies have come to the FWO with excuses it finds very fishy.

“They discover the problem 12 to 18 months ago and they have lawyers and the big four [professional services firms] in and they’ve buried all the bodies. They haven’t even left mounds in the lawn – it’s flat and smooth and there’s nothing to see here. As a regulator that pricks our ears and we want to know what happened,” Brown told the TAPS conference.

Regardless of whether it’s deliberate or not, it certainly seems as if more boards are concerned the companies they oversee might be guilty of underpayment. The FWO definitely wants them to be. 

“I intend to take this issue up with Boards around the country,” says Parker. “Because frankly that is the level within organisations that should be taking an active leadership role on this issue, and seeking assurance about compliance from executive managers. Companies and their boards are on notice that we will consider the full range of enforcement options available under the Fair Work Act, including court enforceable undertakings and litigation where appropriate.”