As part of the sweeping Closing Loopholes reforms, the intentional underpayment of employees (commonly referred to as wage theft) will soon be a criminal offence under the Fair Work Act 2009 (Cth) (FW Act). This development emerges against a backdrop of persistent litigation by the Fair Work Ombudsman (FWO), with the 2023-2024 financial year seeing employers pay more than AU$21 million in court-ordered penalties for breaches of the FW Act.    

This article reflects on 2024’s most notable underpayment decisions and considers how the new offence will be structured; what we know about the approach to enforcement; and what employers should bear in mind for this change in the new year.  

Key Takeaways 

• Decisions of the Federal Court of Australia over the last 9 months have demonstrated that the Courts are prepared to impose substantial fines at the highest range of the civil penalty spectrum, particularly for the purpose of deterrence.
• On 1 January 2025, the FW Act will be supplemented by a new offence of wage theft. The offence will be committed where an employer intentionally engages in conduct that results in a failure to pay an amount to, on behalf of, or for the benefit of an employee in full on or before that payment is due, with a broad range of relevant payments captured by the offence.
• The consequences of conviction for wage theft will be severe. Courts will be empowered to impose fines of up to the greater of three times the underpayment, 5,000 penalty units for individuals (currently AU$1.65 million) or 25,000 penalty units for bodies corporate (currently AU$8.25 million). Individuals may also be punished by up to 10 years imprisonment (in addition to a fine).
• The FWO may strategically refer matters for litigation that will foster the protection of vulnerable workers and improve compliance with the FW Act in the hospitality sector. While proceedings are yet to be brought under the new laws, the FWO’s ongoing no-tolerance approach to underpayment of employees in a civil capacity is likely to be reflected by the penalties sought for criminal offending.

2024 in review

Ahead of the introduction of this offence, we look back to the decisions in two FWO prosecutions which concerned intentional, egregious underpayment of employees and contemplated the personal liability of directors and managers.

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. 

How are the laws changing?

While underpayment of employees already attracts civil penalties under the FW Act, the new section 327A introduces wage theft as a criminal offence. 

For the offence to be committed, the underpayment must be intentional, unlike the existing civil penalty provisions which can be enlivened without intention. While defences of mistake and ignorance of fact may be available, the employer will bear the burden of proof – and this will undoubtedly be a significant burden to discharge. 

The new legislation also includes “course of conduct” provisions. These mean that a person who commits multiple offences which arise from a single course of conduct (for example, failing to pay a variety of award- or enterprise agreement-based entitlements to the same employee) will be taken to only have committed one offence. However, the underpayment amount relating to that single offence will be the sum of the underpayments resulting from all of the offences arising from that course of conduct. This will be relevant to the determination of any fine imposed.

While the FWO will continue to play a pivotal role in enforcing wage compliance, proceedings for wage theft may only be brought by the Director of Public Prosecutions (DPP) and the Australian Federal Police (AFP). 

What will this look like in practice?

We expect that there will be three key manifestations of the new offence: prosecution, cooperation agreements, and the introduction of the Voluntary Small Business Wage Compliance Code (Small Business Code). 

The FWO’s commentary and media alike indicate that the appetite for prosecution is high, and it is only a matter of time before Australian businesses – big and small – are thrust before the Courts. However, while prosecutions will inevitably unfold, the new provisions of the FW Act are somewhat fettered by the introduction of cooperation agreements and development of the Small Business Code.

Cooperation agreements will supplement Part 5-2 of the FW Act. These will operate in a similar fashion to the existing enforceable undertaking scheme, in that once an employer enters into a cooperation agreement with the FWO, the conduct that is covered by that agreement cannot be referred to the DPP or AFP. However, the FWO can simultaneously enter into an enforceable undertaking in relation to that conduct. 

In a move that will afford a measure of relief to small businesses, the Small Business Code will provide an avenue for small business employers to manage non-compliance without the risk of prosecution. The new legislation provides that if the FWO is satisfied that a small business employer has complied with the Small Business Code in relation to an intentional underpayment, that conduct cannot be referred to the DPP or AFP and cannot be the subject of a cooperation agreement. This aspect of the new legislation has already attracted criticism from academics, who consider that the introduction of the Small Business Code undermines the core objective of the new offence: increased compliance. The terms of the Small Business Code are yet to be announced by the FWO.   

What do we do now? 

Employers must remain vigilant for underpayment of their employees. Particularly where employees are covered by modern awards and enterprise agreements (and as we head into the season of penalty and holiday rates), it is critical to ensure that rostering and payroll systems align to appropriately record employees’ entitlements.

Employers whose employees are covered by a modern award or enterprise agreement should implement regular audits of the classification process to ensure that the decisions being made are both accurate (to avoid unintentional non-compliance) and with appropriate checks and balances in place (to avoid any intentional non-compliance on the part of decision-making employees). 

Small business employers should keep an eye out for the finalisation of the Small Business Code – once determined, this will be a foundational document with which employers should become familiar. 

At a managerial level, training for decision-makers and managerial employees is imperative to drive home the potential consequences of non-compliance. The commencement of a new year coinciding with the introduction of new legislation provides a perfect opportunity to update your training programs and refresh managers on their duties and obligations. 

Ultimately, the most important thing for all employers - of all sizes - to do is to stay informed. If you’d like to talk more about what these changes mean for your business and how you can prepare, or for advice on a broad range of employment issues, don’t hesitate to contact our team.