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How do wage underpayments actually occur?

They're rarely deliberate.

Usually, they start with a small error that snowballs into thousands or millions of dollars. Often this is because the employer has no system in place to make sure they are paying people correctly.

Let's take an aspect of the Commonwealth Bank Group's recent underpayment case as an example.

The CBA's enterprise agreement (EA) allows employees to enter into individual flexibility arrangements (IFAs) that vary certain terms of the EA. All EAs and modern awards have these provisions. The employee has to be better off overall as a result of entering into the arrangement.

It looks like CBA was offering a short-term incentive arrangement in exchange for employees agreeing to forgo certain benefits like allowances and overtime.

The problem CBA ran into (or should we say, one of the problems) is that you can only enter into an IFA after a person has commenced employment. If you do it before this, the IFA will be invalid.

CBA entered into IFAs with 2,694 people before they commenced employment. This meant that their IFAs were invalid, and they should have been paid all of the benefits under the EA that they agreed to forgo. This amounted to total underpayments of $5,248,355.

This is a common error that many employers make. It was a costly one for CBA.

How could this have been prevented?

Every employer needs to have a wage compliance plan in place. If CBA had one, it would have included a section on the use of IFAs. It would have assigned responsibility for compliance to the appropriate areas of this business. It might have looked something like this:

  • Ensuring that the use of IFAs complies with the IFA provisions in the EA
  • Drafting compliant IFA templates
  • Training HR on how to use IFAs, including how to apply the better off overall test
  • Conducting regular spot checks to ensure compliance

  • Drafting IFAs using templates approved by legal
  • Ensuring that IFAs only amend permitted terms
  • Ensuring that each employee understands their IFA and genuinely agrees to it 
  • Ensuring that each employee is better off overall as a result of entering into an IFA
  • Ongoing BOOT monitoring
  • Ensuring record keeping is compliant

  • Providing calculations for the initial BOOT
  • Ongoing BOOT monitoring
  • Ensuring that each employee is paid per their IFA

Directors and senior management:
  • Responsibility for the overall system and satisfying themselves that it is adequate to ensure employees are paid correctly.

This isn’t a one-size-fits-all, and it's important that solutions should be tailored to fit your workplace. But it does give you an idea of the systematic measures that need to be put in place to create and maintain a corporate culture of compliance, as required under the coming federal wage theft laws.

With those federal wage theft laws creeping closer, reach out to the team at Source for tailored solutions for your workplace.

Source’s unique model gives your team the extra support they need without having to add headcount, use expensive secondment or placement services or instruct traditional law firms. For an agreed monthly fee that is based on and tailored to your business, Source provides unlimited support for business-as-usual legal needs. There are no hourly rates and no counting of time, so you have complete budget certainty.