Australia's 'fair work' system (and in particular Modern Awards) has been subject to increased scrutiny in 2019 as ongoing investigations conducted by the Fair Work Ombudsman have revealed that in some instances, employees are being paid less than their legal entitlements – colloquially referred to in the media as "wage theft".

Although outdated payroll systems could be partly to blame, it is clear that even Australia's largest and most sophisticated businesses struggle to get it exactly right when it comes to interpreting and applying employee entitlements under Modern Awards. This actually comes as no surprise given the complex nature of Modern Awards and the difficulty businesses often face in correctly navigating, interpreting and implementing classifications for their employees, as well as their entitlements including to allowances, penalty rates and overtime.

Once touted as a system intended to streamline employee engagement and enable businesses to more easily manage the hours of work and other entitlements of employees, the recent focus of the Fair Work Ombudsman into the area of underpayment claims has highlighted the compliance risks associated with Modern Awards and just how easy it is for businesses to get it wrong. 

As Woolworths, MAdE Establishment Group (former Masterchef judge, George Calombaris' hospitality business), Wesfarmers and the Super Retail Group (amongst others) have discovered in recent times, award-based arrangements can unravel if there is no continuous auditing of each employee's arrangements against underlying award entitlements. 

In the case of MAdE Establishment, it was ordered to pay over $7.8 million in wages and superannuation to 524 employees affected by underpayment claims going back to 2011. MAdE Establishment noted that there was an initial misclassification of staff under applicable Modern Awards which had a cascading effect on underpayments over time.

Similarly, some of the country's biggest retail companies have admitted to underpaying their workers in recent months. By and large, each company has said that the underpayments were unintentional. In the case of Woolworths, underpayments were identified as the company implemented its newest enterprise agreement which contained inconsistencies relating to overtime levels under relevant awards. Woolworths estimate that the remediation of these underpayments could cost between $200 million and $300 million, as approximately 5,700 staff have been affected over the last nine years.

With the Fair Work Ombudsman confirming that the protection of workers will continue to be a priority for the agency in the future and that it will place a significant focus on underpayment claims, it is clear that the regulator is trying to send a message to employers that it is not acceptable to underpay workers or to deprive them of their entitlements.

Accordingly, it is more important than ever that businesses conduct audits to understand whether they are complying with their obligations under Modern Awards, including, in particular, whether contractual arrangements and enterprise bargaining agreements are consistent with an employee's legal entitlements. Given the costly implications of failing to properly understand Modern Award entitlements, including the risk of exposure to underpayment claims by employees and penalties imposed by the Fair Work Ombudsman, it is important that businesses get Modern Award entitlements right from the start.