Court Bursts Managing Director’s Bubble For Underpayments

In the recent decision of Fair Work Ombudsman v Chatime Australia Pty Ltd,^[1] the Federal Court found Chatime Australia’s managing director personally liable for underpayments to its employees despite the fact that he did not believe he permitted the company to engage in unlawful activity under the Fast Food Industry Award 2010 (Award) and the Fair Work Act 2009 (Cth) (FWA).

Background

Bubble tea chain, Chatime, is headquartered in Taiwan, with more than 2,500 stores globally. Chatime’s Australian entity and its managing director, Mr Zhao, were prosecuted by the Fair Work Ombudsman for failing to pay Award minimum hourly rates, loadings, penalties and overtime required by the Award. Chatime and Mr Zhao were also prosecuted for failing to pay annual leave entitlements under the FWA.  

Subsequent to Chatime receiving legal advice that the Award applied to its employees, in 2013 Chatime’s Australia’s Chief Financial Officer (CFO) gave a presentation to Mr Zhao, Ms Quian (Co-founder), and others, which included a PowerPoint titled “Store Staff Pay Restructure Discussion”.

The CFO proposed 2 options for restructuring pay of its employees - Costing Model A and Costing Model B:

• Costing Model A would mean that Chatime would add $854,862 to its payroll by paying its employees Award minimum rates, a uniform allowance, casual loading, and weekend penalties; and
• Costing Model B would mean that Chatime would add $254,258 to its payroll by paying its employees Award minimum rates and a uniform allowance but not casual loading and weekend penalties.

Mr Zhao (and other employees) approved Costing Model B. Implementation of Costing Model B resulted in Chatime underpaying its employees a total of $162,533.12.

In November 2022, the Court found Chatime liable for underpaying 152 of its employees between August and December 2016, which arose from the  implementation of Costing Model B.  The Court also came to the view that it was open to find Mr Zhao accessorily liable for those underpayments as a “person involved” within the meaning of section 550 of the FWA.

The Decision – required “knowledge” of Mr Zhao

The Court considered Mr Zhao’s attendance at the 2013 presentation including evidence that:

• Mr Zhao was aware that Chatime had employees that worked full-time, part-time and as casuals;
• Mr Zhao was aware that Chatime’s employees worked or could work overtime, weekends and public holidays;
• Mr Zhao read the CFO’s presentation slides and, therefore, was aware that the Award applied to Chatime’s employees;
• Mr Zhao did not fully appreciate exactly what an award was, or the ramifications for non-compliance with an award, but this did not mean he had no understanding of what an award was or the ramifications for non-compliance;
• Mr Zhao believed the information which the CFO had presented was correct; and
• at the time Mr Zhao jointly approved Costing Model B, he did not believe that Costing Model B was not compliant with legal requirements.

In finding Mr Zhao had knowledge sufficient to render him a person “involved in” Chatime’s contraventions within the meaning of section 550 of the FWA, the Court was satisfied that Mr Zhao had knowledge of the contraventions of the Award, to the extent that Costing Model B excluded certain Award entitlements that were identified in Costing Model A i.e. casual loading and weekend penalties.

Note: At time of publication, the Court is yet to determine the amount of penalties to be ordered against Chatime Australia and Mr Zhao.  

On a separate note, the Federal Government has proposed increased penalties for employers that intentionally engage in wage theft in the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 (Cth).

The Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 (Cth) (Bill) amends the FWA to make intentional underpayments of employees’ wages and certain entitlements (“wage theft”) a criminal offence. 

Companies who engage in intentional wage theft, could face:

• fines of up to $7.825 million; or
• 3 times the amount of the underpayment (if the underpayment amount can be determined),

whichever is greater.

Individuals who engage in intentional wage theft could face:

• a maximum of 10 years imprisonment; and/or;
• fines of up to $1.565 million; or
• 3 times the amount of the underpayment (if the underpayment amount can be determined),

whichever is greater.

The Senate has referred the Bill to the Education and Employment Legislation Committee for inquiry and report by 1 February 2024. If the wage theft provisions are passed, they will take effect on 1 January 2025 (or an earlier date to be fixed by proclamation).

Lavan’s Comments

Navigating the FWA, awards and industrial instruments can be a complex task. The decision of Fair Work Ombudsman v Chatime Australia Pty Ltd^[2] provides a timely reminder that directors, officers and decision makers must exercise due diligence to ensure that employees are receiving their correct legal entitlements.

Lavan recommends employers regularly review their obligations with respect to employee entitlements, particularly when implementing changes in the organisation which may impact  employee entitlements. If you would like assistance in this area, please do not hesitate to contact Lavan’s Employment, Safety and Education team.