The Federal Circuit Court has found that a payroll service provider was liable as an accessory for its involvement in a Japanese food chain's underpayment of a worker.

Zheng was a Taiwanese national who was in Australia on a 417 working holiday visa. He worked for Blue Impression on a casual basis. It paid him a flat rate of $16.50 an hour and he worked weekends, public holidays and evenings without receiving penalty rates, allowances or meal breaks.

Blue Impression admitted breaching s 45 of the  Fair Work Act 2009  (FW Act) by acting in conflict with modern award conditions.

FWO: Ezy had notice of award rates; knew underpayments were unlawful

Ezy – which also offers advice on migration visas – provided payroll services for Blue Impression.

In February 2016, the FWO began pursuing Ezy, opening up a new avenue for targeting third parties and professional advisers as accessories to employee underpayments.

The FWO accused Ezy of being an accessory because the accounting firm processed workers' wages when it knew the rates were well below the award minimum.

The FWO had previously audited Blue Impression in 2014 as part of its national hospitality campaign and put the company on notice after finding it had underpaid 12 employees $8,800. Because Ezy helped Blue Impression to calculate and rectify those underpayments, the FWO had also notified the accounting firm about the minimum award rates.

Ezy director Eric Lau – who is also a registered migration agent – and employee Lina Hii were named as the people at Ezy who performed the accounting, payroll and related services for Blue Impression.

Aside from penalties, FWO is seeking an order restraining Blue Impression and Ezy and their agents from engaging in further workplace breaches. The court adjourned the penalty hearing for Blue Impression until the current matter was resolved.

The FWO alleged Ezy knew the Fast Food Award applied to Blue Impression employees and that the firm was "involved in, and therefore should be treated as having itself also contravened those provisions" under s 550 of the FW Act. The regulator said Lau should be held "to have been wilfully blind" and there was a "strong practical connection ... between Ezy and the relevant contraventions".

Ezy's evidence was an "artificial attempt to compartmentalise knowledge and, given the provisions of s 793 of the FW Act, it was possible to aggregate knowledge", the FWO submitted. Failing this, the court should find Lau to be "wilfully blind" and as a result that Ezy was accessorially liable.

Ezy denies liability

Ezy denied liability, claiming that the scope of its book-keeping services to Blue Impression was narrow.

The company denied it was aware of employees' duties or the total number of hours they worked and said its accounting software calculated the correct pay owed to employees.

Ezy claimed to be unaware that Zheng did not receive meal breaks, allowances or penalty rates and was not paid under the applicable award.

It had no primary legal responsibility to ensure Zheng received his minimum entitlements, the company argued. Ezy was a service provider performing "lawful and proper" payroll data entry for Blue Impression and did not have "actual knowledge and intentional participation in a contravention". Bookkeeper Sharon He, who performed Ezy's data entry work, was unaware of the award and its terms and did not have the "necessary actual knowledge of the essential elements of the contravention". Lau, who had "some knowledge of the Award by reason of an earlier audit of Blue Impression's sister restaurant, Hanaichi Doncaster, was not involved in any way as to any transaction involving Mr Zheng", Ezy argued.

Court: Ezy witnesses not candid; director "deliberately shut his eyes"

Judge O'Sullivan found that "Ezy's witnesses did not impress as candid or forthcoming such that their evidence could be accepted without question".

"Overall the evidence of the witnesses for Ezy left the clear impression of designed or calculated ignorance", he said. He found Lau be the "operative mind of Ezy" despite his "wholly unbelievable efforts to minimise his knowledge of what was done for and by Ezy".

"It is risible to suggest that even the most basic query would not have revealed" that the employee was not receiving the correct pay rates and allowances.

"I am satisfied that Mr Lau was the directing mind and will of Ezy and was, if he had not shut his eyes, aware of the matters", Judge O'Sullivan said.

He was "satisfied the evidence demonstrates Ezy (through Mr Lau) deliberately shut its eyes to what was going on in a manner that amounted to connivance in the contraventions by [Blue Impression]".

Lau had control over Ezy as its director and it was "inherently improbable he did not see all the documentation that was relevant to the 2014 audit or the necessary increases to rates of pay that were required to comply with the applicable award".

Ezy had necessary information at its fingertips

Judge O'Sullivan rejected the submission there was insufficient evidence to establish accessorial liability against Ezy. Lau was a certified practising accountant with a Masters in Taxation and the director of multiple corporate entities, Judge O'Sullivan said.

"As part of the FWO Audit [Lau] was clearly put on notice that the rates were incorrect", he said. "Although he frames his involvement as mere 'data entry', the fact remains that in calculating the underpayment amounts, he was aware that the rates that were being paid were incorrect."

When asked why he continued to process the payroll without any adjustments (knowing that it would likely result in an underpayment), Mr Lau replied that he had no authority to alter anything . He further stated, "… we don't question the pay rate… we don't raise questions. We just process what we are given."

Judge O'Sullivan accepted the FWO's submissions that Ezy and Lau had "at their fingertips all the necessary information that confirmed" Blue Impression's failure to meet the award obligations but "nonetheless persisted with the maintenance of its (payroll) system with the inevitable result that the Award breaches occurred".

He found Ezy to be involved in Blue Impression's FW Act breaches except for the lack of meal breaks between 15 September and 5 October 2014.

(Fair Work Ombudsman v Blue Impression Pty Ltd & Ors [2017], FCCA 810.)

Warning: 'Accessorial liability' provisions cast a wide web

Liability under s550 of the Fair Work Act can extend to anybody who is involved in a contravention.  In recent years the FWO has pursued external advisors (e.g. accountants, lawyers, HR managers and payroll service providers such as bookkeepers), upstream companies as well as franchisors.  Of the 50 civil penalty actions initiated by the FWO in 2015-16, a staggering 46 of them involved an accessory (nearly double the number in the previous year), resulting in total penalties of more than $680,000.  This, together with the Court's recent willingness to impose hefty penalties to those found liable, should come as a clear warning to employers, as well as those who provide advice/services to clients with regards to their payroll functions.

Where to from here?

Ezy has been penalised $53,880. Ezy was potentially facing a maximum penalty of $357,000, which, after 1 July 2017 would be a maximum penalty of $441,000.  Blue Impression has been penalised an additional $115,706 for underpaying two Taiwanese workers a total of $9,549 between September 2014 and April 2015.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 also amends the Fair Work Act to increase penalties for serious contraventions and for failures in record keeping and issuing payslips.

Employers should ensure they are meeting all their legal obligations. If you are acting as a payroll service provider and your client is not meeting all their legal obligations or rectifying breaches, ceasing to act for your client should be considered.

Please get in touch with us to discuss your individual circumstances. Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  reception@rgoodman.com.au . 

© Copyright 2017. All rights reserved. Source: Thomson Reuters & NTAA.  This communication is factual only and does not constitute legal advice. Please consult a legal advisor for specific advice. Brought to you by Robert Goodman Accountants.