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Policy Coverage Spotlight: Employer Underpayments Claims and Class Actions

  • Legal Development 4 June 2020 4 June 2020
  • Asia Pacific

  • Employment, Pensions & Immigration

Employers continue to be subjected to a lengthening list of underpayment class actions, as litigation funders who are looking for new sources of profit explore the benefits of a number of recent employment law decisions.

Policy Coverage Spotlight: Employer Underpayments Claims and Class Actions

This trend has continued in the recent decision of the Full Federal Court in WorkPac Pty Ltd v Rossato [2020] FCAFC 84 where the case made national headlines for confirming that an employee engaged as a casual can still be considered a permanent employee despite there being a contract of employment stating otherwise.

Refer to our earlier publication on this decision

As a result, a series of class actions have now been announced targeting companies and labour hire firms that use long term causal employment contracts.  The case highlights a growing risk to employers from underpayment class actions.

This is also the case in relation to the distinction between casual and permanent employment relationships and was thrust into the spotlight in the decisions of WorkPac Pty Ltd v Skene [2018] FCAFC 131 and WorkPac Pty Ltd v Rossato [2020] FCAFC 84. These cases confirm that there have been a number of decisions favourable to employees in recent times which may affect the operation of Employment Practices Liability cover in stand-alone or management liability policies, with clauses not constructed to weather the storm of some of the new causes of action pleaded by employees against their current or former employers.

With the emergence of a more fertile breeding ground for employment class actions in Australia, policies responding to these claims may need to be reviewed to ensure they are covering what they are intended to cover.

  1. The advent and advancement of employee class actions

    Employee class actions have become a growing trend in the Australian legal landscape in recent years, in large part due to the willingness of litigation funders to venture outside the confines of commercial disputes and mobilise funds to progress large scale litigation against employers who are non-compliant with the provisions of the Fair Work Act 2009 (Cth) (FWA).

    Employee class actions are also attractive to funders and plaintiff law firms due to the availability of civil penalties to the person bringing the actions.  This means that, in addition to lost wages, workers may be entitled to a significant uplift if a Court also decides to impose financial penalties.

    As the Fair Work Act is federal legislation, the Federal Court Rules 2011 (Cth) provides the most obvious regime for commencing employment class actions. Litigation of this kind requires seven or more employees to bring a claim against a common entity (an employer in this case) arising out of the same, similar or related circumstances where there is a substantial common issue of fact or law. This includes circumstances where the lead plaintiff is able to prove that his or her employment contract, was part of a standardised system for engaging or paying workers and, if they successfully prove the system applies to their circumstance, the same outcome would apply to the rest of the class.

  2. Types of claims brought by employees

    Some of the major areas of dispute in relation to underpayment of employees where close attention should be paid by insurers relate to:

    Employees v independent contractors

    In the age of the gig economy where a growing number of workers are abandoning the traditional “9 to 5” employment arrangement in favour of working independently on a “task-by-task” basis, the Courts have frequently had to consider the issue of whether someone is an employee or an independent contractor in various circumstances. Given there are a number of benefits to being an employee which are not afforded to independent contractors, a worker being misclassified as an independent contractor instead of an employee by their employer might mean they miss out on benefits and protections such as unfair dismissal and unlawful termination protections, minimum pay rates, minimum working conditions, leave entitlements and access to a relevant workers’ compensation schemes.

    Casual employees vs permanent employees

    This is also the case in relation to the distinction between casual and permanent employment relationships and was thrust into the spotlight in the decision of WorkPac Pty Ltd v Skene [2018] FCAFC 131 in August 2018. This case provided a new framework for the way casual employment was perceived in the Australian legal landscape where the Full Federal Court held that, despite a casual labour hire employee receiving a casual loading under an award or enterprise agreement, it was entitled to be retroactively paid annual leave in the same way as a permanent employee. Sections 90(2) and 44 of the FWA govern this requirement to pay annual leave untaken and annual leave loading.

    Sham contracting

    Given the differences in treatment between an employee and an independent contractor under the FWA, claims for sham contracting (an illegal method of employment under section 357 of the FWA) are being brought where an employer has misrepresented an employee as an independent contractor. This misrepresentation occurs when an employer offers to engage a worker as an independent contractor when in reality the worker is entering an employment contract in order for the employer to avoid its obligations to pay leave, make superannuation payments, pay workers compensation premiums and payroll tax. This was seen in the November 2018 decision of Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836, where it was alleged that Foodora required each worker to have an Australian Business Number and to sign a contract titled ‘Independent Contractor Agreement’ notwithstanding the tasks and obligations imposed on the workers meant they were likely to be classified as employees. Section 357(1) prohibits misrepresenting a worker as an independent contractor rather than an employee. The FWA imposes strict penalties for sham contracting including sanctions and civil penalties made against an employer for up to AUD63,000 for each contravention.

    Underpayment claims

    These types of claims focus on the misapplication of terms of industrial instruments resulting in alleged underpayment claims. These claims revolve around the underpayment of annual leave, overtime, loadings, penalty rates and allowances for workers. An action of this kind was filed in the Federal Court against Woolworths alleging “underpayment and systemic wage theft”, of more than half a billion dollars, on behalf of over 7,000 current and former salaried employees. Proceedings of this nature can also be brought by the Fair Work Ombudsman, such as in Fair Work Ombudsman v HSCC Pty Ltd [2020] FCA 655 where the Federal Court imposed record penalties of $891,000 against the operators of three Hero Sushi takeaway outlets for underpaying workers $700,832.88 and providing false records to the Fair Work Ombudsman. Section 45 of the FWA obliges employers not to contravene modern awards including ordinary pay and overtime.

  3. A brief overview of recent class actions

    Some recent 'wage theft' class actions include the following:

    • Supermarket giant Coles has become the latest casualty in the ever growing trend of employee class actions.In February 2020, Coles revealed that it owed staff in its supermarket and liquor business as least AUD20 million in pay. Adero Law are representing the class and have suggested flaws in the payroll practice adopted by many Australian retailers which may have resulted in salaried employees being paid only for their ordinary hours and not overtime.

    •A class action on behalf of 1,050 workers against Shahin Enterprises, owner of the chain also known as 'On The Run', was filed in the Federal Court of Australia in May 2020. Adero Law, also representing the workers in this action, has levelled allegations against On The Run for failing to pay overtime, underpaying staff and misusing its traineeship program as a method to reduce workers' pay.

  4. Potential coverage issues for insurers

    Employee entitlements do not always appear to be the most obvious source of claims in an EPL or management liability insurance policy, and insurance claims teams should consider coverage issues which may arise in circumstances where:

    • it is not clear whether the worker in question is an employee or a contractor, insurers may be in a position to decline EPL cover on the basis that the damages sought are for an employee entitlement;

    • cover may be available under an alternative insuring clause that may not attract the exclusions drafted in relation to EPL cover such as a Statutory Liability clause or extension which covers civil penalties and fines incurred by the employer;

    • whilst there may not be cover for employee entitlements sought due to an exclusion in the EPL section, cover may still be available for defence costs depending on the construction of the policy wording;

    • in that scenario, allocation clauses could be enlivened by insurers to reduce their liability in relation to defence costs in respect of partially covered claims so that defence costs advanced are in proportion with the the loss covered under the policy;

    • a director and/or officer may be liable as an accessory to primary wrongdoing of a company if it is alleged they have been involved in that primary wrongdoing against a worker. Cover may be extended under the primary insuring clause in the D&O section of the relevant policy for claims against directors that may be excluded from EPL cover;

    • the definitions of employee entitlements or benefits within EPL or management liability policies may not provide language robust enough to exclude certain claims as uncovered loss and may require review by insurers. For example, an employee benefits exclusion in a management liability policy may not adequately capture and exclude all the types of benefits and payments to be excluded as not covered under the policy;

    • a worker's statement of claim may make determining coverage difficult as it is unclear how they are categorising their damages claims and how this may fit within an insuring clause and any exclusions. For example, sham contracting claims are usually accompanied with underpayment claims. The damages sought in a sham contracting claim may only relate to civil penalties which would only fall for cover under a Statutory Liability section (or sometimes not covered at all), whereas the underpayment claim may only relate to loss suffered by the employee which would fall for cover under the EPL section;

    • a substantial proportion of damages are likely to be civil penalty proceedings which may or may not be covered. Claims handlers should check whether there are statutory liability clauses that may provide cover or whether the policy excludes it. Typical exclusion wording such as allowing for penalties to the extent they are "insurable by law" remains controversial;

    • underpayment claims made by workers may be restitutionary in nature given an underpayment is usually classified as an unjust enrichment of the insured rather than a loss of a worker which the insured must make good. Insurers should pay close attention to the way in which underpayment claims are pleaded to avoid extending cover to loss which is uninsurable at law (i.e. underpayment claims pleaded by workers as money had and received by the insured by mistake is in most circumstances not covered by most management liability policies given it is not classified as damages in most “Loss” definition clauses meaning the insured has not suffered any insurable loss under the policy);

    • reserving may be difficult for insurers where these class actions have potential to drag on for years at time and the amounts claimed by workers in the pleadings are at times much higher than the amounts for which they end up settling.

  5. The road ahead

    It has been clear for some time now that employment class actions are an ever growing area of litigation which is causing insurers some headaches in terms of coverage given the design and operation of EPL sections in management liability policies. 

    Given the number of favourable decisions going the way of employees, Insurers should be constantly reviewing the EPL coverage extended in their policies to ensure it provides for language which is resilient enough to weather the ever growing storm of employment class actions which appears to have no intention of slowing down.

If you wish to discuss the issues raised in this article or would like a tailored session on the coverage of underpayments claims for your claims team, please contact John Moran


Additional authors:

Julian Amato and Joel Harris

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