5 key workplace relations risks for SMEs and how to manage them

 In Law

Workplace relations laws have been reformed significantly over the past decade. Importantly to SME’s, these reforms have included the introduction of many new types of claims against employers and significantly increased penalties for Fair Work Act breaches (up to $51,000 per breach). This is at a time where personal liability provisions for directors and managers are increasingly being utilised. For SME’s, ensuring compliance with these complex laws can be challenging and involve resources they do not have within their enterprise.

However, many common risks for SME’s can be easily managed by taking simple steps, or putting in place simple documentation. Below are 5 examples of workplace relations risks where SMEs can take such steps to ensure compliance and reduce their risk.


1. Unfair dismissal, workplace rights claims and other dismissal related risks
SME employers are often apprehensive about managing poor performers or ill and injured employees because of the risk of various dismissal related employee claims. Particularly, after the introduction of ‘workplace rights claims’ which employees can commence without having been dismissed, exposing employers to penalties of up to $51,000, unlimited damages, and personal liability for directors and managers.

However, the risk of successful claims can usually be managed by ensuring that the reason/s for dismissal are sound and carefully documented, complying with all applicable employer policies and ensuring that the correct process is followed prior to dismissal. The process required to be followed for dismissals varies depending on the reason for the dismissal (such as poor performance, misconduct, fitness for work) and the surrounding circumstances. So, seeking advice before acting is key to minimising risk.

2. Misclassifying employees as contractors and receiving claims for backpay and penalties
When is a worker an employee or an independent contractor? A common difficulty for SMEs is ensuring workers engaged as contractors (such as under an ABN) are in fact contractors and not employees. Employees misclassified as contractors can bring claims such as for unpaid leave entitlements, superannuation, unfair dismissal or other claims on termination, or even claims of sham contracting and penalties of up to $51,000 per breach (with potential personal liability for directors and managers). ‘Unscrambling the egg’ of employee entitlements for a misclassified worker can be time consuming, risky and costly. Many SMEs are also unaware that contractors themselves can bring claims against them under the Independent Contractors Act 2006 that may involve significant financial exposure.

For these reasons, it is key that SMEs ensure that workers are correctly classified, are treated according to that classification and the correct agreements are in place to minimise the ’employer’s’ risk in either case.

3. Claims for ‘reasonable notice’ of termination where there is no written employment contract
Employees without written employment contracts containing a valid notice of termination clause can bring claims that they be paid higher than the statutory notice period, being ‘reasonable notice of termination’. In these circumstances, courts and tribunals have ordered employers who have dismissed employees to pay up to 9, 12, 18 months’ ‘reasonable notice’ pay, or longer, (as well as the costs in many cases). This risk can be eliminated by a simple, written employment contract with a valid notice term.

4. Claims for backpay or an award breach where employees are paid a salary or ‘flat rate’ without the correct written agreement
Many SMEs do not realise they may be at risk of back pay claims, or claims they have breached an underlying award, where they have been paying award covered employees a salary, or a flat rate of pay. Unfortunately, doing so without the correct written agreement/s in place leaves employers exposed to risk of both back pay obligations, penalties of up to $51,000 and potential personal liability of directors and managers.

In many cases, these risks can be avoided or minimised with a simple, correctly drafted employment contract, or by making a valid ‘award flexibility agreement’ with employees.

5. ‘Payroll related’ claims, such as due to incorrectly calculated leave pay and deductions from wages without authority
Inadvertent breaches of workplace laws often occur when processing termination pays. These can include incorrectly calculating annual leave that is paid out on termination (and for example not including annual leave loading or other entitlements where applicable), or making deductions of monies owed to the employer without a written authority that complies with the Fair Work Act. Again, employers are exposed to the risk of back pay, penalties of up to $51,000 per breach and personal liability for directors and managers.

These risks can be avoided or minimised by ensuring that annual leave and other entitlements are paid out at the correct rate, and that the appropriate deduction authorities are in place with employees.

This article was written by Denise O’Reilly, Director, O’Reilly Workplace Law
31 March 2015

If you have any questions about this article, or your obligations under workplace laws, please contact info@oreillyworkplacelaw.com.au

Liability limited by a scheme approved under Professional Standards Legislation

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