Company directors beware – a decision of the Federal Circuit and Family Court of Australia has found that the managing director of Chatime, a popular bubble-tea chain in Australia, was liable for underpayments to employees despite his claim that he had no knowledge of any breaches of workplace legislation.
The Fair Work Ombudsman brought a claim against Chatime and Chatime’s managing director, Chen Zhao, for breaches of the Fair Work Act 2009 (FW Act) relating to underpayment of staff.
At a meeting in 2013, the Chief Financial Officer of Chatime presented two costing models to Mr Zhao and his co-founder. The first model, based on award rates, would have increased Chatime’s annual payroll by over $850,000 (Model A). The second model, which purportedly adhered to minimum award rates while making certain adjustments, would have added approximately $250,000 to payroll costs (Model B).
Mr Zhao’s affidavit made clear that he was one of a group of persons who approved Model B, which, when implemented, led to Chatime underpaying around 150 workers by more than $160,000 over a four-month period in 2016.
Understanding the Director’s Knowledge
The central question in this case was whether Mr Zhao knew enough about the award obligations to be held liable for the underpayments. While he claimed to have no knowledge of unlawful conduct or non-compliance with the law, he admitted to favouring Model B over Model A.
Judge Manousaridis held that Mr Zhao’s preference for Model B demonstrated that he had acquired sufficient knowledge about both costing models to comprehend the differences between them and assess their relative merits. This understanding led to the decision, or involvement in the decision, to proceed with Model B.
It was determined that Mr Zhao qualified as a “person involved” in the admitted underpayments under section 550(2) of the FW Act. Mr Zhao’s assertion of ignorance regarding the breach was not enough to protect him from a finding that he had knowledge of the “essential elements” of the contraventions of the FW Act. The Court held that it was unnecessary to prove that Mr Zhao knew the specific sections of the FW Act being contravened or that he believed the conduct was unlawful. Instead, his knowledge of the differences between the costing models and the implications of choosing Model B was enough to establish his participation in the contraventions. Critically, Mr Zhao’s lack of full comprehension of what the applicable industrial award entailed or the ramifications of non-compliance did not absolve him of liability.
This case serves as a critical reminder of the responsibilities that directors have to exercise due diligence to ensure compliance with workplace laws. As Mr. Zhao had been a key decision maker in electing to use a payment model which contravened the Award, he was liable under the FW Act.
This decision underscores the importance of directors actively engaging with financial and compliance matters within their organisations. Directors are expected to have a basic understanding of the legal framework governing their business operations. Directors should keep in mind that a lack of awareness is not an excuse when it comes to underpayments and non-compliance with workplace laws.
The matter has been listed for directions on 31 August 2023 to determine the appropriate penalties and actions to be taken in light of these findings.
The full case can be found here Fair Work Ombudsman v Chatime Australia Pty Ltd (No 2)  FedCFamC2G 712.
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