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Pay Now or Pay Later? Key watch outs for unpaid work arrangements

18 May 2016

Pay Now or Pay Later? Key watch outs for unpaid work arrangements

Kathryn Dent, Director and David Weiler, Associate

The obligations owed to interns and those engaged in unpaid work experience, and their status under employment and labour laws, has become the subject of increased concern and scrutiny.

The job market in Australia is such that many new graduates are seeking to enter industries, such as media, recruiting or event management, where there are simply far more applicants than paying jobs. This has created a situation where job seekers may find themselves needing to work without payment for a period in order to get relevant experience and hence a foothold in the industry. On the other hand, universities and other institutions that qualify young people (and older workers looking to change careers) for these fields quite legitimately can require work-experience as a prerequisite for the completion of a degree in order to enhance the work readiness of its graduates and improve graduate employment outcomes.

In order to accommodate the provision of genuine work experience opportunities for potential job seekers, the Fair Work Act 2009 (Cth) (“FW Act”) exempts employers from the obligations otherwise applicable in respect of employees such as payment of wages, minimum award rates and casual loading in certain circumstances, for example, if the arrangement qualifies as a “vocational placement”. However, as has been routinely reported for several years, this system has the potential to facilitate exploitation, particularly of young people or those who may already feel their situation is precarious in terms of securing employment, such as former international students.1

This risk was explored in a report commissioned by the Fair Work Ombudsman (“FWO”) from Professors Andrew Stewart and Rosemary Owens on the issue of internships and unpaid work experience in the Australian context, entitled The Nature, Prevalence and Regulation of Unpaid Work Experience, Internships and Trial Periods in Australia: Experience or Exploitation (“FWO Report”).2

Potential exploitation of unpaid work experience

The genesis of the FWO Report was a 2011 Sydney Morning Herald (“SMH”) article entitled “Eager workers can be free and easy”.3 The article touted the benefits of hiring unpaid labour at a time when this issue was at the forefront of the media. About eight months prior to the SMH article, the American magazine Forbes published an article online by Katherine Lewis that explored the reasons businesses are eager to engage free labour and provided quotes from the CEO of a Toronto/New York start-up, Kelly Fallis:4

“People who work for free are far hungrier than anybody who has a salary, so they’re going to outperform, they’re going to try to please, they’re going to be creative.”

“From a cost savings perspective, to get something off the ground, it’s huge. Especially if you’re a small business.”

The article revealed that Ms Fallis had “used about 50 unpaid interns for duties in marketing, editorial, advertising, sales, account management and public relations.” Ms Fallis was also quoted as lamenting the labour law protections applicable: “[u]nfortunately for many employers hoping to use unpaid labor to advance their business goals, there are strict federal and state rules that workers must be paid the minimum wage and paid for overtime, and must abide by other provisions in [federal labour legislation]”.

Guidance for employers

If an employer is considering offering work place experience that could create an employment relationship, it will likely need to abide by its obligations with respect to employees under the FW Act (including the payment of minimum wages and, if the employee is covered by a modern award, the terms and conditions of that award) unless the arrangement qualifies as a vocational placement.

What is a vocational placement exception for unpaid work under FW Act?

(a)  Must be undertaken as a requirement of an education or training course. This is accepted as meaning “to complete a program” (e.g. Certificate in Business Administration, Diploma of Education or Bachelor of Laws).

(b)  Must be authorised under a law or an administrative arrangement of the Commonwealth, a state or a territory. This means that the education or training course itself must be authorised under such a law.

(c) Must not involve a person being entitled to any “remuneration”. Remuneration is not defined but case law suggests it is broader than “wages” and would include “recompense or reward for services rendered, including non-cash benefits”. Reimbursement for expenses incurred is not ordinarily treated as remuneration. Note that gratuities or bonuses without “entitlement” do not preclude meeting the requirements of the exemption.

(d) Stewart and Owens also note that the FW Act provisions make reference to a “placement”, and argue that this suggests there must be some procedure or process for the “placing” of individuals.

Fair Work Ombudsman prosecutes work experience provider

In early 2015, a sports media company which produced radio and television programmes for advertisers was prosecuted by the FWO for not complying with various provisions of the FW Act in respect of its employees. In its Federal Circuit Court application, the FWO alleged that Crocmedia Pty Ltd (“Crocmedia”) had failed to appropriately pay two employees, who had initially performed unpaid work experience for approximately three weeks, when they were subsequently engaged on a casual basis.5 The FWO alleged that when the employees did get paid, the payments were made in reference to “reimbursements for expenses”6 and not for the performance of work.

“…the benefits that participants can receive from such a program can be invaluable to students and recent graduates…”

It was agreed by the parties that Crocmedia failed to pay the employees in accordance with the relevant award after the initial period of three weeks’ work experience, and as a consequence the employer was found to have breached the FW Act by failing to:

(a) pay minimum wages;
(b) pay casual loadings;
(c) pay in full, at least monthly; and
(d) provide pay slips.

In his decision, Riethmuller J commented that “the Respondent cannot avoid the proposition that it is, at best, dishonourable to profit from the work of volunteers, and at worst, exploitative”7, and held that it was “clear that the Respondent was content to receive the benefits that flowed from the arrangement, and that the arrangement itself, when viewed objectively, was exploitative.”8 It should be made clear that the exploitative nature was not the three week period of unpaid work but rather the extension of that program where the students were only reimbursed for their costs.

Despite the strong language used by the Court, when deciding the appropriate penalty for Crocmedia, the Court took into consideration the company’s contrition, corrective action following, and cooperation with, the FWO’s investigation. The fact that the employees had been paid the balance of the underpayments owed to them was a considerable mitigating factor in the Court’s determination that the appropriate penalty for Crocmedia’s breaches of the FW Act was a total of $24,000 (the maximum possible total penalty being $115,500).

The Court also considered the context in which this decision was made and emphasised the need for deterrence in the industry. It was not lost on Riethmuller J that the FWO Report (which was cited at length in the judgment) identifies media as the industry with the highest prevalence of unpaid work experience.9

1. J Price, ‘Despite rorting of internship programs, they’re still worthwhile’, The Conversation, 18 November 2014 (http:// programs-theyre-still-worthwhile-34082); D Cullen, ‘Hidden cost of free labour: interns’, The Australian, 6 January 2011; W Wood, ‘Unpaid internships are exploited by the wealthiest in the creative industry’, The Guardian, 30 November 2011.

2. This was also the subject of a paper presented by Stewart and Owens at the International Labour Organization’s Conference on Developing and Implementing Policies for a Better Future at Work entitled Regulating for Decent Work Experience: Meeting the Challenge of the Rise of the Intern.

3.  V Khoo, ‘Eager workers can be free and easy’, Sydney Morning Herald, 13 August 2011. The same article appeared on the same day in The Age newspaper, under the title ‘How to get Free Labour’.

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5. FWO v Crocmedia Pty Ltd [2015] FCCA 140

6. Ibid., [13].

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