Underpayments of over $4.4 million? Lush tries to ‘makeup’ with enforceable undertaking

By Aaron Dearden and Jonathon Brooking

The Australian branch of international cosmetics company Lush has entered into an enforceable undertaking with the Fair Work Ombudsman, and undertaken to back pay employees over $4.4 million.

In July 2018, Lush self-disclosed to the Ombudsman that it had underpaid employees between 2010 and 2018. The underpayment impacted approximately 3130 employees across Lush’s operations. Affected employees included production assistants, compounders, sales assistants, retail supervisors and managers.

The Ombudsman identified that the main causes of the underpayment were Lush’s lack of training, its manual payroll system, and not having a dedicated human resources department.

As part of the Undertaking, Lush was required to:

• make a $60,000 contrition payment to the Commonwealth’s Consolidated Revenue Fund;
• display public and workplace notices detailing its workplace law breaches;
• provide staff training;
• review the contracts of all salaried employees;
• establish and operate a hotline to assist employees over the following three years with pay enquires; and
• engage an expert auditing firm (at its own cost) to ensure its future compliance.

The Ombudsman stated that the $60,000 contrition payment was determined by factors including:

• Lush cooperated with the Ombudsman to rectify the underpayment;
• the back payments (with interest) went beyond the six year statutory limitation period;
• Lush implemented measures to ensure future compliance; and
• Lush’s operations were significantly impacted due to the COVID-19 pandemic.

Our experience is that an investigation into one form of underpayment often leads to the identification of other underpayments.

Consistent with this, when Lush self-disclosed to the Ombudsman in July 2018, it estimated that the quantum of the underpayment was $2 million. However, it appears that since 2018, Lush identified further underpayment issues, which has meant that the quantum increased to nearly $4.5 million.

Aside from the underpayment, in 2018 Lush stated in an open letter to its employees that it had spent approximately $1.5 million for external payroll experts to investigate the underpayments. It is unclear how much Lush ultimately spent to investigate the further underpayment issues, but this demonstrates the significant cost of underpayment investigations, rectification and ensuring compliance.

The Ombudsman’s press release on Lush’s underpayment quoted Sandra Parker, the Ombudsman. She stated that Lush’s situation:

‘Serves as a warning to all employers that if you don’t prioritise workplace compliance, you will not only have to deal with the cost of paying back significant amounts to employees, but you face reputational damage and ongoing formal scrutiny by the FWO.’

Underpayments are a material – and increasing – issue for employers. The Ombudsman’s practice is to publish the enforceable undertakings that it enters into with employers, and Lush’s enforceable undertaking was one of five published by the Ombudsman in November 2020 alone.

More broadly, in 2020, the Ombudsman entered into enforceable undertakings for underpayments that ranged from $200,000 to over $12 million.

A majority of those enforceable undertakings imposed obligations on employers that were similar to those imposed on Lush. In particular, employers were generally required to make contrition payments, engage auditors, publish notices detailing workplace law breaches, and commission staff training.

Hall & Wilcox provides practical guidance for employers on how to comply with their workplace obligations, investigate potential underpayments, and navigate self-disclosure to the Ombudsman.