Diligence key to avoid ombudsman’s sting

26 July, 2017

Potential business owners are being reminded to exercise due diligence when purchasing a business to avoid costly expenses and reputation damage.

The Fair Work Ombudsman’s policy of publicly announcing businesses it is taking legal action against recently damaged the reputation of an innocent restaurant owner, who inherited underpayment issues from the previous owner. 

The case involved an Indian-born Australian citizen who purchased a small restaurant. As part of the sale he became its sole director from August 2015.

Unknown to the man, the previous owner had significantly underpaid two former workers who had lodged complaints with the Fair Work Ombudsman (FWO).

While the new employer had no involvement with the business at the time of the underpayment, the FWO filed a compliance notice against the business several months after it was transferred and demanded he repay more than $8000 to the underpaid workers.

The complaints were made in February 2015 but the time taken by the FWO to investigate the matter meant the notice was served on the new employer.

Had it been issued a few months earlier the previous employer would have been responsible.

Despite the new employer cooperating with the FWO and attempting to have the previous owner make good the debt, the FWO initiated legal proceedings against him. 

The FWO publicly announced its legal action against the new employer, naming both his businesses and him personally as being involved in the underpayment of the workers, causing him significant embarrassment and damaging his reputation within the Indian community.

In considering the claim, the Federal Circuit Court found the new employer had cooperated with the FWO from an early stage and provided a personal undertaking to pay back the workers, which he had been doing since September 2016 with $500 monthly instalments.

The Court identified the new employer’s failing was not engaging his own lawyers when purchasing the businesses and obtaining full disclosure from the seller of the business, leaving him with debts that he wasn’t aware of and an unprofitable business.

Judge Hartnett issued a $500 penalty out of a maximum $5400 in recognition that any greater penalty would be harsh and crushing, given his actions in repaying the workers and negative media publicity.

The decision also serves as a reminder for all businesses, irrespective of size, to properly exercise due diligence when purchasing a businesses, including assessing the previous employer’s compliance with its employment obligations.

►Want to keep up-to-date with the latest HR and IR news? Subscribe to HR Link to receive topical, relevant and in-depth human resources features and news that will help you make decisions in your business.