In the case of business failure: your obligations for employee entitlements

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Last month, we discussed recent Senate committee proposals to strengthen the civil penalties regime under the Corporations Act 2001 for corporate wrongdoing. Today we want to talk about another area that the Government has identified for a compliance crackdown; employee entitlement liabilities in the case of insolvency.

The Government is currently consulting on a range of options contained in a paper ‘Reforms to address corporate misuse of the Fair Entitlements Guarantee scheme’ (Note: Submissions close on 16 June 2017). The Fair Employment Guarantee (FEG) scheme is intended as a ‘safety net’, where the Government ensures employees get certain entitlements in the case of their employer going insolvent. After paying a claimant, the Government then becomes a creditor of the insolvent business. The scheme cost $1 billion over the four-year period between 2012‑13 and 2015‑16. This is a 75 per cent increase over the preceding four-year period. It has been suggested that this is a result of employer misuse of the scheme or what has been called ‘sharp corporate practices’.

What are ‘sharp corporate practices’?

The consultation paper describes the following in appropriate (and in some cases illegal) behaviour:

  1. Structuring a company or corporate group so that the employees are employed by an entity with insufficient assets to provide for employees’ entitlements on redundancy
  2. Using illegal ‘phoenix’ company activities. This includes moving a company’s assets for nominal value to another company with a similar name, before placing the company in liquidation, in order to deprive employees of their entitlements
  3. Some company directors, company officers, and advisers deliberately and unfairly managing an insolvency to the detriment of creditors, including employees
  4. Some company receivers and liquidators failing to pay employee entitlements out of the proceeds of circulating assets of the business and instead paying those amounts to their appointers.

Changes that may be coming

The consultation document describes a wide range of options for dealing with the diverse ‘sharp practices’ described above. Today we are just focusing on options related to criminal and civil proceedings against wrongdoers.

As it stands, the Corporations Act 2001 (section 596AB) already makes it a criminal offence to intentionally enter into an arrangement that prevents the payment of some or all of a company’s employee entitlement liabilities. The Act also provides that a civil action can be brought by the liquidator (or employees in some circumstances) to recover any loss resulting from the avoidance of the employee entitlements (section 596AC).

The following options are suggested as alterations to that part of the Act:

  1. As proving intentional behaviour is difficult the criminal offence, section 596AB could be altered so that only recklessness is necessary to determine whether the arrangements prevented payment of employee entitlement liabilities.
  2. A separate ‘civil penalty’ provision could be added to this part of the Act allowing a business to be pursued in court for failing to do what a reasonable person would have known or could be expected to know.
  3. The range of parties eligible to initiate civil action could be broadened. For example, the Department of Employment (as well as the liquidators or former employees) could be permitted to bring action.

No matter what the outcome of this consultation, and any changes that the Government proposes, it is essential for every employer to check whether they are falling foul of their employee entitlement obligations, and, if in doubt, seek professional advice.

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