Tough Penalties For Avoiding Employee Entitlements

There are tough penalties for company directors avoiding employee entitlements. The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 made amendments to the Corporations Act 2001 which strengthened the Act’s ability to deter and punish company directors and others that seek to avoid their employee entitlement obligations. It also introduced measures to protect such entitlements from agreements or transactions that would operate to defeat their recovery.

Misuse of the Fair Entitlements Guarantee

In particular, the amendment addresses corporate misuse of the Fair Entitlements Guarantee (FEG). The FEG scheme operates to protect employment entitlements (such as accrued leave, redundancy payments and unpaid wages) when workers lose their jobs due to their employer’s insolvency.

A Government consultation paper released in 2017 identified that certain employers were increasingly utilising a number of underhanded practices that rely on the protections contained in the FEG. Indeed, annual costs under the FEG scheme increased significantly from $70.7 million in the four year period between 2005 and 2009, to $235.3 million in the four year period between 2014 and 2018. The FEG protections allow employers to shift the cost of those entitlements from their businesses to the FEG scheme, and ultimately to taxpayers.

Inappropriate practices that were identified by the Government consultation paper included phoenix activity and asset shifting.

Important changes made to deter avoiding employee entitlements

1. The threshold for a criminal offence has been lowered to capture a wider range of situations by extending the fault element to include circumstances where a person ‘recklessly’ enters into transactions to avoid or significantly reduce the recovery of employee entitlements.
2. A civil penalty provision is included with an objective ‘reasonable person’ test, increasing the enforcement options available when entering transactions.
3. A civil compensation provision provides a compensation mechanism for those who have suffered loss as a result of breaches to the civil penalty provision.
4. The criminal offence and civil penalty provisions have been expanded to capture company directors and officers who cause the company to enter into a transaction that contravenes the criminal and civil penalty provisions.
5. Where previously civil compensation proceedings could only be brought by a company’s former employees, now the Australian Tax Office, Department of Jobs and Small Business and Fair Work Ombudsman also have standing to commence civil compensation proceedings.
6. ASIC or a Court now have the power to disqualify a person from managing corporations where there has been a track record of involvement in corporate contraventions, insolvencies and inappropriate use of the FEG scheme.

Whilst not all corporate practices seeking to minimise employee entitlement payments upon insolvency are necessarily illegal, the enforcement options should make it clear that intentional avoidance of employee entitlements and inappropriate reliance on the FEG will be punished.

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The information contained in this post is current at the date of editing – 1 July 2024.