Australia has a taxpayer funded scheme which guarantees employee entitlements arising out of liquidation up to statutory caps. It is known as the Fair Entitlements Guarantee Scheme (FEG). The Australian Government has become concerned that questionable practices which rely on FEG to avoid employee entitlement obligations, such as illegal phoenixing, are on the rise and imposing significant costs on FEG and therefore, the Australian taxpayer. The Government has introduced legislative amendments to facilitate the effective recovery of entitlements from parties which take part in these questionable practices.

The old

The existing provisions of the Corporations Act 2001 (Cth), which sought to enable the recovery of employee entitlements from agreements and transactions that had been entered into with the intention of defeating their recovery, had resulted in no successful proceedings in the 19 years of their operation. These provisions have now been amended to make it easier to bring successful actions.

We focus in this blog on amendments to the civil provisions in particular, which have benefited from significant amendments that retain the basic tenets of the original provisions, but make it easier to both bring and establish claims, and provide more options for recovery.

The new

The amendments introduce the following key changes, among others:

  1. More parties can be caught: Previously, the provisions applied only to persons who had actually entered into the transaction. It now applies to parties who caused a company to enter into, or were involved in, such transactions.

These amendments target parties which may have previously escaped liability on the basis that they did not personally enter such transactions e.g. officers and other entities in a corporate group, or professional advisors such as accountants.

  1. More parties can pursue claims: Previously, only liquidators and employees could pursue civil claims. Now the Australian Tax Office, the Fair Work Ombudsman, the entity which administers FEG, and trade unions can also bring claims.

The right of a liquidator to do so tends to take precedence, though, and any compensation remains payable to either the company in liquidation or to the employee, regardless of who brings the claim.

  1. More realistic objective test: Previously, the civil offence required proof of an intent to defeat employee entitlements. This was a barrier to the pursuit of successful claims, because proving subjective intent has a high bar. Now, an objective test applies, based on what a reasonable person would have known or been expected to have known about how the transaction would affect employee entitlements, and should be easier to meet.

If this test is met, the actual outcome of the transaction is irrelevant. It can be met even if all employee entitlements are actually recovered.

  1. Additional recovery options: It is now possible to recover employee entitlements from companies within a corporate group, or entities with a closely connected economic relationship, who may not be caught by the main offence but who benefitted economically from the work of another company’s employees without incurring any liability for their employee entitlements. This is available in limited circumstances. Arms-length arrangements are unlikely to be caught.

Any funds recovered under this section are payable to the liquidator, though the other regulatory entities can also bring the action.

The risk

While we have focused here on the civil offences, it should be noted a criminal offence may also apply, and that breaches of the civil offences can be used by the regulator to pursue civil penalty provisions. The quantum of the fines and terms of imprisonment available are significant. For individuals, 10 years’ imprisonment and fines equal to the greater of $945,000 or 3 times the value of entitlements attributable to the offence may be imposed. For corporate entities, this increases to the greater of $9.45 million, 3 times the value of entitlements attributable to the offence, or 10% of its annual turnover for a specific period.

The verdict

We consider that these amendments are a positive development in improving returns in respect of employee entitlements. They are targeted to the practical difficulties posed by the former drafting, and go further in closing potential loopholes (e.g. regarding officer liability) and expanding the net (e.g. to the wider corporate group). We expect that the significant penalty provisions may strengthen deterrence efforts.