Amendments to the Corporations Act 2001 have recently been passed and as a result, tougher penalties will be given to company directors and others who are avoiding employee entitlements.
The Corporations Amendment Bill 2018 (Strengthening Protections for Employee Entitlements) aims to strengthen the Act’s ability to sanction punishments and to protect employee entitlements from wrongful agreements or transactions.
Protection of Fair Entitlements Guarantee
The new bill’s primary purpose is to protect the Fair Entitlements Guarantee (FEG) from misuse by employers. The FEG assures employees entitlements such as outstanding wages and accrued leave in case companies face insolvency.
For the past decade, employers have taken advantage of the FEG scheme and have able to remove the cost of employment entitlements from their businesses. In fact, the cost incurred under the FEG has risen to $235.3 million (2014-2018) from $70.7 million (2005-2009). The increase is due to the underhanded practices utilised by many employers that include asset shifting and phoenix activity.
The Corporations Amendment Bill 2018 addresses these unwanted practices to ensure that employers will take responsibility and pay employee entitlements.
The Phoenix Activity
Many employers have been known to use inappropriate business practices such as avoid paying employee entitlements or to significantly lessen the cost of it. Another one of such practices is Phoenix activity.
Also called ‘phoenixing’, it refers to the creation of a new company to carry on the business of an insolvent company, which has been deliberately liquidated to avoid paying employee entitlements and other debts. A “Phoenix Hotline” has been established by the Federal Government for employees and creditors to report any illegal phoenix activity to the Australian Taxation Office (ATO).
An illegal Phoenix activity can be determined if the new company has the same directors and shareholders as the insolvent company. It may also be doing business on the same premises as the old one. Phoenix activity can also be discovered by reviewing the activities of the previous company, which can include giving away assets or selling them at a lower price.
Other Inappropriate Practices
Aside from Phoenix activity, many employers have been avoiding payments of employee entitlements by intentionally diverting assets or deliberate restructuring of corporate positions. Dubious employers might also engage with third-party agencies to create transactions that will help avoid obligations before the company completely winds up.
Significant changes made by the bill
The Corporations Amendment Bill 2018 made several significant amendments to the Corporations Act 2001, that will prevent employers from avoiding employee entitlements.
1. The fault element that will constitute a criminal offense has been widened to include situations where a person “recklessly” made transactions to avoid employee entitlements or reduce the recovery of it.
2. There’s a new civil penalty provision that includes an objective “reasonable person” test to increase the available enforcement options.
3. A compensation mechanism brought about by a new civil compensation provision will help those who experienced monetary loss because of breaches to the civil penalty provision.
4. The civil penalty provision and criminal offense were expanded to expose those who caused the company to make transactions that violate both provisions.
5. The Department of Jobs and Small Business, the Australian Tax Office, and the Fair Work Ombudsman now also have the right to start civil compensation proceedings aside from the former employees of a company.
6. Any person with a history of involvement in an improper use of the FEG scheme, insolvencies, and corporate contraventions can now be disqualified by the Australian Securities and Investments Commission (ASIC) or a Court.
To be clear, not all corporate actions that aim to minimise payment for employee entitlements when facing insolvency are illegal. However, intentionally avoiding payment of employee entitlements and improper use of FEG scheme are punishable according to the new bill.
Avoid Penalties by Getting Informed
If you are a company director or executive, it’s crucial that you fully understand the new Corporations Amendment Bill 2018 to avoid getting penalties. Adams Wilson Lawyers can give you assistance to do so.
Our team of lawyers will give you advice on compliance with the Corporations Amendment Bill 2018 and all other business laws in Australia.