Strengthening Employee Entitlement Protections in the Corporations Act Amendment in focus – offences and civil penalty provisions

Earlier this year, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act (Cth) (the Act) commenced.  This article will focus on the key changes made to the employee entitlements provisions.

The purpose of the Act

The objective of the Act is to stop sharp corporate practices which improperly burden the Fair Entitlements Guarantee (FEG) scheme under the Fair Entitlements Guarantee Act 2012 (Cth).

In essence, such sharp corporate practices have allowed some unscrupulous employers to:

• prevent, avoid or significantly reduce their liability for employee entitlements in an insolvency context; and
• shift the cost of paying employee entitlements from their businesses to the FEG scheme, that is, to taxpayers.[1]

What are the key changes?

1. The criminal offence provisions have been widened by lowering the fault element to include situations where a person (or company) “recklessly” enters into the agreement or transaction;
2. A new civil penalty provision has been introduced which includes an objective “reasonable person” test;
3. Both the criminal offence and civil penalty provisions have been widened to capture company officers who cause companies to enter into the agreement or transaction;
4. A new civil penalty compensation provision has been introduced;
5. The civil penalty and compensation provisions have also been widened to capture those who are “involved” in contraventions of the civil penalty provisions (for example, unregistered pre-insolvency advisers); and
6. Civil compensation proceedings can now be commenced by a broader range of parties (including the ATO, the Department administering FEG and the Fair Work Ombudsman).

What actions are now available?

There are 3 primary actions now available to deal with parties preventing, avoiding or significantly reducing their liability for employee entitlements in an insolvency context.

These include:

1. Criminal sanctions against parties who intend to enter into, recklessly enter into, or cause the entry into, such transactions/agreements;
2. Civil penalty proceedings against parties who know, or ought reasonably to have known, a transaction/agreement is likely to avoid, prevent or significantly reduce the recovery of employee entitlements.  Note that these proceedings can only be commenced after a liquidator has been appointed;
3. Civil compensation proceedings brought by the liquidator (or subject to certain requirements, the ATO, Fair Work Ombudsman, FEG or employees) seeking compensation for loss and damage for contravention of a civil penalty provision.

Some Key Concepts

What is “reckless”?

This term is not defined.  However, the Explanatory Memorandum notes that a person who enters into a relevant agreement/transaction will be “reckless” if they are aware that there is a substantial risk that entering into a relevant agreement/transaction will avoid or prevent the recovery of, or significantly reduce the recoverable amount of, employee entitlements, and doing so is unjustifiable in the circumstances.

Accessorial liability – what is “involved”?

As set out above, the civil penalty and compensation provisions have been widened to capture those who are “involved” in contravention of the civil penalty provisions.

“Involved” is very widely defined in the Corporations Act 2001 (Cth).  By way of example, it includes any person who has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention.

Penalties for contravention of the criminal offence provisions

For an individual, penalties may include imprisonment for 10 years, or a fine the greater of 4,500 penalty units (which is $210/unit as at the date of publication), or if the Court can determine the total value of the benefit that has been obtained and it is reasonably attributable to the commission of the offence – 3 times that total value.  The fine could also include both.

The penalty provisions for body corporates are broadly similar, save that the available penalties also include 10% of the body corporate’s annual turnover during the 12-month period ending at the end of the month in which the body corporate committed, or began committing, the offence.

Liability to pay compensation for contravention of the civil penalty provisions

Additionally, a person who contravenes the civil penalty provisions may be liable to pay compensation.  The liquidator may recover the amount of the loss or damage in question as a debt due to the company.  Alternatively, subject to certain conditions, an employee who has suffered loss or damage may recover the amount of that loss or damage as a debt due to the employee.

Key Takeaways:

• The amendments represent a critical widening of the criminal offence and civil penalty provisions in order to deter the prevention/avoidance of employee entitlements;
• The amendments compliment the recent amendments made targeting phoenixing activity in line with the Federal Government’s ongoing changes to the Australian insolvency landscape;
• The introduction of accessorial liability provisions will impact the pre-insolvency advice sector.  It will be interesting to see how the Courts interpret these provisions, as well as how industry participants adjust their practices to address these changes.

See our further articles considering:

• employee entitlement contribution orders; and
• the changes made in relation to disqualification of wrongdoers from managing corporations.

[1] Average annual costs under the FEG scheme has more than tripled from $70.7 million in the four year period between 1 July 2005 and 30 June 2009, to $235.3 million in the four year period between 1 July 2014 and 30 June 2018. Under the previous form of the Corporations Act 2001 (Cth), there had been no successful criminal or civil recovery actions under those provisions.  See paragraph 1.6 and 2.5 of the Explanatory Memorandum.

Authored by:

Kimberley Arden, Partner

Tahlia O’Connor, Associate