May 2019 | James Freidman

Employee entitlements and the Fair Entitlements Guarantee (FEG)

In a liquidation situation, employees of a business are particularly vulnerable as ‘unsecured creditors’. Through the Fair Entitlements Guarantee (FEG) scheme, the Australian Government provides financial assistance to cover certain unpaid employee entitlements to eligible employees who lose their job due to the liquidation or bankruptcy of their employer.

The cost of the FEG scheme rose from $70.7 million between 2005 to 2009, to $243.6 million between 2013 to 2017. A contributory factor to this large price hike (at taxpayers’ expense) is likely a result of misuse of the FEG scheme by company directors attempting to avoid paying employee entitlements. This occurs for example, where illegal phoenixing activity takes place, defined by the ATO as the creation of a new company to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including employee entitlements. 

In an effort to curtail such misuse, the government introduced Part 5.8A to the Corporations Act 2001 (Cth) in 2000 generally speaking, this Part aimed to prevent the non-payment of employee entitlements and allowed for them to be recovered if unpaid. However, there have been no successful criminal or civil claims under this Part since its inception.

Following ongoing misuse of the FEG scheme (through “sharp corporate practices” such as phoenixing) as well as the perceived ineffectiveness of the aforementioned Part 5.8A of the Corporations Act 2001 (Cth), the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 was passed in the House of Representatives on the 3rd of April 2019 and came into effect on 6 April 2019.

These amendments will likely impact upon many different classes of people, including those directly involved with illegal phoenixing schemes as well as employees who have not been paid their owed entitlements. These legislative amendments are also a strategy to reduce the ongoing cost of the FEG scheme.

The amendments

The Assistant Treasurer, the Hon. Stuart Robert MP stated: “The new laws mean we have stronger levers to ensure employers are held accountable for their obligations. Stronger penalties, better options to recover entitlements and greater powers to deal with directors and companies deliberately evading their obligations.”

The key amendments are as follows:

  • Lowering the fault element to capture company officers who enter into agreements or transactions that are reasonably likely to prevent the recovery of the entitlements of employees of a company or significantly reduce the amount of entitlements that can be recovered. This is a criminal offence provision. Individuals may be liable for imprisonment up to 10 years or a fine up to $945,000 (or three times the value of the benefits avoided), or both.
  • The introduction of a new civil penalty provision – if a person knows, or if a reasonable person in their position would have known, that an agreement or transaction would prevent, or significantly reduce, the recovery of employee entitlements, then they are in contravention of this new provision.
  • In addition to employees, civil recovery claims can now be brought by the Commissioner of Taxation (ATO) and the Fair Work Ombudsman (FWO).
  • New provisions in Part 5.7B mean liquidators can now obtain ‘employee entitlements contribution orders’ from the Court where it is ‘just and equitable’ and where the entity has benefited from the labour of the employees in question.
  • Amendments to Part 2D.6 include new provisions to disqualify company directors/company officers from managing corporations who have a history of requiring the FEG to fund unpaid employee entitlements.

If you require any further information about illegal phoenixing activity or if you have not been paid your owed employee entitlements call us today on 9231 2466.