TGIF 28 February 2025 – Discussion paper released on corporate misuse of the Fair Entitlements Guarantee

On 17 February 2025, the Department of Employment and Workplace Relations (DEWR) issued a discussion paper addressing corporate misuse of the Fair Entitlements Guarantee (FEG).

The paper sets out several options for reform aimed at addressing and putting an end to future misuse of FEG by unscrupulous corporate actors.

Key takeaways

• The Department of Employment and Workplace Relations (DEWR) has issued a discussion paper which addresses corporate misuse of the Fair Entitlements Guarantee (FEG).
  
  
• The paper raises some options for reform aimed at deterring improper reliance on FEG and strengthening the ability to recover amounts advanced under FEG.
  
  
• You can have your say on the reform options set out in the paper by making a submission to the DEWR which addresses the questions raised in the paper.

What is FEG? 

FEG is the statutory right for certain employees of insolvent employers to recover unpaid employment entitlements from the Commonwealth pursuant to the Fair Entitlements Guarantee Act 2012 (Cth) (the Act). FEG is administered and managed by DEWR.

Under the Act, assuming they meet the eligibility criteria, employees of insolvent employers may receive an advance from the Commonwealth for unpaid entitlements (including, for example, wages, annual leave, and long service leave) that they would have received if not for the insolvency of their employer.

The Commonwealth then ‘steps into the shoes’ of the employee and is treated as a creditor of the insolvent employer through section 560 of the Corporations Act 2001 (Cth) (Corporations Act) or section 109 of the Bankruptcy Act 1966 (Cth).

Why is DEWR concerned with misuse of FEG?

In providing employees with the means to recover unpaid entitlements that might otherwise be lost due to their employer’s insolvency, the importance of FEG as a social safety net is clear.

However, FEG is intended to be a scheme of ‘last resort’, operating only when there are genuinely no funds or assets available to satisfy unpaid employee entitlements - apart from, for example, costly antecedent and other claims available to the liquidators of the employer.

DEWR is concerned that FEG is being misused by ‘sharp corporate practices’ aimed at deliberately shifting the obligation to pay employee entitlements from the employer to the taxpayer (through FEG) in insolvency scenarios.

The examples provided by DEWR in its paper are:

• structuring the affairs of employer companies such that liabilities for employment entitlements sit with companies which have little or no assets;
  
  
• unlawful phoenix activities – that is, transferring the employer’s assets and business at an undervalue to another company with the same owners, leaving the employer with no assets to pay its debts;
  
  
• employers taking steps to appoint ‘friendly’ liquidators who do not properly investigate the company’s affairs;
  
  
• inappropriate use of restructuring processes, such as the voluntary administration process pursuant to part 5.3A of Chapter 5 of the Corporations Act, to avoid paying employee entitlements; and
  
  
• receivers and controllers appointed by secured creditors failing to comply with their obligations to pay employee entitlements as a priority.

DEWR estimates that, in 2023–24, around 43% of the total advances made under FEG (being around $90 million) involved company structures that separated employee entitlement liabilities from assets and suspected transactions or agreements aimed at defeating employee entitlements.

What are the reform options proposed by DEWR?

DEWR’s paper sets out a number of reform options to address the misuse of FEG by deterring improper reliance and increasing the recovery by the Commonwealth of amounts advanced under FEG.

The options proposed by DEWR are addressed at a high level below.

Reform to the existing ‘contribution provisions’ in Part 5.7B of the Corporations Act

In 2019, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 (Cth) reformed the Corporations Act to address corporate structures being used to hold liabilities for employment entitlements on the books of assetless companies.

Contributions by related entities

The amendments introduced provisions in Part 5.7B of the Corporations Act that allow for a Court, in certain circumstances, to make an order that unpaid employment entitlements owing by an insolvent company be paid to its liquidator—at least partially—by an entity within the same corporate group of that insolvent company (contributing entity) (see section 588ZA of the Corporations Act).

The amount a Court may order a contributing entity to pay is calculated to reflect any excess benefit received by the contributing entity between:

1. the value of the actual benefit the contributing entity has received from work of the effected employees; and
   
   
2. the value of the benefit that would be reasonable in the circumstances if the insolvent company and the contributing entity were dealing at arm's length.

The liquidator of the insolvent company, the Commissioner of Taxation, the Fair Work Ombudsman and DEWR all have standing to bring a contribution application pursuant to section 588ZA.

Contribution orders lack effectiveness so far

The reforms are designed to provide another way to ‘pierce the corporate veil’ in appropriate circumstances, so that unpaid entitlements can be recovered from third parties who benefited from work performed by the relevant employees.

However, whether the reforms have had their desired effect is, at best, questionable. The paper states that a court is yet to make an order pursuant to section 588ZA and, at least on DEWR’s understanding, no applications have even been made.

Proposals put pressure on contributing entities

The options canvassed in the paper to address the effectiveness (or lack thereof) of the contribution provisions vary. Various ways in which the existing contribution regime could be varied to lower the barriers to obtaining an order are proposed.

The reform options canvassed are generally aimed at the requirements for establishing that the contributing entity has benefited from work performed by the relevant employees, and that benefit exceeds that which would be reasonable if the insolvent company and the contributing entity were dealing at arm’s length (see section 588ZA(1)(d) and (e)). For example, by shifting the evidentiary onus to the contributing entity by making the factors in section 588ZA(1)(d) and (e) rebuttable presumptions, or removing these requirements altogether.

The paper also canvasses reforms to the contribution regime which may be described as more ‘structural’ in nature. The most significant is perhaps the proposal to make companies within a corporate group jointly and severally liable for employment entitlement liabilities which are incurred across the group. This would be an adaption of the models imposed by various state laws which make companies in corporate groups jointly and severally liable for tax debts (for example, the Payroll Tax Act 2007 (Vic)).

Proposals to protect employees’ interests

The paper also addresses options to reform the current voluntary administration regime (provided in Part 5.3A of the Corporations Act) to better protect the interests of employees. DEWR’s concern is that the current regime is being used to restructure asset holding companies in a corporate group through a DOCA, while companies which hold the liabilities for employment entitlements are liquidated.

In order to address this issue, the paper proposes an option to extend section 444DA of the Corporations Act (which requires that DOCAs provide priority unsecured creditors with the same priority they would have had in a liquidation scenario) to apply to any DOCAs for companies within a corporate group. That is, a DOCA for an asset holding company must account for priority unsecured creditors of a related entity.

Other proposed reform options

Apart from options to reform the contribution regime, the paper also addresses other reform options aimed at providing better protection to employee entitlements in insolvency scenarios.

These include:

1. strengthening the civil penalty provisions in Part 5.8A of the Corporations Act which are aimed at deterring and penalising persons who enter into transactions that prevent, avoid or significantly reduce the amount of employee entitlements recoverable in insolvency (see section 596AC);
   
   
2. including the ‘superannuation guarantee charge’ as an employee entitlement for the purposes of part 5.8A of the Corporations Act;
   
   
3. varying the power of a liquidator to set aside ‘creditor defeating dispositions’ pursuant to section 588FDB of the Corporations Act;
   
   
4. providing priority unsecured creditors with a right to receive information from receivers appointed by secured creditors to allow them to monitor whether a receiver is complying with the obligations that arise when there are insufficient assets to satisfy priority unsecured creditors; and
   
   
5. strengthening the provisions in the Corporations Act (see sections 206EAB and 206GAA) which permit the disqualification of company directors and officers where FEG has been inappropriately utilised.

How can you have your say?

The DEWR has invited stakeholders to make submissions which respond to the questions set out in the paper.

Submissions are open until 31 March 2025. Further details on how you can make a submissions can be found at the following link: Have your say: Addressing corporate misuse of the Fair Entitlements Guarantee - Department of Employment and Workplace Relations

Comment

Any reform of FEG needs to balance the clear need to strengthen the integrity of the scheme by deterring and addressing sharp corporate practice with the potential effects that any such reform may have on legitimate commercial behaviour.

In instances where FEG is misused, liquidators and DEWR (and other appropriate persons) need to be able to effectively investigate, and ultimately recover from, the bad corporate actors. If the current powers in the Corporations Act are not fit for purpose, the need for reform is clear.

However, taking steps against bad actors can be an expensive and risky exercise, especially where the enforcement mechanism is through litigation. Effective reform will need to ensure that the risk and consequences of attempting to misuse FEG is a clear deterrent to sharp corporate practice.

Further stakeholder input is essential to achieving the right balance and we encourage industry players to engage in the current consultation process.