Employee Entitlements & Safe Harbour Eligibility
19 October 2018
In our capacity of Qualified Entity Vantage keeps abreast of developments and situations which might impact an entity’s eligibility for safe harbour protection. By sharing such information, our goal is to ensure that boards and management teams are aware of nuances within the legislation and take appropriate steps in respect to their safe harbour status.
A quick recap on Safe Harbour
Subsection 588GA of the Corporations Act 2001 sets out that directors will not be personally liable for debts incurred by a company while it was insolvent, where it can be shown that:
- The directors were taking or developing a course of action that was reasonably likely to achieve a better outcome for the company than could be achieved by putting the company in administration or liquidation;
- The debts were incurred directly or indirectly in connection with this course of action;
- An administrator or liquidator has not been appointed;
- Employee entitlements are paid when they fall due;
- Tax returns are lodged on time;
- If an administrator or liquidator were to be subsequently appointed, the directors comply with the notices to provide information and records.
Regarding factors that may determine whether a course of action is reasonably likely to lead to a better outcome for the company, Subsection 588GA suggests that the directors should:
- Be properly informed about the company’s position;
- Take appropriate steps to prevent misconduct;
- Ensure appropriate financial records are maintained;
- Take advice from an appropriately qualified entity.
Employee entitlements & Safe Harbour
Underpayment of employee entitlements has hit the news recently, with large retailers like Big W Super Retail, Lush Cosmetics and 7-11 disclosing material underpayment of employee entitlements. As noted above, payment of employee entitlements as they fall due is one of the “hurdle tests” for safe harbour eligibility. Taken at face value, this seems like a straightforward issue. However, Boards should take care to ensure that their business complies with both the timing and quantum of employee entitlement payments.
To better illustrate this point, consider the following hypothetical scenarios:
Company A – entitlements timing issue
- EBA stipulated that redundancy payments must be made within 2 days of employee’s effective date of termination of employment
- However, company’s customary practice was to include redundancy payments in first scheduled payroll following date of termination
- Result – actual date of payment of employee entitlements from time to time lagged due date as specified by EBA
Company B – entitlements quantum issue
- Company acquired a business in which employees were subject to an EBA
- Employee entitlements following date of acquisition were paid in accordance with the terms of the current EBA
- However, the company subsequently discovered that the acquired business had failed to pay employees at rates that fully complied with the old EBA
- Result – historic employee entitlements found to be underpaid
In both of these hypothetical cases, the directors of each company could have believed that they were complying with the safe harbour eligibility criteria relating to the payment of employee entitlements. However, in the event that the businesses ultimately failed, and liquidators were appointed, there would be a risk that the liquidators could undertake a comprehensive audit of the employee entitlement payment position with a view to rejecting the directors’ safe harbour protection.
Other situations to watch out for include:
- Casual employees who convert to full time employees
- Recent changes to the Fair Work Act (2007) mean that employees covered under specific employment Awards may be permanent employees (and thus be eligible for such entitlements) even if they are employed on a casual basis. Furthermore, even if they are definitely casual, they may now have the right to request conversion to permanent employment status. Employers need to be aware of their new obligations under both aspects.
- Casual employees or contractors who under certain situations may be regarded as employees
- In a recent case (WorkPac Pty Ltd v Skene ), the Federal Court confirmed that just calling your employee casual does not make it so, they could in fact be permanent staff. Whether they are casual or permanent part-time (or full-time) is determined by a variety of factors, including how regular the work hours are and how certain the employment is.
The key take-away here is that if there is any risk that employee entitlements have not been – or are not being – properly recognized, Boards should fully investigate the position and identify any potential exposure.
If the foregoing raises any red flags for you, please don’t hesitate to contact Andrew Birch on 0422 220 122 or at firstname.lastname@example.org to arrange a confidential meeting.
 Subsection 588GA(2)(d) of the Corporation Act 2001