New legislation tackles FEG abuse

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New legislation tackles FEG abuse

New legislation will target companies that abuse the Fair Entitlements Guarantee Scheme.

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New legislation will target companies that abuse the Fair Entitlements Guarantee scheme.

Details of the proposed legislation are not currently available.

However, a joint ministerial statement from Employment Minister Michaelia Cash and Revenue Minister Kelly O’Dwyer says the changes will:

  • penalise company directors and other people who engage in transactions directed at preventing, avoiding or reducing employer liability for employee entitlements
  • enable the recovery of monies paid under the guarantee from other entities in a corporate group where
    • those other entities have used workers of the insolvent entity; and
    • this was done on non-arm’s length terms
  • strengthen the ability to punish directors and company officers where there is:
    • a track record of insolvencies; and
    • the Fair Entitlements Guarantee is repeatedly relied upon.

“These changes will be targeted to deter and punish only those who have inappropriately relied on FEG. They will not affect the overwhelming majority of companies who are doing the right thing. The government is taking action to ensure employers are held responsible for paying their workers and that taxpayers are protected from corporate abuse of the FEG scheme,” the joint ministerial statement reads.

The new legislation will also support the federal government’s proposed reforms on illegal phoenixing, which is the use of the corporate veil and the insolvency regime to escape a wide range of liabilities. This would include payments under the FEG, as well as payments to suppliers, other creditors, and government agencies.

Worried about the increasing cost

The government is worried that employers are increasingly not paying accrued employee entitlements when the employing entity (usually a company) goes broke.

The state then pays those entitlements to the worker under the Fair Entitlements Guarantee. The guarantee (also known as FEGs) is a scheme of last resort; payments are made when there is no other way for eligible employees to receive their accrued entitlements because of their employer’s insolvency.

The guarantee covers unpaid wages (up to 13 weeks), annual leave, long service leave, payment in lieu of notice, and redundancy pay of up to four weeks per full year of service.

An investigation in 2015-16 discovered that some employers were deliberately structuring their financial arrangements to avoid or reduce the payment of employee entitlements by abusing the corporate insolvency regime.

Typically, assets are stripped from an otherwise viable company within the corporate group or, alternatively, liabilities are loaded onto it instead. That company, whether an empty- or debt-laden shell, is then liquidated.

Between five to 10 per cent of Fair Entitlements Guarantee cases paid in recent years involved companies that had previously formed part of a larger corporate group, the Department of Employment says.

The annual cost of the FEG scheme has been increasing in recent years. 

In 2007-2008 there were 983 Fair Entitlements Guarantee cases, in which 7808 people were paid a total of $60.8m, states the Department of Employment in its consultation paper, “Reforms to address corporate misuse of the Fair Entitlements Guarantee Scheme”.

That paper was released in May this year. By 2015-16, the number of cases increased by 77.6% and the number of people paid increased by 83.6%. The total cost ballooned by 4.6 times to $284.1m, which is a 367% increase.

Further reading

Fair Entitlements Guarantee (FEG)

Phoenixing under fire: new consultation paper

Reforms to Address Corporate Misuse of the Fair Entitlements Guarantee Scheme

Consultation Paper - Reforms to address corporate misuse of the Fair Entitlements Guarantee scheme

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