Strengthening Employee Entitlement Protections in the Corporations Act Amendment in focus – employee entitlement contribution orders

Earlier this year, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act (Cth) (the Act) commenced.  This article will focus on the provisions introducing employee entitlement contribution orders.

Please refer to our article summarising the critical changes and key concepts introduced by the Act.

The amendments aim to deter corporate groups from adopting structures where the insolvency of a corporate group member with employee entitlement liabilities results in those entitlements not being paid, despite the fact that other corporate group members have resources to pay those entitlements.  This closes a gap whereby one member of a corporate group could take on the labour liabilities of the group, with other group members benefitting from the work of those employees but avoiding the liability to pay the employee entitlements in an insolvency context.

Significantly, there was no equivalent provision in the former legislative framework.

Who may apply for an employee entitlement contribution order?

1. The liquidator of the insolvent company;
2. The Commissioner of Taxation;
3. The Fair Work Ombudsman; or
4. The Secretary of the Department administering the FEG scheme.

However, note that the government bodies can only seek such an order where they have obtained the liquidator’s written consent or leave of the Court.

What is an employee entitlement contribution order?

Subject to certain requirements, the Court can make an employee entitlement contribution order requiring an entity to contribute to the payment of employee entitlement liabilities of an insolvent company within the same “contribution order group”.

The Court may make a contribution order in relation to an entity where:

• A company is being wound up;
• An amount of employee entitlements has not been paid;
• The contributing entity is a member of the same “contribution order group” as the insolvent company;
• The contributing entity has benefited from work done by those employees;
• That benefit exceeds the benefit that would be reasonable in the circumstances if the insolvent company and the contributing entity were dealing at arm’s length; and
• It is just and equitable to make the order.

The Court may order the contributing entity to pay the liquidator of the insolvent company an amount that is equivalent to the benefit obtained by that entity.  However, it cannot exceed the amount of the unpaid employee entitlements.

What is a “contribution order group”?

The Act sets out six tests as to when two entities are members of the same “contribution order group”.  By way of example, this includes where:

• Both entities represent, or have represented, to the public that they are related to one another; or
• Both entities are (or were) part of a collection of entities that, as a matter of economic and commercial substance, functions(ed) as a single entity.

Key Takeaways:

• The amendments seek to close a gap where unscrupulous corporate groups would prevent, avoid or significantly reduce their liability for 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.
• It will be interesting to see how regularly contribution orders are sought and how corporate structures evolve as a result.

For further information, see our article considering disqualification from managing corporations.

Authored by:

Kimberley Arden, Partner

Tahlia O’Connor, Associate