Employment issues arising from insolvency

By 3 May, 2021 No Comments

With the lifting of the insolvency moratorium, we summarise below the key risks all insolvency practitioners must be conscious of when dealing with employee entitlements in an insolvency situation.

Employment related claims

A common issued faced in insolvency is how existing and new employment-related claims are dealt with.

Under section 440D of the Corporations Act 2001 (Cth) (Corporations Act), during the administration of a company, a proceeding in a Court against the company or in relation to any of its property cannot be begun or proceeded with, except with either the administrator’s written consent or the leave of the Court.

This means that either consent or a Court order is required for an employee to commence or continue a claim for:

  • unpaid entitlements in the Industrial Magistrates Court;
  • breaches of the employee’s general protections or other breaches of the Fair Work Act 2009 (Cth)(FW Act) in the Federal Circuit; and
  • breaches of discrimination legislation in the Federal Circuit Court.

Importantly, unfair dismissal claims are not affected by the requirements of the Corporations Act because the Fair Work Commission is not a “Court” within the meaning of section 58AA of the Corporations Act. This means that employees can commence or proceed with an unfair dismissal claim, subject to the Commission’s general discretion as to how it will deal with the claim.

Penalties for breaches of the Fair Work Act

It is all too common in insolvency situations that the company has, for some time leading to the actual insolvency, been breaching its obligations under the FW Act including failing to pay staff their full wages. In addition to an order for backpay, a company can be ordered to pay a pecuniary penalty (fine) of up to $63,000 per breach. When deciding what pecuniary penalty to order, the Court will take into account a range of factors including whether payment has been made to the affected employee and other actions taken to address the breach by the company.

Given that employees can pursue underpayments and any other breaches of the FW Act for 6 years, it is crucial for insolvency practitioners to identify:

  • any historical underpayments such as unpaid wages, superannuation and leave;
  • whether any employees that are labelled as ‘casual’ were properly characterised as permanent employees and therefore will be entitled to payment in respect of annual leave, notice of termination and redundancy pay;
  • when the company first learned about the underpayment and what action the company took to address it (i.e. did they make payment in full or did they just let the issue sit on their books) – as this will be relevant to the amount of any penalty awarded; and
  • what steps need to be been taken to address the issue.

The role of the Federal Entitlements Guarantee

In addition to identifying any historical underpayment risks, insolvency practitioners should be aware of the role and limitations of the Federal Entitlements Guarantee (FEG) in relation to employee entitlements.

Broadly speaking, FEG allows eligible employees whose employment ended due to the insolvency of their employer, to claim payment (up to a capped maximum amount) from the scheme for:

  • unpaid wages of up to 13 weeks;
  • unpaid annual leave and long service leave;
  • payment in lieu of up to 5 weeks’ notice; and
  • redundancy pay of up to 4 weeks per full year of service.

Importantly, FEG does not cover unpaid employer superannuation contributions.

Caretaker employees

It is not uncommon for insolvency practitioners to request that key employees of the business continue to be employed in the business for a short period to assist in the winding up of the business and/or to preserve the assets of the business.

In relation to these ‘caretaker’ employees, it is very important to confirm the following in writing:

  • their rate of pay and hours of work (e.g. is there enough work for them to continue full-time or are they just needed on a part-time or casual basis);
  • that their employment is for a limited time and tied to the ongoing operation of the business; and
  • that they are responsible for specified tasks and must report to the insolvency practitioner.

Pragma Lawyers are insolvency and employment law specialists. Contact us today by clicking here or call us on (08) 6188 3340.