House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 5

Regulation impact statement

The problem

5.1 The Australian Government operates the FEG scheme which assists certain employees when their employer's business fails and the employer has not made adequate provision for employee entitlements (such as accrued leave, redundancy payments and unpaid wages). It is a scheme of last resort to support redundant workers.

5.2 Average annual costs under the FEG scheme has more than tripled from $70.7 million in the four year period between 1 July 2005 and 30 June 2009, to $235.3 million in the four year period between 1 July 2014 and 30 June 2018.

5.3 Certain employers are deliberately structuring their corporate affairs using sharp corporate practices to avoid paying employee entitlements when a business becomes insolvent. This is contributing to the upward cost trend of the scheme.

Case for government action/objective of the reforms

5.4 While use of such corporate practices is not always unlawful, they place an unfair burden on taxpayers where those practices result in improper reliance on the FEG scheme. Sharp corporate practices also impact other parties such as suppliers of goods and services who are not paid, and commercially disadvantage other businesses who pay all their debts including their employee entitlements.

5.5 Government departments and agencies are adopting a range of administrative actions and legal approaches to assist in mitigating the impacts of sharp corporate practices on the FEG scheme.

5.6 While this assists, the actions are largely targeted at illegal activities after they have occurred and do not address all the sharp corporate practices adopted by corporate employers, their representatives and other parties to insolvencies.

5.7 The current law does not adequately mitigate the risks and costs imposed on the community and appropriately deter or sanction the behaviour of:

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those involved in agreements or transactions which result in the intentional avoidance or reduction of the recovery of employee entitlements, which results in inappropriate reliance on FEG;

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those using a corporate or other entity group structure to avoid or reduce their exposure to meet employee entitlement obligations which results in inappropriate reliance on FEG; and

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company officers and directors who have a history of corporate contraventions and involvement in insolvencies, where FEG is repeatedly and inappropriately used to pay part or all of the outstanding employee entitlements.

5.8 To address these behaviours, enforcement focussed law reform is required.

5.9 The key objective of the targeted law reforms is to mitigate the impact of misuse of the FEG scheme and to improve recovery of FEG payments and outstanding employee entitlements.

Policy options and consultation

5.10 The enforcement related reforms in the Bill were the subject of extensive public consultation processes conducted during 2017 and 2018, aimed at ensuring the reforms were appropriate and sufficiently targeted to address the corporate misuse that has been identified.

5.11 This process included consultation on potential policy reform options in 2017, and consultation on an exposure draft of the Bill in 2018.

5.12 The consistent feedback from stakeholders throughout the consultation processes was that law reforms to address corporate misuse of the FEG scheme should be made, and that those responsible for such behaviours need to be appropriately sanctioned.

Regulatory impacts of the reforms

5.13 The enforcement related reforms in this Bill will only:

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impact companies, company directors and officers and other persons, who have undertaken or engaged in inappropriate transactions to avoid, reduce or prevent the payment of employee entitlements, in breach of Part 5.8A of the Corporations Act;

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apply to a small minority of corporate or entity groups which have avoided paying the costs related to redundant employees of their group, where the group has capacity to pay for those costs but does not do so; and

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apply to sanction a small number of company directors and officers, being those with a track record of corporate contraventions and involvement in insolvencies where FEG is inappropriately relied upon.

5.14 There will be one-off education costs on the wider business community related to the reforms. These have been estimated at $150,000 on an annualised basis.