Illegal phoenixing laws pass through federal government

AICD head of Advocacy Louise Petschler discusses the Fair Work Ombudsman flagging new criminal penalties for wage underpayment. Plus, illegal phoenixing activity laws pass through federal government.

In addition to the primary and most important impact on employees and their families, underpayment of staff undermines community confidence in business. It causes significant reputational damage to firms and can lead to a decline in workforce morale, productivity and performance. The Australian government has said that it “considers it unacceptable that there is a persistence of underpayment and exploitation by a small number of employers” and is reviewing compliance and enforcement accordingly.

The Attorney-General is consulting on powers for the Fair Work Ombudsman (FWO) to ban directors and has flagged new federal criminal penalties for severe cases of systemic wage underpayment.

A separate Senate inquiry on wage underpayment is also underway.

States and Territories are also moving to act independently — Victoria is consulting on criminalising “wage theft”, proposing personal liability for directors and offences with prison terms of up to 10 years. Queensland recently flagged new “wage theft” laws for its jurisdiction, with up to 14 years’ imprisonment. This could be a rapidly changing and overlapping regulatory environment.

These proposals are in addition to existing accessorial liability provisions for directors. At a federal level, directors can already be personally liable for wage underpayment if they are found to have intentionally participated in the underpayment (actual cases have been rare to date).

New rules for record keeping on annualised salary employees, starting from 1 March, may also see a return of bundy time clocks across many workplaces in Australia.

The FWO has signalled that employers will no longer receive amnesty for self-reporting wage underpayment. It is increasing its focus on enforcement, auditing, contrition payments and public “naming and shaming” of entities breaching the law.

It is important all boards increase their focus on the governance and compliance frameworks in place for ensuring employees receive the appropriate payment for their work. How boards respond will depend on their sector, size of their workforce and complexity of their industrial arrangements.

Of course, compliance with the law should be non-negotiable, with the tone set from the top. Boards in sectors where there are specific risks — such as high reliance on labour hire, casual workforces or management overtime and/or known non-compliance risks — will need to bring a sharper focus to their challenge to management and assurance requirements.

Directors should satisfy themselves that management’s compliance and control systems operate effectively and are subject to regular monitoring and sampling across systems. Audits and assurance of practices should feature as part of the governance framework, appropriate to the needs of the organisation. Additionally, accountability should feature in the remuneration and KPI settings for senior management.

Phoenixing laws go live

A significant regulatory reform that impacts all directors has materialised with the passing of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 through federal parliament. The new laws form part of the Government’s insolvency law reforms and aim to counter phoenix activity or “creditor-defeating dispositions”.

In addition to measures specifically targeting phoenixing, the laws also:

• Restrict back-dating of director resignations — any late lodgement of resignation to the Australian Securities and Investments Commission (ASIC) will now be taken to apply from the date the notice was received by ASIC.
• Prevent directors from resigning if the resignation would leave the company without a director.
• Extend the director liability regime to cover a company’s GST liabilities in certain circumstances. We note that draft ATO guidance indicates these provisions will only be applied in limited circumstances including where there are reasonable grounds to believe the taxpayer/business or its related entities are involved in phoenix behaviour, or assets are being dissipated (or other action being taken) with the intention to defeat creditors.

Directors should be aware of these significant changes, and give thought to their organisation’s current processes and procedures, particularly in relation to ASIC lodgements.

The AICD has been closely engaged on these reforms — briefing political offices and providing submissions — including to the Senate committee that considered the bill in early 2019.

We strongly support the goal of deterring and disrupting phoenix activity, and acknowledge the significant harm phoenixing causes to creditors, employees and the broader economy. However, our consistent view has been that more proactive policing and enforcement of existing laws is more important in combatting phoenixing. This remains our view.

The introduction of director identification numbers or “director IDs” — perhaps late this year — will also help combat phoenixing activity. It is important, however, that the framework is robust and practical.

The AICD is a member of the ATO’s Business Advisory Group, providing input on the director ID framework, and representing the interests of the director community. We will keep members closely updated. The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019, which introduces director identification numbers (DINs) is before federal parliament at the time of writing.