Labor vows to crack down on corporate ‘shonks’

New reform options to stop misuse of the taxpayer funded workers’ entitlements scheme.

Minister for Employment and Workplace Relations Murray Watt. Photo Steve Pohlner

The Albanese government will crack down on corporate “shonks” misusing the federal workers’ entitlements scheme, as new figures show its cost to taxpayers will jump back to more than $1bn over four years.

Workplace Relations Minister Murray Watt will examine targeted legal changes in a bid to “future-proof” the Fair Entitlements Guarantee from misuse, including measures to address the deliberate structuring of corporate groups to avoid paying employee entitlements, and directors selling off the assets of their financially distressed company to a related entity at a cut price.

The annual cost to taxpayers of the scheme will increase to more than $300m this financial year and is projected to remain above $250m a year until 2028.

Under the scheme, workers are able to claim up to 13 weeks of unpaid wages where the employer collapses and no alternative avenue exists to fund their entitlements.

A discussion paper, to be released by Senator Watt on Monday, canvasses a series of policy options to combat companies splitting up their operations to protect their assets while leaving taxpayers liable for employee entitlements.

To develop a “fairer, dupe-free scheme”, the options for reform include better protecting employees’ entitlements in insolvency, improving access to information held by controllers and increasing director accountability for unpaid employee entitlements in insolvency.

“Shonks who engage in phoenixing, or deliberately avoid paying employee entitlements are being put on notice,” Senator Watt said. “You will not be allowed to shift the cost of employee entitlements on to taxpayers so you can save a buck.”

The discussion paper by the Department of Employment and Workplace Relations says deliberate structuring to access the scheme and shift the cost of employee entitlements from businesses on to the taxpayer puts pressure on the scheme’s sustainability and gives an unfair competitive advantage to businesses avoiding their obligations to pay employees.

Based on an analysis of liquidations where FEG advances were paid last financial year,

about $90m, or 43 per cent, was paid out to companies using restructuring practices including the separation of employee entitlement liabilities from assets.

Of 311 FEG cases involving advances to former employees of more than $100,000, 171 have been identified as potentially involving avoidance of employee entitlements either by pre-insolvency transactions or agreements, or by corporate structuring to separate employees from assets. Potential illegal phoenix activity is being probed in 12 cases.

According to the government, $470m in FEG advances has been recovered since 2015. The projected rise in coming years reflects the difference between actual and forecast expenditure; increases in the maximum weekly wage for FEG payments; elevated company insolvency rates; the removal of Covid support measures, and; the Australian Taxation Office resuming enforcement action on unpaid taxes.

The discussion paper highlights the use of “sharp corporate practices” to try to prevent,

avoid or reduce company liabilities, including employee entitlements.

Citing the use of corporate group structures to split assets from employee entitlement liabilities, it says when financial difficulties arise, the entity liable is liquidated with minimal or no assets. By protecting assets in a separate entity, the business can continue trading but the employees go unpaid.

As well as the use of illegal phoenix activities, examples of sharp practices include appointing a “friendly” liquidator who does not properly investigate fraudulent transactions, and the inappropriate use of deeds of company arrangement to avoid liability for employee entitlements.

“The use of such sharp corporate practices imposes an unfair burden on the taxpayer through increased FEG expenditure to advance employee entitlements in windings up,” the paper says. “It also disadvantages other parties including employees (in respect of their superannuation entitlements and other entitlements not covered by FEG), unpaid suppliers of goods and services, competitors who meet employee entitlements and the community more broadly through foregone taxation revenue.”