The Federal Circuit Court has used the Fair Work Act 2009(Act) to hold company directors personally liable to pay compensation to former employees for Award underpayments in Roberts v A1Scaffold Group Pty Ltd & Ors  FCCA 422.
Mr John Roberts was dismissed in May 2013 from A1 Scaffolding Group Pty Ltd (A1 Scaffolding) after making an inquiry to the CFMEU regarding a backdated letter of offer. He subsequently brought an adverse action claim against A1 Scaffolding and also claimed he had been underpaid by his employer in the years prior to his dismissal.
Mr Roberts not only named A1 Scaffolding and its director as a respondent but also former directors of related liquidated or deregistered companies. Essentially A1 Scaffolding had emerged from the debris of previously registered companies, namely “A1 Scaffolding Pty Ltd”, “A1 Scaffolding (NSW) Pty Ltd” and “A1 Scaffold Pty Ltd” (collectively, the A1 Companies). These previous entities had involved the same business of scaffolding with similar shareholders, directors and secretaries appearing between the various entities over the years.
Mr Roberts submitted, and the Court accepted, that the company and its predecessors were arranged in a classic case of “phoenixing”. Phoenixing arrangements occur when an incorporated entity avoids liabilities through transferring its assets, liquidating and then emerging as a new incorporated entity, usually with the same assets and similar directors but with no creditors or debt. In theory the new incorporated entity then carries on the business of the old company with a clean slate. In some circumstances the phoenixing arrangements can go on indefinitely, with a regular cycle of entities going under (and leaving unpaid creditors in its wake)before reincarnating as substantially the same company. Phoenixing arrangements are not of themselves illegal in Australia.
s550 Fair Work Act
While it is usually the case that debts of a liquidated or deregistered company are unenforceable, section 550 of the Act provides that a person “involved in” a contravention of certain provisions will be taken to have contravened the provision themselves. In this way an individual, not just the corporate entity, may be held personally liable for unlawful conduct under the Act. This was how the previous directors of the A1 Companies were ultimately held to have been “involved in” the underpayment of wages to Mr Roberts, as the A1 Companies were proven to have acted through them.
Applying the provisions of section 550 of the Act, the Court found that, in each instance, the employer acted through the “personal” respondents, the directors and former directors, who were each found to have had requisite knowledge of the contraventions and to have failed to remedy them. Accordingly the Court found that they had each breached a civil remedy provision of the Act.
Once a finding under section 550 of the Act is made, the individual, and not just the corporate entity, may be ordered to pay a penalty under the Act. Importantly, proceedings may be brought against an individual under that section without having to bring similar proceedings against the corporate entity.
Orders for compensation
While section 550 does not, by itself, create personal liability for any underpayment, section 545(2)(b) of the Act provides that a Court may also order a person, in addition to paying any penalty, to pay compensation for the loss that an employee has suffered because of that contravention. In usual circumstances the award of compensation is made against the employer entity, rather than an individual. However, as seen in Roberts, a personal respondent may be ordered to pay compensation and a failure to pay may see the individual pursued for breaching a Court order.
In Roberts, the various directors and A1 Scaffolding Group Pty Ltd did not bring evidence and default judgement was ordered against them. Consequently the decision must be treated with some degree of caution. Cases on similar facts may result in a different outcome if the personal respondents choose to bring evidence which establishes they were not “involved in” the company’s contraventions. However, the case highlights the risk to sole directors or executives of smaller companies who will usually be intimately involved in the day-to day running of the company.
Here the former employee managed to successfully recoup compensation to cover the loss he incurred as a result of being underpaid despite some of the companies no longer existing (through liquidation or de-registration). Directors and Officers should be wary of trying to escape employee debts or obligations using phoenixing arrangements in the future. Such arrangements no longer constitute a “get out of jail free” pass. With orders for compensation and pecuniary penalties directors could be looking at significant personal exposure.
In these harder economic times, expect the savvy employee to pursue breaches of the Act (in the form of underpayments) against multiple defendants (and not just their former employer), particularly where the money available for distribution under s556 of the Corporations Act is inadequate.