Directors have new cause to ensure their obligations to employees are met as a result of a recent Federal Circuit Court decision which found that a director was personally liable for employee entitlements.

The decision of Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & anor [2016] FCCA 1482 concerned a security company, Step Ahead, which had continuously failed to pay its employees correct rates and allowances. This ultimately resulted in proceedings being commenced by the Fair Work Ombudsman against Step Ahead Security and its sole director, following multiple complaints lodged by employees.

The Court found Step Ahead Security was in breach of provisions of the Fair Work Act (2009) (FWA). The Court found also that Step Ahead Security’s sole director was personally liable by being “involved” in those contraventions of the FWA. The Court ordered that the director personally repay the unpaid employee entitlements of around $22,779.72 and also fined him $51,408.00.

The director in this case can expect no contribution from Step Ahead Security, which was already in liquidation by the time judgment was handed down.

This case represents the first reported decision in which the Federal Circuit Court has utilised the accessorial liability provisions in the FWA to order a director to personally pay both the underpaid entitlements and a fine.

The circumstances in this case are somewhat unique in that the director had a history of managing other companies with unpaid employee entitlements. However the decision does reflect an upward trend by the Fair Work Ombudsman in seeking and securing high penalties for breach of the FWA.

Whilst the employer in Step Ahead was insolvent at the time of judgment, this is not a necessary requirement for a finding of direct liability against directors. Insolvency of the employer would be expected to increase the risks however of such a ruling.

Further, whilst the claim in Step Ahead was brought by the Fair Work Ombudsman, employees themselves can also bring claims under the FWA for underpayment or non-payment of entitlements under the National Employment Standards, Awards and Enterprise Agreements.

The liquidation of an employer also entitles employees to make an application to the Fair Entitlements Guarantee (FEG) programme for payment of their entitlements (excluding superannuation) as an ‘advance’. On paying those funds, which are treated as priority payments in the winding up, the Commonwealth department administering FEG is subrogated to (or steps into the shoes of) the employee creditors and could theoretically bring its own claims against the company’s directors.

The Commonwealth department administering FEG now operates and administers its own funding regime. FEG has been actively seeking and funding liquidators to pursue claims against directors in an attempt by FEG to recover some of the entitlement funds paid out. This has been happening across the board - in high profile matters such as Queensland Nickel and down to the SME sector.

Directors may also be personally liable for unpaid superannuation as a debt due to the Commissioner of Taxation.

Our message to directors therefore is that the need for vigilance and care in ensuring employer companies meet their obligations to employees has never been greater.