Overview

The New South Wales (NSW) Small Business Commissioner has recently released the Small Business Shorter Payment Terms Policy ("Policy") which requires companies entering into contracts with the NSW Government from 1 July 2021 with a value of AUD 7.5 million or more to pay their direct subcontractors within 20 business days following the receipt of a correctly rendered invoice. Failure to adhere to the Policy can lead to the relevant small business making a complaint directly to the government agency and potentially damage the reputation of the relevant large business, detrimentally affecting its prospects of further government work.

Importantly, this Policy does not apply to construction work or goods or services under a construction contract subject to the Building and Construction Industry Security of Payment Act 1999 (NSW), for which mandatory maximum payment periods apply already.

 Key takeaways

Affected businesses should change their payment terms to pay their direct small business subcontractors within 20 business days. Relevant large business entities should consider these changes when negotiating contracts and make adjustments to their cash flow procedures to accommodate this payment period when administering the relevant future contracts.

In more detail

Earlier this year, we discussed the Commonwealth Government's Payment Times Reporting Act 2020 (Cth) with effect from 1 July 2021 in Australia: Government pressures large businesses to pay suppliers more quickly. In short, the Commonwealth act requires large businesses to report on their payment practices with small businesses. These reports will be be published on a new Payment Times Reports Register which will be publically available after the end of the first reporting period, which is the third quarter of 2021.The purpose of this register is to increase transparency of large business' payment practices and to better inform small business' decisions when contracting with these large businesses.

Consistent with this Commonwealth legislation, the NSW Government has issued the Policy which builds on the existing and complementary policy requiring the NSW government to pay registered small businesses with which it contracts directly within five days. The Policy now extends this payment period concept indirectly to small businesses subcontractors, by requiring large businesses contracting with the NSW Government to pay their direct subcontractors within 20 business days. The Policy adopts the definition of 'Large Business' directly from the Commonwealth legislation.

A NSW Government agency must apply the Policy to all new goods or services procurement activities that commence from 1 July 2021. The Policy expressly does not apply to construction work or the provision of goods or services under a construction contract, which is already subject to the Building and Construction Industry Security of Payment Act 1999 (NSW).

The following are key definitions in the Policy:

• Business Day means a day that is not a Saturday, a Sunday or a public holiday in NSW;

• Large Business is defined as an entity which:

a. has 200 or more full time equivalent employees (excluding registered charities and not-for-profit organisations); or

• Small Business Subcontractor means a direct subcontractor entity, which is identified as a small business on the NSW Government website at https://buy.nsw.gov.au.

The Policy requires large businesses to complete the following:

• identify direct subcontractors which are engaged to provide goods or services to the large business for the purposes of the relevant goods or services head contract between the large business and the NSW Government, and inform them of this Policy

• include in its subcontracts with small business subcontractors, which are (wholly or in part) for the provision of goods or services for the purposes of the relevant NSW Government head contract, a requirement that the large business make payments under the subcontracts within 20 business days following the receipt of a correctly rendered invoice from the small business contractor

• pay small business subcontractors for the provision of goods or services relevant to the NSW Government agency head contract within 20 business days following receipt of a correctly rendered invoice

• report under the head contract as per the contractual requirements relating to this Policy.

The Policy expressly links the definition of Small Business Subcontractor to registration with the NSW Government. Accordingly, it is essential for small business suppliers wishing to be eligible for the 20 business day payment period for direct subcontractors under the new Policy as well as for the 5 business day payment period for direct contracts with the NSW Government under its existing policy to register on the NSW Government "Supplier Hub".

If a large business fails to comply with its obligations to pay small businesses within 20 business days, the Policy provides that the small business subcontractor can raise the issue with the large business (with the NSW Small Business Commissioner providing mediation services if necessary) or raise the issue with the relevant contracting agency directly. We presume that a large business's failure to comply with the Policy will negatively affect its reputation and potentially adversely affect its ability to win future NSW Government tenders. However, this effect may be limited since the Policy does not directly address the sharing of non-compliance information between agencies or publication of such information, similarly to that in the related Commonwealth legislation.

The new Policy suggests that the NSW Government continues to focus on prompt payments to small businesses and that this issue is a growing trend in Australia. There is a potential that other states may follow NSW's lead and implement similar policies.