Watch this space: Criminal charges laid against persons allegedly involved in unlawfully restructuring to avoid payment of employee entitlements

Over recent years there has been a groundswell of support for criminalising wage theft. Less widely appreciated however, is the existing ‘teeth’ afforded to regulators to pursue individuals involved in corporate restructuring that evades payment of employee entitlements. This article provides an overview of the legal framework and a current criminal prosecution in which a director and an officer are squarely accused of such criminal activity.

For context, in April 2019, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 (Act) came into effect. That legislation enhanced Part 5.8A of the Corporations Act 2001 (Cth) (Corporations Act) to make it easier to prosecute persons involved in corporate restructures that had the effect of reducing recovery of employees’ entitlements.

Section 596AB of the Corporations Act already made it an offence for a person to enter into an agreement with the intention of, or with an intention that included: (i) preventing the recovery of entitlements of employees of the company; or (ii) significantly reducing the amount of entitlements employees of a company could recover. The amendments lessened that threshold: a person can now be liable if they are ‘reckless’ as to the whether an agreement will prevent or significantly reduce the amount recoverable by employees (section 596(1C)).

The stakes are high with the current penalty set at 15 years imprisonment for individuals and/or a fine of up to $999,000 and, if the court can determine the benefit derived and detriment avoided because of the offence—that amount multiplied by 3.

Until recently, the Australian Securities & Investments Commission (ASIC) has not actively pursed many prosecutions under Part 5.8A. However that is changing. In March 2022, the former chairman of  Bruck Textile Technologies Pty Ltd (Bruck Textile) and the former Chief Financial Officer, appeared in the Wangaratta Magistrates Court where it was alleged that both persons had, in contravention of section 596AB, sold the assets of Bruck Textile to a related entity in 2014 prior to implementing staff redundancies so as to prevent or significantly reduce the amount of redundancy entitlements ultimately payable to employees (estimated by the liquidators to exceed $3.48 million). The day after the sale, Bruck Textile was deemed insolvent and placed into liquidation, resulting in the dismissal of 58 employees many of whom did not receive their legal entitlements.

The matter is being prosecuted by the Commonwealth Director of Public Prosecutions (CDPP). The accuseds face a maximum penalty for a breach of section 596AB of $170,000 (applicable at the time of the offence) or imprisonment for 10 years, or both.

We understand this prosecution is the first of its kind and will be followed with keen interest. As the 2019 amendments have the effect of making prosecutions easier (the CDPP need only establish that the person was reckless as to the consequences of the corporate restructure rather than having intended a particular result), and as the focus on wage theft only intensifies, we anticipate there will be more regulatory interest by ASIC and others in this space.

Read other items in the Australian employment brief - July 2022