Burnt by the Phoenix: a tale of an employee, 5 companies and 4 directors

Underpayment of employee entitlements and wages. This is often a sign that an employer is strapped for cash. But often the shrewd employer will engage in phoenix activity in order to protect the assets of their business from creditors. When this happens, from the ashes of the struggling company, a new company will rise, which in many respects is nearly identical to the previously company. This is commonly known as phoenix activity. And when phoenix activity occurs it usually results in employees losing out.

But in the decision of Roberts v A1 Scaffolding Pty Ltd & Ors, the Federal Court made orders that the directors of four companies personally make payments for the underpayment of wages of an employee. In addition to this, the Court also ordered penalties against the directors for aiding and abetting the companies in the underpayment of wages.

All employers under the Fair Work Act have an obligation to pay the minimum wage to their employees. Failure to pay the minimum wage is a breach of the Fair Work Act. Where an employer fails to pay the minimum wage, an employee is entitled to bring an action to seek payment of wages, and to seek penalties against the company for breach of the Act.

In this particular case, the A1 Scaffolding group of companies continuously employed an employee from 2005 to 2013. His employment was transferred to a new entity as a result of the appointment of administrators or liquidators over each previous company. There was no transfer of accrued entitlements, and there was a continued underpayment of wages. In this proceeding, the employee joined a union organisation, and actively encouraged other members to join the union, as a result of the employer’s suspicious conduct.

As a consequence, the employee was confronted by the employer and his employment was terminated because of his union activities. The employee brought an adverse action claim and also sought orders against the directors of each of his last five employers (four of which were deregistered companies) under section 550 of the Fair Work Act for failure to provide payslips and underpayment of wages. No evidence was filed by any of the directors in response, and judgment was granted on behalf of the employee.

The Court held the directors to be liable as accessories to the breaches of each company. As a consequence of the orders being made, the Court imposed penalties upon the appropriate directors for failure to provide payslips and underpayment of wages, annual leave, loading, and long service leave.

Whilst the penalties are yet to be handed down by the Court, there are important lessons for employers and employees. For employees, they can be heartened that the Courts are more willing than ever to impose accessorial liability on directors personally to breaches by companies of the Fair Work Act. Moreover, underpayment of wages and failure to provide payslips are now becoming common breaches by employers that employees act upon.

Employers need to ensure that they are paying their employees in line with the minimum wage or base minimum award rate. Employers can also no longer rely on the insolvency of their company to protect from the personal liability of the actions of the company.

If you have any questions about your legal obligations as an employer, please contact Chris Morey (Principal, Director of Business Law) or Adam Foster (Lawyer, Business Law) on (03) 9629 9629