Impact of proposed changes to the Fair Work Act on insolvency and restructuring practitioners

In brief - The legislative changes proposed within the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 (Cth) (the Bill) is, as aptly titled, proposing to close outstanding 'loopholes' in the Fair Work Act 2009 (Cth) (the FWA).

As restructuring and insolvency professionals will know, section 121 of the FWA currently provides that a business with fewer than 15 employees is not obligated to make redundancy payments to employees if those employees' redundancy entitlements are covered by the National Employment Standards (the NES) which are contained in the FWA.

This resulted in the anomaly that employees of small businesses the subject of a restructure or staggered closure could miss out on redundancy payments that may otherwise be met through the Fair Entitlements Guarantee Scheme (FEG) or be paid as a priority in a Deed of Company Arrangement or in a liquidation. This anomaly has been the source of industry comment and comments in the Administrative Appeals Tribunal (notably in Tjoputra and Secretary, Attorney-General’s Department [2021] AATA 1596).

Section 28 of the Bill sets out additions to new subsection 4 to be added to Section 121 of the FWA (https://www.legislation.gov.au/Details/C2023B00131, pages 35-36). 

These proposed amendments will permit employees of small businesses to be entitled to redundancy pay if the employee was terminated under the new requirements which are extracted below: 

       (4) Despite subsection (1), an employee whose employment is terminated is entitled to be paid redundancy pay in accordance with this Division if:
           (a) at the time of the termination, section 119 did not apply to the termination because the employer was a small business employer; and
           (b) the employer is bankrupt or in liquidation (other than only because of a members’ voluntary winding up); and
           (c) the employer is a small business employer because the employment of one or more employees was terminated; and
           (d) those terminations occurred:
               (i) on or after the day that is 6 months before the employer became bankrupt or went into liquidation; or
               (ii) if there was an insolvency practitioner (the last insolvency practitioner) for the employer on the business day before the employer became bankrupt or went into liquidation—on or after the day that is 6 months before the insolvency practitioner was appointed; or
              (iii) if, before the last insolvency practitioner was appointed, other insolvency practitioners for the employer were appointed without any intervening business days between any of those appointments—on or after the day that is 6 months before the first of those insolvency practitioners was appointed; or
              (iv) due to the insolvency of the employer. (emphasis added)

The relevant tests as to whether employees are entitled to redundancy payments following the passing of the Bill will be if employee terminations in the 6 months before the insolvency appointment brought the company below the small business redundancy exemption (i.e. to fewer than 15 employees) or if the insolvency practitioner terminated the employees to restructure the company's business. 

Implications for insolvency practitioners and restructuring advisors

If the Bill passes then this amendment will have the following practical implications for insolvency practitioners and restructuring advisors:

• it will impact the calculation of outcome positions in a Safe Harbour review or planning of a business restructure prior to an insolvency
• it will require a review of the movements of employees in the 6 months prior to the appointment of an insolvency practitioner, to calculate employee entitlements and complete appropriate documentation for FEG.

The Bill has not yet passed. Stay tuned as we will provide a further update once this occurs.