insolvency network newsletter july 2017
Jul 15 2017
Accountants Held Liable For Client’s Underpayment Of Wages
On 28 April 2017, the Federal Circuit Court reached a landmark decision in the case of Fair Work Ombudsman v Blue Impression Pty Ltd & Ors [2017] FCCA 810, which sets a precedent for advisors and accountants being implicated in accessorial liability.
Accessorial Liability is where any person who is involved in a contravention even where they did not commit that contravention may be held responsible for that contravention.
The Fair Work Ombudsman relied on Section 550 of the Fair Work Act, which states that:
(1) A person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision.
(2) A person is involved in a contravention of a civil remedy provision if, and only if, the person:
a) has aided, abetted, counselled or procured the contravention; or
b) has induced the contravention, whether by threats or promises or otherwise; or
c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
d) has conspired with others to effect the contravention.
Common law provides guidance on accessorial liability as follows:-
• The person has knowledge and essential facts of the contravention;
• The person is knowingly concerned in or involved in the breach;
• The person is an intentional participant in the breach – wherein wilful blindness is not an excuse.
In Fair Work Ombudsman v Blue Impression Pty Ltd, Ezy Accounting 123 Pty Ltd (“Ezy Accounting”) was found to be liable for contraventions of the Fair Work Act, through the provision of payroll services. Ezy Accounting was found to be accessorily liable as the accounting firm failed to maintain current award rates of pay for employees in Australia in their MYOB payroll system for one of their clients. This resulted in the underpayment of employee entitlements. Ezy Accounting’s argument of having ‘no knowledge’ of minimum rates for employees and merely taking instructions from their client fell short.Fair Work argued that:-
• As a result of a payroll audit conducted by the Fair Work Ombudsman in 2014, Ezy Accounting was fully aware of the accurate pay rates as they had assisted their client, Blue Impression, to correct underpayments detected in the audit.
• Ezy Accounting received clear instructions from their client to insert payroll figures into their system manually. These figures were less than the default figures automatically generated on its MYOB payroll system.
The contravention of accessorial liability may include financial penalties of up to $51,000 per breach of the Act. Exposing the names of those involved may also result in potential reputational damage.
The Fair Work Ombudsman explained that in addition to naming accessories, the Fair Work Ombudsman may still seek to recoup back-payments and penalties from individuals, irrespective of whether a corporate employer is still operating or has money in the bank.
Consequently, should a corporate entity be protected due to insolvency, the Fair Work Ombudsman is able to pursue the accessories personally. Directors should be aware that they are not off the hook should they voluntarily place a company into liquidation.
This recent Federal Circuit Court decision highlights the potential risks accountants face whilst providing services to their clients, and reinforces the importance of ensuring their actions comply with the respective legislation. Accountants, in some circumstances, should seek specialist advice to best fulfil the needs of their clients.
Determining Bankrupt’s Income: Third Party Benefits
As soon as practicable after the start of each anniversary of a bankruptcy, pursuant to Section 139W of the Bankruptcy Act 1966, the Trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period in order to determine the amount the bankrupt is liable to pay in respect of that period.
In making the assessment, the Trustee has wide powers to determine the income that is likely to be derived or was derived by a bankrupt during what is the contribution assessment period. One of those powers is to deem that the bankrupt derived income when a third party received the benefits of the services performed by the bankrupt. For example, when a bankrupt performs work on behalf of a Trust or a corporate entity, and the Trust or corporate entity receives the money, a Trustee may consider the income received by the Trust or a corporate entity or any other benefit, as income of the bankrupt.
The mere fact that the bankrupt performs work for a Trust or a corporate entity, in which the Trust or corporate entity receives income does not necessarily mean it is income derived by the bankrupt. In the case of the Inspector-General in Bankruptcy v McGushin [2009] FCA 662, a Trustee argued that services provided by the bankrupt on behalf of a company, for which the company was paid, was income derived by the bankrupt. It was contended that if the bankrupt ceased employment with the company, the company would generate little income, if any.
However, the Court found that the net income received by a company from the services performed by the bankrupt is unable to be included in any calculation of the bankrupt’s income assessment.
In contrast, in Bilios and Inspector-General in Bankruptcy [2012] AATA 873, Dr Bilios was a medical practitioner who had worked at the same medical centre since 1993, performing the same duties. The arrangement between the medical centre and Dr Bilios was that he would receive 80 per cent of his individual gross billings, together with directors’ fees. This equated to remuneration in excess of $500,000 per annum. However, during the period of bankruptcy, Dr Bilios’ tax returns were structured in a way that the bankrupt only received $180,000 per annum, with his spouse receiving the balance of income
The Administrative Appeals Tribunal confirmed McGushin’s case and distinguished the difference in Dr Bilios’ circumstances in determing that the income was still derived from the bankrupt’s personal exertion.
In considering services provided by a bankrupt, for which a third party receives the income, a Trustee must consider any pre-bankruptcy arrangement between the corporate entity or Trust. That is, if the income was always received by the corporate entity or Trust and distributed by way of ordinary means, it would not be income of the bankrupt.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:
Stephen Michell – Director smichell@pcipartners.com.au
Philip Newman – Director pnewman@pcipartners.com.au
David Quin – Director dquin@pcipartners.com.au
Clyde White - Director cwhite@pcipartners.com.au
Warren White - Principal wwhite@pcipartners.com.au
Sean Pulverman – Principal spulverman@pcipartners.com.au
Kylie Wright - Principal kwright@pcipartners.com.au
Sophie Zapantis – Senior Manager szapantis@pcipartners.com.au
Peter Fraczek - Manager pfraczek@pcipartners.com.au
Frank Ntim - Manager fntim@pcipartners.com.au
Anna Odrzywolska - Manager aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any readerwishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.
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