Administrators promise to preserve employee entitlement claim despite being a “small business employer”
In Re Bullivant and Secretary, Attorney-General’s Dept  AATA 2047, the Administrative Appeals Tribunal (AAT) overturned a decision of, which had refused an employee’s claim for employment entitlements pursuant to the Fair Entitlements Guarantee Act 2012 (Cth) (FEG Act), relying on a “promise” of the administrators of the employer company to its employees to do so.
This is a cautionary tale for administrators managing employees post-appointment to consider the “small business employer” test in the Fair Work Act 2009 (Cth) (FWA), noting the potential flow on effects to the FEG Act. The FEG Act provides a legislative safety net scheme of last resort with assistance available for eligible employees (subject to various eligibility considerations) in the event that the employer entity becomes subject to an “insolvency event.” Relevantly, an “insolvency event” is the appointment of a liquidator or trustee, but does not encompass the appointment of a voluntary administrator.
On 8 September 2016, the NSW mining company, KBL Mining Limited formerly known as Kimberly Metals Limited (Company), was placed into voluntary administration and joint administrators were appointed. The administrators resolved to put a Deed of Company Arrangement to the creditors of the Company, and to continue trading the Company in order to assess the viability of selling its business or otherwise undertaking its recapitalisation. To facilitate this, and to preserve value for creditors of the Company, some of the employees of the Company were asked by the administrators to continue their employment with the Company.
At the time of the administrators’ appointment to the Company, the Company was a medium size enterprise and the administrators had negotiated with the retained employees that they would be entitled to all their accrued entitlements for redundancy pay should they leave their roles or otherwise the Company ceased to trade its business.
In June 2018, the Company was wound up. Following the administrators’ appointment and prior to the Company being wound up, the total number of employees had fallen below 15, which made the Company a “small business employer” pursuant to section 121 of the FWA (SBE). Section 121 of the FWA provides that employers do not need to pay “redundancy pay” if, immediately before the employee’s termination (here, at liquidation of the Company), the employer is an SBE.
An employee submitted a claim form for an advance under the FEG Act for amounts in respect of unpaid wages, annual leave, payment in lieu of notice, redundancy pay and long service leave.
The Department of Jobs and Small Business assessed that the employee was entitled to a FEG advance for wages, annual leave, payments in lieu of notice, and long service leave, but not in respect of redundancy pay as the Company was an SBE immediately before the time of the termination.
The employee subsequently challenged this decision which went before the AAT for consideration.
The administrators (then the liquidators) of the Company did not adduce any evidence to support the application. However, the AAT found that it was reasonable that the administrators made promises to the employees to the effect that their employee entitlements would be protected in circumstances where the employees would assist the business of the Company continuing to trade.
The AAT determined that where “an insolvency practitioner undertakes to specific employees that, in return for ongoing service their entitlements to redundancy pay will be protected (whether or not the employer becomes an SBE), section 121(1)(b) of the FWA is necessarily excluded from the agreement. Otherwise, a promise along such lines would be dishonest or at the very least negligent. If the Company is, or becomes, an SBE, and the governing instrument for employee entitlements is the FWA, then such an undertaking would be worthless.”
The AAT held that the employee was entitled to her redundancy pay calculated in accordance with section 119(2) of the FWA.
Insolvency practitioners should be alive to the SBE test under the FWA at the commencement of their appointment as voluntary administrators. For the purposes of calculating the number of employees at a particular time, associated entities of the employer are taken to be and considered to be one entity. Insolvency practitioners should monitor ongoing employee arrangements post-appointment, during a “trade-on” of the company’s business, cognisant of the threshold number that makes an employing entity an SBE as there is often natural attrition of employees where the company’s business is heading towards a liquidation scenario.
Prudent insolvency practitioners should take care before extending a “promise” or undertaking to employees of a Company (in administration), that their entitlements will be preserved should the Company later be liquidated if the Company is or may become an SBE”.