"Casual" employees now get leave entitlements. What does this mean for insolvent trading?

Image > Insight > "Casual" employees now get leave entitlements. What does this mean for insolvent trading?

The case

A Full Court of the Federal Court recently held in Workpac Pty Ltd v Rossato [2020] FCAFC 84 that an employee who was employed as a casual is entitled to back pay for annual leave, personal/carer's leave, compassionate leave and public holidays because the characteristic of "a firm advance commitment" to offer and accept work meant the employee was a permanent employee rather than a casual. The Court also found that the employer was not entitled to offset the back-pay against the 25% loading that the employee had been paid as a casual, whether by way of common law set-off principles, restitution or under regulation 2.03A of the Fair Work Regulations 2009 (Cth).

This decision has significant potential implications for the law of insolvency, particularly in relation to the amendments to the Corporations Act in response to the COVID-19 pandemic. For example, it raises questions about the applicability of those amendments in a scenario where a company now finds itself with additional (potentially) substantial liabilities for employee entitlements and is insolvent or at risk of insolvency as a result.

What does the case mean for employers in an employment context?

The Court provided further definition of the "firm advance commitment" test. The Full Court held that even where a contract of employment is wholly written, consideration of both implied terms, the parties' conduct in the employment relationship and the other indicia of permanent or casual employment also need to be considered.

The Full Court found that, in the employee's circumstances, there had been an express written "firm advance commitment" in the employment agreements with WorkPac. Relevantly, the Court found that the employment agreements:

  • provided that the employee would work regular shifts, which were scheduled 12 months in advance, for continuing standard blocks of time;
  • did not contain a fixed term or suggestion of temporary, short term employment, but did include the right for either party to terminate on notice, which supported the conclusion that the parties intended an ongoing indefinite employment relationship; and
  • even though there was a provision in the most recent employment agreement which purported to allow the employee to reject shifts, the Court held that this was inoperative in the face of the other indicia in the agreement setting out that the agreement was for permanent, not casual employment.

The Court considered that although the employee was paid an hourly wage, could turn down work, was not guaranteed work, could be terminated on one hour's notice and was required to submit timesheets to confirm the hours he worked, it was not significant enough, either alone or in combination, to outweigh the indicia that the employee worked regular and continuing standard blocks of time and was indeed provided with a firm advance commitment.

For a further consideration of the employment law issues in this case, please refer to this article prepared by our Workplace Relations & Safety team.

What does the case mean for employers and directors from an insolvency perspective?

In what employers will undoubtedly find alarming, the Full Court found that WorkPac could not set-off the employee's leave entitlements against the 25% casual loading he had been receiving, saying that regulation 2.03A of the Fair Work Regulations could not be relied upon in this case. The Full Court said that regulation 2.03A had no application in this case because the fourth condition in subregulation (1), being that "the person makes a claim to be paid an amount in lieu of one or more of the relevant NES entitlements" was not satisfied. The Court's reasoning was that the employee was not claiming to be paid an amount "in lieu of" an NES entitlement, he was seeking payment of the entitlements conferred by the NES. The Full Court found that the regulation did not provide a basis for a claim for set off.

Further, the Court said that it was not Parliament's intention when providing leave entitlements that an employee could be remunerated for not having access to them.

One issue arising from the decision is whether s 588GAAA of the Corporations Act 2001 inserted by the Coronavirus Economic Response Package Omnibus Bill 2020 will give protection to directors from liability for insolvent trading if the consequence of the increased leave liability is that the company becomes insolvent, or is at risk of insolvency. The section provides that a director will not be liable for insolvent trading in respect of a debt incurred:

  • in the ordinary course of business;
  • during the six-month period starting on the day the section commences (or any longer period prescribed by the regulations); and
  • before any appointment during that period of an administrator, or liquidator, of the company.

While it is not clear which debts will be regarded as being incurred "in the ordinary course of business", it is likely that paying wages would be incurred "in the ordinary course of the company's business" given it is "one of the ordinary day to day business activities, having no unusual or special features" (see Australian Receivables Ltd v Tekitu Pty Ltd [2011] NSWSC 1306). However, where a company is concerned with a retrospectively acquired liability to back pay employees, it is difficult to see how that could be interpreted as something that was incurred "in the ordinary course of business".

A principal concern for businesses will likely be when the liability to pay the leave entitlements accrues. The two alternatives seem to be:

  1. The liability to pay leave entitlements accrued when the Federal Court decided WorkPac, meaning a company's directors would be covered by the s 588GAAA safe harbour; or
  2. The liability to pay leave entitlements has been accruing throughout each employee's employment with a company, such that the new safe harbour would not apply to back-pay liabilities that accrued before 25 March 2020 (when the new safe harbour commenced).

Ultimately, the more likely interpretation is that any liability for leave entitlements will be taken to have accrued throughout each employee's employment, and therefore, not incurred during the six-month period prescribed under the amendments.

However, what will really concern businesses and directors are the broader implications of this decision. Primarily, how do companies and directors approach their liabilities in the event this decision means they now have drastically increased leave liabilities that they cannot meet?

Businesses will need to make a judgment call as to how they resource their business, in light of the fact that they may be opening themselves up to insolvent trading. It is foreseeable that further leave entitlements incurred would be done so in the ordinary course of the company's business. There is also a very real possibility that the effects of this decision will be overturned on appeal to the High Court or made redundant by the sweeping proposed industrial relations reforms announced by Prime Minister Scott Morrison.

For the time being, the circumstances contemplated above highlight the need to get prompt, specialist advice on any potential insolvency issues. The right advice can go a long way to helping a business potentially avoid an insolvency event.

If you would like further information about the effects of this case on your business or any other aspect of insolvency law, please do not hesitate to contact us.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here. You may also be interested in our recent article on the how the temporary suspension of directors duties for insolvent trading doesn't remove the need for directors to continue to comply with their usual directors duties.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.