The Federal Government has launched a crackdown on misuse of a safety net for unpaid wages.

The taxpayer-funded fair entitlement guarantee (FEG) is designed to protect workers when their employers are unable to pay their wages.

The government says it has seen growing evidence that employers are shifting their costs to the scheme to avoid paying their own wage bills.

Employment minister Michaelia Cash has now announced a federal government crackdown on misuse and repeated access to the scheme.

Ms Cash says one in seven FED claims involve companies engaging in practices to deliberately avoid paying their employees’ entitlements when they become insolvent.  

A consultation paper earlier this year also concluded “there are more than 1,300 company directors who were directors of two or more companies” who accessed the scheme.

“The majority of these 1,300 directors serially managed companies which failed.”

The paper outlined some key corporate practices that companies use to avoid entitlements, including:

  • Hiring employees without having sufficient assets to pay their redundancies
  • Transferring assets away before redundancies
  • “Phoenixing”, where a company goes insolvent after its business and assets are transferred to another company that often have the same directors or officers
  • Managing an insolvency in a way that is detrimental to creditors, such as using a “friendly” liquidator
  • Using receivers or liquidators that fail to pay employee entitlements in breach of legal obligations

The proposed changes include creating a new civil penalty for directors or managers who act in a wat that a reasonable person would have known would evade employee entitlements.

The government is also seeking to lower the standard for criminal offences so that company officials who make transactions to avoid employee entitlements are punished.

The current civil penalty is equal to the amount of employee entitlements avoided with a criminal penalty of 10 years’ jail, $210,000 or both.

The existing penalties have never been successfully applied.

The reforms will also disqualify directors and officers who have repeatedly become insolvent, rely on the FEG, or otherwise breach the Corporations Act.

The average annual cost of the FEG has quadrupled since 2007, up from $63 million to $247 million.

In 2016-17, unpaid entitlements were paid to 12,354 workers, costing of $183 million.

Just $37 million from that figure was recovered from insolvent companies.