Navigating stand down orders for Australian insolvency practitioners

Administrators are under pressure to preserve cash, but standing down employees without pay is not a decision that can be made on commercial grounds alone. It requires strict compliance with the Fair Work Act 2009 (Cth), assessment of contractual obligations and regard to the commercial reality that administrators are personally liable for debts incurred during the administration. These decisions are therefore not just about legal compliance; they are central to risk management.

Voluntary administrators taking control of a company should be aware of the legal rights of a company’s employee workforce before making any decisions on how, and when, they are stood down. For example, if an administrator is considering standing down employees without pay or terminating employment arrangements from the time of their appointment.

Under the Fair Work Act, an employee can be stood down without pay during a period in which the employee cannot be usefully employed because of a stoppage of work for any cause for which the employer cannot be held reasonably responsible.

At the outset of an appointment, administrators must consider, firstly, are the circumstances such that they cannot reasonably be held responsible for the stoppage of work. A stoppage of work must be an actual stoppage of at least part of the business and not just a reduction or slow down. In many circumstances, this can be a difficult test to satisfy.

Secondly, administrators must consider whether the stoppage of work caused each employee to be unable to be usefully employed, which will vary depending on the type of work each employee does.

For example, in a manufacturing business where manufacturing has ceased but distribution is continuing of already manufactured stock, the employees doing distribution work cannot be stood down under the Fair Work Act, but the manufacturing employees could be stood down. This is a relevant consideration for administrators when assessing which of the employees are essential for ongoing trade of the business. 

Another consideration is whether the employees can be redeployed or reassigned – is there  any work that the employees can do throughout other parts of the business? If there is work, they can complete, even if it's not their usual duties, then the test will not be satisfied.

The terms of any enterprise agreement (EA) or employment contract must also be considered, particularly if there is a right to stand down employees without pay under those terms. If there is a right under an EA or a contract, then the employer cannot rely on the terms of the Fair Work Act to stand down and must apply the EA or contract terms.

The basis for a stand down under an EA or a contract could be broader or narrower than the Fair Work right, and it's also important to remember that employees have the right to challenge a fair stand down in the Fair Work Commission.

As an alternative to stand down, administrators may wish to consider engaging with employees about taking their paid leave instead of being stood down without pay, which the Fair Work Act allows.

If there is no effective right to stand down the employee, but the business cannot provide them with work and they don't want to take leave, then the employee may need to be dismissed or stood down with pay.

If an administrator is standing down employees, it's critical to make it clear that a decision to do so has been made, while supplying the employee with the basis for being stood down. The terms of any written communication to the employee should also be as precise as possible.

For insolvency practitioners, compliance is not optional. An unlawful stand down can lead to:

• back-pay claims and penalties;
• employee disputes before the Fair Work Commission; and
• reputational damage.

Standing down employees may seem like a quick way to preserve cash, particularly in a trading appointment, but if the statutory test is not satisfied, the cost of litigation and compensation can outweigh any short-term savings. Administrators should seek legal advice before implementing stand-down measures to cross-check their decision-making concerning employees.
Co-written by Arvand Ghazizadeh of Pinsent Masons.