Trevor Chappell
(Australian Associated Press)

The federal government scheme that covers entitlements of workers at failed companies is under review following a blowout in costs and a surge in the number of employers abusing the program through “sharp” corporate practices.

The Fair Entitlements Guarantee (FEG) scheme provides financial help to employees who have lost their jobs and entitlements because their employer has gone bust but the federal government says annual costs have risen dramatically, with the amount paid out in assistance increasing from $60.8 million in 2007/08 to $284.1 million in 2015/16.

“Costs of the FEG scheme have been increasing due to the adoption of sharp corporate practices by select employers and parties associated with them, resulting in cost-shifting to the scheme and through it, to taxpayers,” a Treasury consultation paper released on Wednesday said.

Treasury is inviting submissions on how to reform the scheme to address corporate abuse, saying the government “believes that legislative reforms are required to ensure that employers take more responsibility for paying the entitlements of their employees”.

The paper says “sharp corporate practices” have driven the increase in costs.

Sharp practices are classed as methods used by companies or directors seeking to prevent, avoid or reduce the obligations of a company to pay workers or creditors.

Examples could include use of company structures under which employees are employed by an entity which does not provide for their employee entitlements; or assets of the entity employing the workers are transferred elsewhere before employees are made redundant.

The government said an examination of cases involving FEG assistance since July 2007 revealed that more than 1,300 company directors had been involved in multiple FEG cases.

In a substantial percentage of the cases, an examination of creditor reports and other documents revealed claims of potential breaches of the law, including the failure of directors to keep proper books and records, failures to comply with reporting and payment requirements under tax laws.

The government says 7,808 workers across 983 entities were paid FEG assistance. in 2007/08.

That climbed to 14,341 redundant workers across 1,746 insolvent entities in 2015/16.

Nearly half of total FEG claims made each year come from the construction, manufacturing and retail sectors.