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Why you need Management Liability insurance

  • Aug 09, 2019
  • 12 min read

We only have to look at the George Calombaris scandal to see what damage underpaying staff can do to a business.

And regardless of your view of the furore surrounding this case, one thing is for sure.

The Fair Work Ombudsman (FWO) can and will prosecute underpaying employers, and they always get paid the right amount.

But in spite of this enforcement, paying staff legally isn’t that simple – even if your employees agree to their pay rate.  As an employer, it is your job to define when you must pay your workers overtime, penalties or shift allowances, and casual loading.

Not to mention statutory entitlements and incentive-based payments or bonuses too.

Every part of minimum wage requirements is strictly legislated and if the FWO finds that you have underpaid your employees any of their entitlements, even unintentionally, you can face serious penalties.

And you don’t have to be a large employer – in fact all employers are on the FWO’s radar and anyone who fails to pay workers their correct minimum wages and entitlements can end up in court.

Earlier this year a family business owner who ran three Tokyo Sushi outlets in NSW was fined more than $380,000 for underpaying her staff. This was despite the fact she paid her workers 25% loading on Saturdays and 50% loading on Sundays. She was also ordered to back pay them around $70,000.

Below are some other recent penalties employers have been ordered to pay the FWO – and this doesn’t include back pay.

 

EMPLOYER DATE TOTAL PENALTY
A & S Wholesale Fruit and Vegetables Pty Ltd July 2019 $243,000
Sushi Bay ACT Pty Ltd July 2019 $124,416
Safecorp Security Pty Ltd and Safecorp Security Group Pty Ltd July 2019 $35,540.84
Zucco Farming Pty Ltd May 2019 $144,000
Logan City Electrical Service Division Pty Ltd April 2019 $39,312
G & Z United Pty Ltd (Subway franchisee) March 2019 $65,438
Abdul Wahid and Sons Pty Ltd (Caltex franchisee) February 2019 $77,708
Hair-Rass Me Pty Ltd February 2019 $77,873.20
Hero Sushi (3 x outlet operators) February 2019 $694,628
Ital One Holdings Pty Ltd (Café Baci) February 2019 $257,000
Her Fashion Box Pty Ltd February 2019 $329,133
Xia Jing Qi Pty Ltd (7-Eleven franchisee) January 2019 $335,664

 

The FWO is happy to point out that a number of these businesses are now insolvent as a result.

So as a conscientious employer, who is trying to keep your head above water and genuinely do the right thing by your staff, how can you protect yourself from this sort of thing torpedoing your future?

 

Management Liability Insurance

Management Liability Insurance protects you and your company against the risks and exposures of running the company – that is, your liability for mismanagement.

If you are responsible for your business, you could risk losing your business, as well as your personal assets.  Management Liability insurance protects your business and by extension your personal wellbeing as well..

The legal costs to defend allegations of wrongful acts alone can be financially crippling for businesses and individuals, regardless of whether you’re in the right or not.

 

Not Professional Indemnity Insurance – why not?

The purpose of Professional Indemnity (‘PI’) Insurance is to respond to claims from third parties in respect of the professional/specialist services (including advice) you provide NOT for claims that you mismanaged your company and caused loss to others. You have to take out separate insurance for this exposure.

Where PI Insurance cover the ‘activities’ of the company, Management Liability Insurance focuses on the ‘act of running a company’.

 

What does Management Liability Insurance Cover?

  • Damages and claimant costs awarded against you
  • Defence (i.e. legal) costs
  • Investigation costs
  • Civil fines & pecuniary penalties.

 

Management Liability Insurance is a packaged product which will normally cover the following management liability risks:

 

Directors and Officers Liabilities

Will protect the directors and officers plus anyone else involved in the management of a company for claims alleging a wrongful act.  Examples of claims include things like unfair competition, fraud/breach of fiduciary duty, misappropriation of trade secrets, insolvent trading and manslaughter

 

Employment Practices Liabilities

Covers the company, directors, officers and employees for claims made by current, past and prospective employees for issues arising from employment practices, including harassment, unfair dismissal and a range other employment issues.

 

Statutory Liabilities

Covers individuals and the company for fines and penalties from operating the business including fines related to workers compensation and occupational health & safety, EPA and pecuniary penalties

 

Crime Cover

This provides cover to the company for loss arising from dishonest acts such as theft and fraud by employees including theft of stock and inventory.

 

Legal Representation Costs

Legal representation costs that are incurred by directors/officers and the company for attendance at official investigations or inquiries are covered.  This could include an ASIC enquiry.

Additional management exposures can also be insured against under management liability insurance, to reimburse the company for costs incurred during a tax investigation by the ATO or to engage professional assistance in a public relations crisis.

 

The environment for businesses

Firstly the potential for the severity of loss grows as revenue in the company increases. The bigger the company, the more employees, suppliers and creditors, the bigger the claims tend to be.  And it’s not just directors who can be held personally liable (exposing personal wealth) but also managers and employees.

As the regulatory environment changes, directors are often unaware of their full responsibilities at law.  Directors are responsible for the risk management of their company and ASIC has been on the front foot, putting directors on notice.

A company’s reputation can be damaged if they are investigated, not to mention the ongoing legal costs to defend claims.

In the current economic climate – companies have seen an increase in:

  • Business failures
  • Regulatory investigations
  • Employment practices claims
  • Employee theft, and,
  • Regulatory actions

And there are a number of directions a business owner can be attacked;

  • Regulators (e.g. ACCC, ASIC & the ATO)
  • Employees
  • Competitors
  • Creditors
  • Shareholders (especially minority shareholders)
  • Clients
  • Liquidators/Administrators

 

Most common types of claims under Management Liability Insurance

  • Breaches of director’s duties and/or fiduciary duties, including breach of trust
  • False, misleading & deceptive conduct by directors/officers and employees
  • Actions alleging improper and illegal conduct
  • Statutory breach of duty i.e. under legislation
  • OH & S prosecutions and inquiries
  • Employment: unfair/wrongful dismissal, discrimination, harassment, wrongful failure to employ or promote
  • Defamation by directors/officers
  • Breach of intellectual property rights by directors/officers
  • Employee theft, including theft of money and property
  • Statutory fines & penalties
  • Taxation investigation costs

 

Management Liability Insurance – Summary Points

Management Liability Insurance covers the exposures & risks in managing a business.

Where PI Insurance covers the activities of the company, Management Liability Insurance focuses on the act of running a company.

Obviously there are limits to what this insurance covers – and this is where you need a competent broker to help you navigate the process and get you the best cover for your business.

Remember, your full time job is to run your business as fairly, equitably, safely and profitably as you.  Insurance takes care of the things that fall through the cracks.  Certainly in the current environment you need the ace up your sleeve if something goes wrong.

Our brokers are seasoned experts when it comes to keeping business people in business.  We’d love to help you protect you, your business and your staff.  Call us on 07 3252 5254.

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