The practical approach for clients that operate a labour hire business would be to quickly undertake a fair assessment as to whether their company will pass the financial viability test.
If there are legacy issues, payment plans, overdue statutory debts or aging of trade creditors then passing the financial viability test may not be a lay down misere. In our opinion, if there is uncertainty surrounding the financial viability assessment, then a wait and see approach is a risk too great for established and committed operators to assume. Although a short window, there are options available for the proactive.
Background
The Labour Hire Licensing Act 2017 (the Act) commenced on 16 April, 2018 and is supported by the Labour Hire Licensing Regulation 2018 (the Regulation).
The Act establishes a mandatory labour hire licensing scheme to protect labour hire workers from exploitation and promote the integrity of the labour hire industry.
Licence holders are required to meet standards including being a fit and property person, financially viable and compliant with relevant laws. Users of labour hire must only engage licensed provider and there are strong penalties for operating without a licence or for using an unlicensed provider.
From 16 April 2018, existing labour hire providers will have 60 days to lodge an application for a licence. This means a licence application must be made before 15 June, 2018 to continue operating in Queensland.
The Labour Hire Industry
It is our experience that the labour hire industry can be high risk. These businesses often need to extend trade terms to clients but need to make weekly or fortnightly payment runs to employees.
The result of this model is that many businesses carry significant debtor ledgers. To improve cashflow the use of debtor finance is almost a core requirement to remain liquid.
So what happens when a Labour Hire Business has a significant client that goes broke and doesn’t pay?
Typically, it goes like this:
- The debtor financier will disapprove the invoices of the failed client and reduce the funding available to the business;
- The Business Activity Statement and Instalment Activity Statement debts will not be paid as the business is starved of working capital;
- The business will try and deploy the workers to a new client as they need to maintain turnover to fund the mounting employment related debts;
- Trade Credit insurance will be claimed upon (where the policy is in place);
- Payment plans will be negotiated in relation to statutory debts.
The result is that the business may or may not be able to trade out of its position.
We expect that there will be a large number of labour hire firms that are carrying bad debts, particularly those supplying labour to the building industry where there have been a number of corporate failures.
The question will be that when the labour hire licence applications are assessed will these firms pass the financial viability test? The Act defines financially viable as “for a person, means the person is able to pay the person’s debts as and when they become due and payable”.
Have A Plan
In the absence of an effective turnaround management plan we consider many applicants will be at risk of failing the financial viability test, this in turn could mean that the business will need to cease trading.
Given the clock is ticking for labour hire firms to apply for a licence, directors and their advisors should be reviewing their financial structures. If financial viability is a concern, then advice needs to be sought immediately to assess the available options.