In February of this year the Commonwealth Parliament passed important reforms to the whistle-blower protections regimes that applies to private entities, including some not-for-profits. The new regime will commence on 1 July 2019.
The reforms bolster the current private sector whistle-blower protections by:
- expanding the types of people who can make a ‘protected disclosure’;
- expanding the types of disclosures that are protected;
- increasing protections for whistle-blowers; and
- requiring certain organisations to have a whistle-blower policy in place.
The new reforms are contained within the Corporations Act 2001 (Cth) (Corporations Act) and the Income Tax Assessment Act 1997 (Cth) (ITAA97). The regimes inserted into both the Corporations Act and the ITAA97 are similar in structure but differ in terms of the nature of the conduct being targeted.
- the protections in the Corporations Act will apply to whistleblowing of conduct relating to breaches of corporations law; and
- the protections in the ITAA97 will apply to whistleblowing of conduct relating to breaches of tax law.
It may seem that breaches of taxation law would not be a major issue for not-for-profits, however, provisions in the ITAA97 provide the basis of eligibility for many tax exemptions, including ongoing entitlement to be exempt of income tax (which includes that an entity complies with the substantive requirements of its governing rules) and endorsement as a deductible gift recipient.
Do I have to comply with the new regime?
The initial difficulty for not-for-profits will be determining if they are caught by the new regime.
Many charities do not have to comply with the current whistle-blower regime because it only applies to companies registered under the Corporations Act.
The new regime will require organisations that meet the definition of a ‘regulated entity’ to comply. A ‘regulated entity’ is a much broader definition than ‘company’ as it includes what is known as ‘constitutional corporations’.
A constitutional corporation includes:
- trading corporations;
- financial corporations; and
- foreign corporations.
Many not-for-profit organisations will meet the definition of ‘trading corporations’ and some may meet the definition of ‘financial corporation’. The lack of guidance in case law on these definitions makes determining whether a not-for-profit meets these definitions difficult.
A corporation will be a trading corporation if it engages in ‘substantial corporate activity’. The following concepts guide this definition:
- trading is not just buying and selling, it is business activities carried on with a view to earning revenue;
- making a profit is not an essential element of trading, but it usually exists concurrently;
- the fact that trading activities are conducted in the public interest will not necessarily exclude the characterisation of these activities as ‘trade’; and
- the commercial nature of an activity is an element in deciding whether activity is considered ‘trading’.
A not-for profit entity will be considered a trading corporation where trading is a ‘substantial corporate activity’ of the entity or is ‘sufficiently significant’ but not ‘insubstantial’.
For example, the Australian Red Cross Society was found to be a trading corporation by the Federal Court. While the Society’s trading activities contributed only 4.4% towards the Society’s total revenue, the trading activities equaled over $2M in real terms.
It is less likely that a not-for-profit entity will meet the definition of a ‘financial corporation’, however there have been some notable examples including:
- a co-operative building society;
- a union; and
- a university (on the basis of substantial investments in the short-term money market).
An entity will be a ‘financial corporation’ if its commercial dealings in finance (such as the borrowing and lending of money) is a substantial and not a mere ancillary part of its activities.
Who is a protected whistle-blower?
Previously, the Corporations Act regime only applied to whistle-blowers who were, at the time of the disclosure, an officer, employee or contractor of a company.
An eligible whistle-blower is now expanded under the new regime to include current or former:
- contractors (including employees of contractors); and
- individual associates.
An eligible whistle-blower can also be the current or former relatives or dependents of the above (which includes a spouse or former spouse).
Who can a protected disclosure be made to?
The disclosure generally must be to:
- Australian Securities and Investments Commission (ASIC);
- Australian Prudential Regulation Authority (APRA);
- a prescribed Commonwealth authority; or
- an ‘eligible recipient’ which includes an officer, senior manager, an auditor, or a person authorised by the regulated entity to receive disclosures whether that be an internal or external person.
In certain circumstances, a protected disclosure may be made to a legal practitioner, a journalist or a parliamentarian.
What matters will be a protected disclosure?
The whistle-blower must have reasonable grounds to suspect the information concerns “misconduct or an improper state of affairs or circumstances”. It includes contraventions of certain law administered by APRA or ASIC, however, it is a broad term and may be interpreted widely by the courts.
The laws carve-out “personal work-related grievances” from what would otherwise constitute a disclosable matter. If the disclosure is a personal work-related grievance it will only be protected if it:
- concerns alleged victimisation of the whistle-blower;
- has significant implications extending beyond the whistle-blower; or
- the disclosure is made to a legal practitioner for the purposes of obtaining legal advice in relation to the operation of the whistle-blower provisions.
Previously the protections only operated to protect disclosures about a potential contravention of the Corporations Act. These reforms significantly broaden the scope of protected disclosures.
Disclosures to a journalist or parliamentarian
Public interest disclosures to a journalist or parliamentarian may be protected if:
- the whistle-blower first makes a protected disclosure of the disclosable matter to a regulator;
- at least 90 days have passed since the disclosure;
- the whistle-blower does not have reasonable grounds to believe that action is being taken to address the matters disclosed;
- the whistle-blower has reasonable grounds to believe that making a further disclosure of the information would be in the public interest;
- the whistle-blower makes a written notification to the recipient of the previous disclosure no less than 90 days after the previous disclosure; and
- the disclosure to the journalist or the parliamentarian is no greater than is necessary to inform the recipient of the misconduct or the improper state of affairs or circumstances.
Emergency disclosures may also be made to a journalist or parliamentarian if the whistle-blower has reasonable grounds to believe that the information concerns a substantial and imminent danger to the health or safety of one or more persons or to the natural environment. There is no waiting requirement for an emergency disclosure but the whistle-blower must still have made a previous disclosure and also given prior written notification to the recipient of the previous disclosure.
What protections does a whistle-blower have?
The reforms increase the protections available to whistle-blowers, including:
- a whistle-blower will have immunity from civil, criminal or administrative liability (such as disciplinary action) for making a protected disclosure;
- information received will not be admissible into evidence against the whistle-blower in criminal proceedings unless the proceedings relate to the falsity of the information;
- no contractual or other remedies or rights may be enforced or exercised against a disclosure on the basis of the protected disclosure;
- a contract cannot be terminated on the basis that the disclosure constitutes a breach of contract;
- if a person discloses the identity of the whistle-blower or information that reveals the identity of the whistle blower it is a breach of a civil penalty provision; and
- it is an offence to threaten or cause detriment to a person because of a suspicion that a protected disclosure has or may be made.
A whistle-blower can now take civil action if they have suffered detriment because of a protected disclosure. Detriment includes:
- dismissal or an injury in their employment;
- discrimination, harassment or intimidation;
- harm or injury (including psychological harm);
- reputational damage; and
- other types of damage.
Significantly, the new regime also introduces a reverse onus of proof in respect of both claims against an individual as well as claims against a company, in favour of the whistle-blower.
The extent to which the regulated entity will bear the onus of proof will depend on the type of claim but will generally include proving that a belief or suspicion that a protected disclosure was, may or could be made was not part of the reason for the detrimental conduct.
Mandatory whistle-blower policies
On 1 January 2020, a compliant whistle-blower policy will be required for:
- a public company (such as a company limited by guarantee); or
- a ‘large private company’ which is defined as a company with:
- has at least $25 million consolidated revenue per financial year;
- $12.5 million in assets; or
- 50 employees.
Before the commencement of the new regime on 1 July 2019, not-for-profits should:
- assess whether they are caught by the legislation; and
- prepare policies and procedures as necessary.
The new regime is a significant increase in the power and protections of whistle-blowers. Accordingly, organisations caught by the new regime will have an increased exposure to reputational damage.