Novated leases - sting in the tail for employers ? Uninsured risks
I've recently had the pleasure of scrolling thru novated lease and underlying finance lease proformas, not having had that joy for a number of years.
These are typically sold as no risk or obligation to the employer and its all about the tax benefits for the employee.
My reading of the typical finance lease that a employee first signs (having fully read and understood it, of course) is that they sign their lives away to the finance company, with some heavy duty indemnities (eg if the car is written off, they fail to insure / register / the insurer declines the claim / register, don't vacuum/wash the car etc ).
The sting in the tail is in the novation agreement, under which the employer agrees to step into the shoes of the employee for all the obligations and indemnities the employee gave the financier (plus some more in the novation agreement), but not thankfully to pay the residual payment (and maybe vaccum/wash the car if the financier was generous enough to exclude that obligation).
How many companies (generally the HR admin) actually read what they have agreed to sign up to in the employee finance lease, or even get a copy of it ?
The result seems to be that if the employee (or say they lend the car to their teenager / spouse / neighbour as in the TV ad etc ) and that person writes the car off (plus say a few other cars etc as collateral damage) and then is found to have been drink driving / under influence of drugs / texting / drag racing etc (insert long list of insurance policy exclusions), the insurer will likely say "we are out of here" and decline the claim.
So then the novation agreement kicks in and the employer is left to foot the bill, having "willingly" agreed to stand in the shoes of the employee to save the employee some tax dollars.
I doubt most companies have any insurances to cover this liability, which could be a few hundred thousand dollars depending on the value of the car (plus remaining finance costs) and the value of the other car (s) or property damaged or destroyed.
The finance company will typically say at this point that yes, the employer is liable to pay us but look on the bright side, you can sue the employee and recover under yet another indemnity in the novation agreement.
I'm sure those of you who have sued lawyered up employees know the joy of that exercise, assuming the employee has funds to cover the debt (and pay the lawyer).
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Now if the employee resigned or was terminated before the said accident, the novation would cease and the risk and liability would revert to the now ex-employee under the finance lease.
So why not leave those liabilities with the employee in the first place and not seek to make the employer "a guarantor" of the employee for the sake of a few tax dollar savings to the employee and no benefit but all risk for the employer ?
My reading of cases under the old and new Cth Unfair Contracts Act (started 9.11) is that many of the indemnities sought by the financier in the finance and novated agreement would be suspect, so long as you were a consumer or small business.
Comments ?
Some indemnity cases / articles to consider
Bank of Queensland also has one that excludes the problematic employee obligations from novation to the employer .
Goods news that at least one financier, being Macquarie Leasing (no plug intended) has recently revised its novated lease terms to exclude the following from employer novated obligations - Location and use of goods, repair and maintenance of goods, loss or damage to goods, insurance and the old residual value - maybe the Unfair Contracts Terms Act started 9 Nov had something to do with it - now to ask to update all those old existing novated agreements