Corporate insolvencies and worker's entitlements


Current Issues

Corporate Insolvencies and Workers' Entitlements

E-Brief: Online Only issued Date August 2001; Updated 15 September 2004

Steve O'Neill Analysis and Policy
Economics, Commerce and Industrial Relations

Introduction

Disclaimer: this Brief does not refer to any registered company as insolvent. The focus of this Brief is with the (often initial) loss of employee entitlements due to some cessation of trading, creating, in effect, redundancies. A business insolvency ultimately relegates a business's ongoing employees to the status of creditors if they are owed money.

The issue of corporate insolvency and loss of workers' entitlements has received significant public attention since 1998/99. Concern was focused initially on mine closures such as Oakdale Colliery (NSW), the Woodlawn mine (NSW) and the Cobar Copper Mine (NSW). In 1999 the closures of the National Textiles establishment in the Hunter Valley (NSW) and later, Braybrook Manufacturing in Victoria involved the loss of accrued entitlements for employees in the textile industry. In 2001, the collapse of the Ansett Airline Group involved the loss of entitlements to over 16 000 employees in the airline industry as well as losses for many other creditors and their staff.

Other corporate failures of 2001 including One.Tel and HIH Insurance Ltd appear to have resulted in smaller or even negligible entitlement loss for employees, and there are particular reasons for this such as competitors taking over parts of a business in the case of HIH. In redundancy award proceedings (AIRC PR904332), the provisional liquidator for HIH advised that a legal instrument determining the redundancy entitlement was preferable to the company's non-formal policy on redundancy. In the case of One.Tel, its short time since start-up meant that accrued entitlements would be low. The efforts of many parties including its directors and the relevant union, the CPSU, helped ensure that entitlements were paid by initially securing a federal redundancy award (AIRC PR904916) to generate a redundancy entitlement. There is also a particular issue in respect of redundancy awards made by the Tasmanian Industrial Relations Commission, in so far as these awards may be made on a case by case basis after a workplace closure. Therefore at the time of a plant’s closure or lay-off, from the point of view of insolvency practitioners, there tends to be no legal instrument or obligation generating redundancy entitlements.

The spate of corporate closures has highlighted the difficult position of employees and creditors when a corporation and non-corporate trading entities become insolvent. Business closures can be expected under the normal competitive workings of the economy, and indeed economic theory encourages the removal of inefficient or unprofitable businesses from a given market.

Dimensions of insolvency

The matter of insolvency and entitlement loss are not confined to corporations, and, an insolvency ipso facto does not necessarily imply that entitlements of employees are forfeited, particularly in the case where a business wind-up is not established. In effect, the group of businesses (and employees) which become insolvent and result in a loss of accrued entitlements are a subset of the group of businesses which cease trading over a particular period. To gauge the dimensions of insolvency and entitlement loss, The Age newspaper noted in 1999:

  • It is hard to quantify the problem accurately. Neither the Australian Bureau of Statistics nor the Australian Securities and Investment Commission monitors employee entitlements (lost), but estimates suggest that losses could be as high as $181 million a year.
  • The ACTU … calculated that up to 7000 businesses fail each year. About half of those cause their employees to lose entitlements to long service leave, holiday and sick pay and redundancy benefits. The ACTU estimated that up to 20 000 workers a year are in this situation. Using five insolvency cases in which the average amount claimed by employees was $7000, it calculated that annual losses would total about $140 million.

The ACTU submission was made to the Joint Parliamentary Committee on Corporations and Securities in 1998. Note that the (Cth) Parliamentary Joint Committee on Corporations and Financial Services reported on Australia’s corporate insolvency laws in June 2004. No new data on the numbers of businesses, employee numbers nor estimates of losses was provided in this report and its principle recommendation in respect of employee entitlements was a consideration that GEERS meets the losses of employee superannuation contributions forfeited due to employer insolvency (in the context of new requirements that superannuation contributions be forwarded quarterly rather than yearly), and that the use of trust funds and/or insurance schemes to preserve entitlements be explored (recommendations 44, 48).

 The accrued entitlements which employees may lose through insolvency of their employer are unpaid wages and annual leave, followed by long service leave and redundancy pay where an employee has significant years of service, and also any workers' compensation payments (for which Australian employers are required to be covered under the relevant State workers' compensation schemes). Any employer funded superannuation contributions to employees not made, may be claimed. Provisions of the Bankruptcy Act 1966 and the Corporations Act 2001 (section 556) prioritise the claims of the different classes of creditors' claims (other than those of secured creditors) and the distribution of assets in a liquidation.

Issues concerning the loss of employee entitlements in the insolvency of the employer were recognised by the Australian Law Reform Commission's General Insolvency Inquiry (Report No.45, 1988 referred to as the Harmer Report. The Harmer Report looked at the broader issues of corporate governance and responsibilities, as well as the loss of worker entitlements and indeed the effects of insolvency on other creditors.

The definitional issues associated with employee entitlements are also important. In most industries, redundancy pay and notice of termination do not accrue as an entitlement in the same way as long service leave, since they are contingent upon the event of redundancy of the individual or insolvency of the employer. Thus, employer associations such as Australian Industry Group argue that many employers are not likely to face staff-retrenchment costs, although they will face leave costs. Some industrial agreements may allow the payment of unused sick leave but this is also infrequent. Thus the relevant legal instrument such as a federal or State award or agreement (and possibly an individual's employment contract) generates the initial suite of entitlements. In the case of leave entitlements, the taking of leave by the employee will reduce the employee's accrued leave entitlement.

A Ministerial Discussion Paper by Hon Peter Reith released in August 1999 discussed the current position of employee entitlements on employer insolvency, and the Coalition Government's proposals for a safety net scheme. The paper proposed two options for entitlement protection. One was a general entitlement scheme using consolidated revenue funds to fund it. The second was an insurance scheme, but with an exemption for small business making contributions via premiums. To set the limits of entitlements available under either the insurance or general entitlements scheme, the Discussion Paper proposed a framework guaranteeing (and limiting) claims to 29 weeks of pay (at ordinary time rates), comprising:

  • up to 4 weeks unpaid wages;
  • up to 4 weeks annual leave (accrued in the last year and not taken);
  • up to 5 weeks pay in lieu of notice (according to the scale in s170CM of the Workplace Relations Act 1996);
  • up to 4 weeks redundancy pay (where eligible); and
  • up to 12 weeks long service leave (where eligible).
  • The maximum rate of payment for each week of entitlements could be the weekly rate corresponding to an annual wage or salary (ordinary time earnings) of $40,000.
  • The maximum payment to any individual employee might be set at $20,000, with shareholding executive directors who are employees being excluded from any claim.

This blueprint was adopted (see below). The peak employers’ group, the Australian Chamber of Commerce and Industry responded to the Government’s Discussion Paper in September 1999 in a submission which rebuffed the option of the insurance scheme:

  • (ACCI) strongly rejected the insurance levy or compulsory contribution option … Council reiterates its opposition to the establishment of a levy or contribution obligation on employers to ensure payment of Employee Entitlements. Such a measure would be counterproductive, and could only have the effect of tying up scarce investment capital, and therefore damaging employment.
  • ACCI strongly believes that such a scheme would be an overreaction to a limited problem, and a problem that can be addressed in other ways that will not damage employment and investment. Council reiterates its support for a proposal to make related companies liable as a group for employee entitlement debts owed to employees of that group, where a proper, harsh, unjust or unreasonable test has been satisfied.

ACCI resolved that Option A in the Ministerial Discussion Paper (the Government funded basic payments proposal) was a preferable scheme to Option B (the compulsory insurance scheme). ACCI also determined that the following conditions needed to be met in any proposed entitlement protection scheme:

  • The scheme should operate as a basic safety net and should be capped
  • In order to function effectively the scheme requires co-operation between Commonwealth and State governments
  • There must be a mechanism for insurers or the Government to pursue those who default on the scheme
  • Individuals who have control of insolvent businesses should not be beneficiaries of the scheme.

ACCI considered that if Option A were adopted it should be implemented in the following way:

  • The 50% Commonwealth Government contribution should be drawn from existing general revenue, not from an additional levy or tax on employers and
  • The 50% State/Territory contribution should also be drawn from existing general revenue, and not be ‘linked to existing revenue from payroll tax’ as proposed, or by an additional tax or levy on employers, which is not proposed in the paper

ACCI also rejected the idea that small business should be treated differently, eg by being excluded from premium levies under the insurance option.

Pros and Cons for an entitlements protection scheme

The main problems of setting up an entitlements protection scheme are that:

  • lower graded creditors other than wage earners are not similarly protected,
  • corporate managers may be encouraged to be lax in their internal procedures concerning these entitlements (called: ‘moral hazard’), knowing that some support will be available to employees,
  • the scheme may encourage the Phoenix Company syndrome in which a company, having gone into liquidation, reappears under another name with the same managers/owners engaged in a similar business, (although legislation discussed below will attempt to limit this),
  • all accrued entitlements may not be paid to employees. Some insolvencies over the past few years have highlighted the other forms of entitlement which can be in part lost due to insolvency. For example the Superannuation Guarantee legislation allows payments made to a fund for the employees to be paid once per year and so can place part of superannuation contributions in jeopardy should a business fail. It has been the case that these contributions and even deductions from employees’ pay, for example, to health insurance schemes can be lost in an insolvency.

On the benefits side, the entitlements protection scheme is likely to:

  • provide a minimum amount of assistance to those who have lost wages but may have less accrued entitlements than longer serving employees,
  • place Australia on par with many other industrialised countries. The lack of an employee entitlement protection scheme vis a vis these countries was noted by the Harmer Report.

The Harmer Report was reluctant to specify what components of entitlements should be protected in any forthcoming protection scheme. In implementing some of the Harmer report's recommendations, the ALP Government did relegate the priority of the Australian Taxation Commissioner to that of  'unsecured creditor' and thus below wage earners via the Insolvency (Tax Priorities) Legislation Amendment Act 1993.

Initial legislative initiatives

A number private members bills have been introduced to the Commonwealth Parliament regarding the issue. These include the Employee Protection (Wage Guarantee) Bill 1998 introduced to the House of Representatives by Ms Janice Crosio MP, in March 1998. See Bills Digest No.182 1997-98, and the Explanatory Memorandum. A similar bill was introduced to the Senate on 19 May 1998 by Senator Forshaw. Mrs Crosio reintroduced the bill in March 1999, however it was withdrawn from the Notice Paper. The bill was amended and introduced in March 2000 as the Employee Protection (Employee Entitlements Guarantee) Bill 2000. See the Explanatory Memorandum. See Employee Protection (Employee Entitlements Guarantee) Bill 2004.

The Employment Security Bill 1998 was introduced to the Senate by Senator McMullan in June 1998. See the Explanatory Memorandum. The Employment Security Bill [No.2] 1998 was introduced by Sen Mackay in May 1998, and the Employment Security Bill 1999 was introduced by Mr Bevis MP, in March 1999.

As a response to the specific problem of the loss of entitlements of NSW Oakdale coal miners, Parliament passed the Coal Mining Legislation Amendment (Oakdale Collieries and others) Act 1999. This Act allowed miners from Oakdale (and the Merrywood Mine, Tasmania) access to the coal mining industry trust fund which accumulates contributions from employers for the cost of long service leave for the industry's workforce. The fund is administered under Commonwealth legislation. The explanatory memorandum for this bill is available here, and there is also a supplementary explanatory memorandum. See also Bills Digest No.50 1999 – 2000. It is important to note that this initiative did not result in a call on Commonwealth funds. The legislation was needed since the fund was a long service leave fund and was not authorised to disburse funds for other purposes.

The Government introduced a Bill to tighten obligations on company directors in the event of a company insolvency. The Corporations Law Amendment (Employee Entitlements) Act 2000 amends the Corporations Law by:

  • introducing a new offence for persons who deliberately enter into agreements or transactions for the purpose of evading payment of employee entitlements
  • allowing a court to order payment of compensation to employees who have lost entitlements because of the agreement or transaction (which breaches the new provision)
  • extending the duty on company directors not to engage in insolvent trading.

The Bill passed the Senate on 10 May 2000 and the House of Representatives on 27 June 2000. There is an explanatory memorandum and Bills Digest No.129 1999-2000 available for this Bill. The report of the Parliamentary Joint Statutory Committee on Corporations and Securities on the Bill is available here.

Proposals for a National Insurance Scheme

An insurance scheme to protect employee entitlements in the event of liquidation or bankruptcy of their employer has been addressed in National Insurance Scheme to Protect Employee Entitlements: Preliminary Feasibility Study - 29 July 1999 by the insolvency firm Benfield Greig, commissioned by the NSW Government. While noting the ACTU calculations of entitlement loss, Benfield Creig also noted that in an 'High' scenario, ie for a period where more than the average number of insolvencies occurred, the annual entitlement loss could be as high as $464 million. As well, the total annual costs of setting up and running a national scheme to cover entitlement loss was likely to vary from $234 million to $598 million, once administration, claims management and capital costs incurred in running such a scheme were factored in.

The ALP has proposed a scheme to fund an entitlement protection scheme by using existing superannuation funds and marginally increasing contribution rates.

The ALP also notes the role of industry trust funds as used in the coal mining industry (and other industries) and appreciates that these could have their roles expanded to cover insolvency matters. The ALP discussion paper is available here.

The ACTU released details of a proposal for a comprehensive national safety net scheme for the protection of employee entitlements in February 2000. The ACTU's National Employees Entitlements Protection Scheme is designed to enable practical and effective comprehensive protection through:

  1. 0.1% levy of wages/salaries on all employers to be paid into a central fund managed by independent body. To assist in start up costs, $50m would be allocated by the Commonwealth to the fund. The $50m reflects the amount the Commonwealth has indicated it would contribute its proposed Basic Payments Scheme,
  2. Companies to be exempted from levy where they demonstrate that they have provided for protection of all employees entitlements by:
  • Participation in industry trust arrangement; and/or
  • Participation in insurance arrangements which meet core ACTU principles.

The ACTU also reported that unions were already campaigning industrially to create trust funds, which once established, "are the most effective means for the protection and portability of entitlements".('Unions in push for employer levy', The Age, 22/2/2000).

By July 1999, the Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union (AMWU) had set up parameters for ‘Manusafe’, an industry-wide trust fund designed to protect employee entitlements such as annual leave, long service leave and redundancy payments.  However the principal manufacturing industry employers’ group, Australian Industry Group has opposed the scheme and advised its 11 000 business members not to participate. In an advice to members of 22 March 1999, AIG suggested the following reasons for opposing the Manusafe scheme:

  • It involves taking substantial amounts of money out of businesses before any obligation to make the payments arise
  • It appears to require employers to make payments that may never become due (eg redundancy and sick leave)
  • The tax implications are unclear
  • Regardless of any employer contribution, the law still imposes a liability on the employer to make direct payments to the employee when they fall due
  • There is no legislation or award underpinning the scheme
  • There is no information on how an employer may withdraw from the fund
  • There is no information as to how contribution rates would be set.

The AMWU made amendments to Manusafe trust deeds to counter these criticisms, but AIG has continued to oppose Manusafe. Without support of the AIG, the Union has determined to include the protection of employee entitlements through Manusafe in its enterprise bargaining claims (‘Bosses reject fund for sacked workers’, SMH 21 July 1999). However clauses addressing the general protection of employee entitlements are becoming more numerous in enterprise agreements. As well, there is some evidence from a survey of employers that after the One.Tel and HIH collapses, the protection of entitlements in a form of a trust instrument or other financial arrangement is becoming more acceptable to employers.

The Employee Entitlements Support Scheme

The former Minister for Employment, Workplace Relations and Small Business, Hon Peter Reith, released operational arrangements for the Employee Entitlements Support Scheme (EESS) on 8 February 2000. This general entitlements scheme operated under an administrative arrangement within the Department of Employment Workplace Relations and Small Business (DEWRSB). It is designed to provide a safety net for workers who lose their jobs due to insolvency and adopts the parameters of entitlement claims payment set out in the 1999 Discussion Paper outlined above.

At a meeting of Workplace Relations Ministers on 27 April 2000, this scheme (requiring a 50 per cent contribution by the States/Territories collectively and a 50 per cent contribution by the Federal Government to a central fund of at least $100 million) was rejected by ministers representing the four Labor States. See press release by the Victorian Minister for Industrial Relations, Monica Gould. At the meeting the Federal Government also announced its rejection of the insurance model as a viable option. The Coalition Government has been unwilling to legislate and finance the alternative universal scheme to meet lost entitlements, without cooperation (and contributions) from the States.

The Minister for Employment, Workplace Relations and Small Business, the Hon Peter Reith, issued a press release and ministerial statement following the meeting. Mr Reith advised that the current EESS scheme which had been used to meet part of the Commonwealth obligations for worker entitlements initially lost in the National Textiles closure, would continue on an administrative basis for possibly up to three years. However, where a State/Territory did not contribute to the financing of a scheme, the Government will limit its compensation to 50 per cent of the calculated entitlement in any consequent claim arising from the State/Territory. In its current form the scheme provides no statutory right of access to the fund by eligible employees.

The Government initially provided $55 million in the 2000-2001 Budget to fund the Employee Entitlements Support Scheme.

Reactions to EESS

National Textiles workers received  full entitlements payments made up of contributions  from the EESS, the NSW Government and the Regional Assistance Program on 23/3/00. However, the legality of the payment was questioned by the Sydney Morning Herald (21/6/00). Mr Reith responded with a press release on 21/6/00.

Initially, no State had  supported the Federal Government's Employee Entitlements Support Scheme. The ALP Conference on 2 August 2000 resolved not to support the Government's scheme requiring top up contributions from the States. See article in The Australian (3 August 2000)

The ACTU Congress (June 2000) called for State Labor Governments to support the scheme under some form of transitional measure as affected workers were losing half of the possible payout. ('Unions in payout call' Australian Financial Review 29/6/00). A press release was issued by Mr Reith on 29/6/00 in which the Minister welcomed the ACTU's support for the scheme. Union concern with EESS has been that the scheme does not adequately address the range of issues concerning employer insolvency and accrued entitlements. Unions also tend to reject the notion that taxpayers should fund accrued entitlements in the case of employer insolvency.

The moves to contract out and privatise functions such as the major utilities (rail, power, water etc) have exacerbated fears of potentially redundant employees that they may lose previously safely accrued entitlements where their employment is ‘transferred’ from the public sector to the private sector and at times when the relevant employer does not win subsequent tenders. A lengthy industrial dispute concerned the preservation of employee entitlements at a train maintenance facility at Auburn, Sydney called Maintrain in July-August 2001. The settlement to this dispute, involving former Prime Minister Bob Hawke as mediator, relied on the use of bank guarantees to protect accrued employee entitlements. Ongoing leave entitlements and future long service leave entitlements will be protected by a trust fund arrangement (but not the Manusafe scheme).

Payments under EESS

The Minister for Employment and Workplace Relations and Small Business, the Hon Tony Abbott MP released a progress report on the Employee Entitlements Support Scheme on 31/01/01: Year One Activity Report and a Rebuttal statement to alternative entitlement schemes and Questions and Answers to the scheme. The reports provide or help to provide the following data.

  • Under the Employee Entitlements Support Scheme some 1650 employees of 104 insolvent firms have been paid a total of $3.1 million in the 12 months to 31 December 2000.
  • 3390 claims had been received from former employees involving 432 insolvent businesses (including non-incorporated businesses).
  • Claims from 127 employees of 42 businesses have been refused because the eligibility criteria had not been met.

New Entitlement Schemes: SEES (Ansett) and GEERS

Ansett Employees

Ansett Airlines group was placed under administration on 12 September 2001 (‘Administrators Called In’ The Age, 13/9/01). Ansett groups direct staff number was about 16 000 and 45 000 persons appear to be involved in the provision of services/supplies. The Ansett collapse has prompted the Government to reconsider aspects of current arrangements for accessing employee entitlements in the event of employer insolvency. There are four dimensions to the new strategy:

  1. Establishing a new government-funded employee entitlements scheme, to meet the likley costs of Ansett staff terminations
  2. Imposing an airline ticket surcharge of $10.00 to meet the costs of the Ansett terminations and countencing the imposition of similar surcharges in other industries
  3. Ranking wage earners ahead of secured creditors in the access to liquidated assets of failed businesses
  4. Replacing the EESS scheme with a more generous General Employee Entitlements Redundancy Scheme, which is not reliant on the States contributing to the scheme.

The Prime Minister the Hon. John Howard indicated that the Federal Government would guarantee what was owed to Ansett Employees under a separate Special Employee Entitlements Support Scheme. The Hon John Howard MP stated on14/09/01:

  • We are ...  as a government concerned about the employees' entitlements and we would not wish to see them denied their entitlements, and without prejudice to the pursuit of Air New Zealand we would seek to see a situation where essentially what could be called the statutory entitlements of the Ansett employees - that is:
  • - unpaid salary, although there may not be any unpaid salary, I do not know, that's a matter for the liquidator
  • - long service leave,
  • - holiday pay, matters of that nature, those statutory entitlements, that they should be met and

    -  redundancies up to what we loosely called 'a community standard' and that's no more than eight weeks.

  • There are some redundancy arrangements in the Ansett Company that are particularly generous by community standards. Obviously for the government to meet those it would be a very severe budgetary burden and we therefore would consider, if necessary, the introduction of a special levy on airline tickets to fund those obligations.

Ranking Secured Creditors behind Employees

The Coalition briefly flirted with the idea of ranking workers a head of secured creditors in respect of 'new' debts (refer: 'New laws change lending outlook', The Australian Financial Review 18 September 2001). Consultation with the finance industry and the States is needed before any Bill is introduced amending corporations and bankruptcy legislation. The ACTU believed this policy change was an attempt to cover the government’s outlays under EESS/GEERS: the government is attempting to cover its exposure by placing itself in front of the employees to the extent of any monies loaned to a company in external administration. In 2004, the Attorney-General he Hon Phillip Ruddock MP denied to the States that the Federal Government had ever made a commitment to rank employee entitlements above secure creditors. (‘States want ‘workers first’ legislation’, Australian Financial Review, 19 March 2004).

It should be noted that under administrative arrangements of the entitlements scheme, the Government ‘stands in the shoes’ of the wage earner for the purposes of pursuing the employee’s entitlements through the liquidation of company assets. All wage earners supported under EESS/GEERS must agree to this arrangement before any entitlement is paid, therefore government expenditures on employee entitlements may be mitigated via the airline ticket levy and any liquidation of assets..

General Employee Entitlements Redundancy Scheme (GEERS)

The Hon Tony Abbott announced a replacement scheme for EESS. (Companies: Insolvency and Employee Entitlements:: 19 September 2001, Hansard p.30917 and Media Release: ‘Even better arrangements to protect employee entitlements 20 September 2001).

The new scheme – General Employee Entitlements Redundancy Scheme (GEERS) - replaces the existing Employee Entitlement Support Scheme (EESS). EESS will apply to claims lodged in respect terminations (due to insolvency) up to and including 11 September 2001, and GEERS will apply to terminations (due to insolvency) occurring on or after 12 September 2001. The ACTU argues that the SEES scheme will result in considerable losses of redundancy pay for long-serving Ansett employees.

The new scheme will pay:

  • All unpaid wages
  • All accrued annual leave
  • All accrued long service leave
  • All accrued pay in lieu of notice, and
  • Up to 8 weeks redundancy entitlements (as per community standard).

The previous practice of discounting entitlements under EESS by 50% (due to non-participation of most of the States) will be discarded under GEERS. The total government payout cap ($20 000) is removed; a new salary cap of $75 200 (this is the salary rate currently specified under WR Act regulations for excluding 'executives' from the unfair dismissal system) is substituted for the previous $40 000 AWE salary maximum. The 4 week max redundancy payout is replaced by a ‘community standard’ of 8 weeks, although casuals will be excluded. Certain other EESS caps are removed. Media reports have generally been supportive of the new entitlements protection scheme ('Entitled to a better deal', The Australian 26 September 2001) but critical of the proposal to rank secured creditors below wage earners in liquidation processes ('New laws change lending outlook', The Australian Financial Review 18 September 2001).

The table below compares the key features of the key schemes.

EESS from 1/1/00 GEERS from 2/9/01 SEES (Ansett)
up to 4 weeks unpaid wages;

up to 4 weeks annual leave (accrued in the last year and not taken);

Up to 5 weeks pay in lieu of notice (according to the scale in s170CM of the Workplace Relations Act 1996);

Up to 4 weeks redundancy pay (where eligible); and

Up to 12 weeks long service leave (where eligible).

Paid to a maximum salary of $40 000

$20 000 cap on max payout

All unpaid wages

All accrued annual leave

All accrued pay in lieu of notice

Up to 8 weeks redundancy entitlements

All accrued long service leave

Paid to a maximum salary of $75 200

No $20 000 max payout

All unpaid wages

All accrued annual leave

All accrued pay in lieu of notice

Up to 8 weeks redundancy entitlements

All accrued long service leave

na

                                       No salary cap

 Payments under GEERS

The DEWR Annual Report 2002-03 showed that for that year $63.12m was paid to 8700 former employees from GEERS and almost $1.5m under EESS (675 recipients). $5.2 million was recovered from the assets of the failed businesses where advances had been made. The cost of administration (EESS/GEERS) was $5.4m. 67% of claims were processed within 16 weeks of receipt of the claim, although DEWR is attempting to have the bulk of applications processed within 4 weeks of receiving verified data from the appointed insolvency practitioner (DEWR Annual Report p.149-151)

The Minister for Employment and Workplace Relations, the Hon. Kevin Andrews MP has claimed in July 2004, that close to $180 million in employee entitlements assistance payments have been made to more than 30,000 Australians who lost their jobs due to their employer’s insolvency or bankruptcy. ‘Labor Scaremongering Obscures Facts On GEERS’, The Hon Kevin Andrews, Media Release, 15 July 2004.

Other proposals

The Australian Democrats proposed more stringent regulations over the way corporations work by introducing a Corporate Code of Conduct Bill 2000 to the Parliament. In part, this Bill deals with labour issues including recognising international conventions and obliging corporations to meet these, in their relations with employees and unions. ILO Convention 173 deals with the protection of worker claims (employer insolvency) 1992. Also, the Democrats have proposed amendments to the corporations law to enable workers claims to be met by related parties to the employing business.

The ALP proposed its Corporate Responsibility and Employee Security Bill 2001 on 24 September 2001 which rolls together its earlier and current legislative proposals, ie concerning related party transactions which deny employees entitlements in a result of a company failure, the proposal to levy a 0.1 per cent payroll charge along lines similar to the current Superannuation Guarantee Charge system and other measures.

The employee entitlements policy which the ALP will take to the 2004 federal election reads:

Employees deserve the security of knowing that the entitlements they have earned in the course of their work will be paid to them, in full, if their employer becomes insolvent. The Howard Government’s current scheme (GEERS) fails to satisfy this basic principle, as it does not give working Australians the full amount of their entitlements. GEERS also contains loopholes that leave many employees without access to any entitlements at all. Labor will guarantee 100 per cent of employee entitlements, including superannuation. Labor’s scheme will be funded by a levy of 0.1 per cent of payroll for businesses with more than 20 employees. There will be no levy on small business. Labor will not implement a national portable long service leave scheme.

And in chapter 3 of National Platform and Constitution 2004 of the Australian Labor Party, employee entitlements protection in the event of employer insolvency is also addressed in a context of proposing legislation:

‘Protection of employee entitlements in circumstances of company insolvency is an increasingly important aspect of income security. Labor’s legislation to protect employee entitlements will be national and ensure that:

  • 100 per cent of entitlements of employees are protected;
  • payments to employees are timely;
  • additional cost burdens placed on employers are minimised;
  • employers are not required to make additional payments for benefits already protected by trusts or other appropriate means;
  • small business is protected from any additional costs;
  • corporations law is amended to enable recovery of assets in circumstances where the use of corporate structures has the effect of denying workers their entitlements; and
  • entitlements are deem to be a debt for the purpose of insolvency, and courts are enabled to recover entitlements from related companies.’ [Ch3, para 73]

At the time of this update, the Coalition had not updated its policy on employee entitlements.

Standards for Notice of Termination and Redundancy

Federal award standards on notice of termination (or pay in lieu) and redundancy pay were determined in 1984 in the Australian Conciliation and Arbitration Commission in an award test case called the Termination, Change and Redundancy Case 1984 (TCR case). The Industrial Relations Commissions of the States have almost uniformly followed the federal standard for state awards, and so redundancy pay at 8 weeks maximum can be fairly described as a safety net community standard. However the TCR standard has been reviewed in the federal jurisdiction and in the NSW (1994) and (in 2003) Qld state jurisdictions increasing the award redundancy pay maximum to 16 weeks of service. A similar claim is before the WA Industrial Relations Commission (August 2004).

Comment

While a federal election is set for October 2004, the reality is that even with an ALP victory, a form of the GEERS arrangemsents is likely to be in place for some time. The components most likely to change concern the quantum of redundancy paid (ie removal of the GEERS cap), the current salary cap and superannuation. Meanwhile unions may well continue to pursue enterprise and industry arrangements to preserve entitlements in trust funds or some other arrangements given the scale of entitlement loss in recent insolvencies. Finally, it also fair to note a more pervasive reliance placed on industrial awards in generating legally enforceable entitlements by those involved in the administration of insolvent companies, before liability is accepted.

Other Useful Sites

The Australian Securities and Investment Commission

The Insolvency and Trustee Service

A paper by the NSW Parliamentary Library Research Service analyses corporate insolvency and subsequent calls for reform.

For copyright reasons some linked items are only available to Members of Parliament.

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