Meeting employee entitlements in the event of employer insolvency

4 April 2011

Steve O'Neill
Economics Section

Contents

Introduction
  Dimensions of insolvency
Pros and cons for an entitlements protection scheme
ALP response to insolvency
Government proposal
Business response
Initial legislative initiatives
Proposals for a National Insurance Scheme
The Employee Entitlements Support Scheme
Reactions to EESS
Entitlement schemes: SEES (Ansett) and GEERS
Ansett employees
General Employee Entitlements Redundancy Scheme
Ranking secured creditors behind employees
Payments under EESS and GEERS
GEERS under the Rudd and Gillard Governments
Related developments in 2011
GEERS budget
GEERS allocations and outcomes
Other reforms relating to insolvency and entitlements
Assessment

Introduction

The issue of corporate insolvency and loss of accrued workers' entitlements (usually comprising: unpaid wages, accrued annual leave, accrued long service leave and redundancy pay) received public attention after mine closures affecting the Oakdale Colliery (NSW), the Woodlawn mine (NSW) and the Cobar copper mine (NSW) in 1998-99. The waterfront dispute of 1998 involving Patrick Stevedore company group and the Maritime Union of Australia, brought before the Federal Court the use of intra-corporate restructurings so as to create an employing company which supplied labour to the other corporate members, resulting in redundancy of its employees when inter corporate agreements for the supply of labour were terminated.[1] In the Australian Parliament, the Hon. Janice Crosio raised concerns over the loss of employee entitlements following a business insolvency in her electorate in 1996, leading to her presenting a Bill for the protection of employee entitlements via employer insurance in 1998.[2]

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. Other corporate failures of 2001 including One.Tel and HIH Insurance Ltd appear to have resulted in smaller losses. In the case of One.Tel, its short time since start-up meant that accrued entitlements would be low. The efforts of its directors, the relevant union, the Community and Public Sector Union as well as the Federal Government, helped ensure that entitlements were met by initially securing a federal redundancy award. Its purpose was to generate binding redundancy and other entitlements as the individual employment contracts for staff used by One.Tel were silent on redundancy pay.[3]  

In the case of HIH, employee entitlement loss due to competitors taking over parts of a business mitigated the impact on HIH staff. However the relevant union, the Financial Sector Union also commenced redundancy award proceedings with the provisional liquidator advising the Australian Industrial Relations Commission (AIRC) that a legal instrument determining the redundancy entitlement was preferable to the company's non-formal policy on redundancy benefits, as an enforceable legal instrument would be created and thus recognised under company law.[4] However the insolvency of the Ansett group of companies in September 2001 resulted in widespread redundancies and loss of entitlements, as discussed below.

The spate of corporate closures 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

An insolvency, of itself, does not necessarily imply that entitlements of employees are forfeited particularly in the case where a business wind-up is not established and other business strategies may be deployed. In effect, the group of businesses which become insolvent but also result in a loss of accrued entitlements to employees, are a subset of the group of businesses which cease trading in a particular period.

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 on behalf of employees not made to the relevant fund, may also be claimed through the administration process. Provisions of the Bankruptcy Act 1966 (section 109) 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.

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, for example, accrues, since they are contingent upon the event of redundancy of the individual or insolvency of the employer. Thus, employer associations 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 personal leave but this is also infrequent. Thus a relevant legal instrument such as the National Employment Standards of the Fair Work Act 2009 (from January 2010), federal or state awards, or enterprise agreements (and possibly an individual's employment contract) may generate 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 and employers may seek to impose limits on leave accruals to minimise their liabilities.

The Australian Council of Trade Unions (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.[5] In work commissioned by the New South Wales Government, insolvency firm Benfield Greig noted that in a 'high' scenario, that is, 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.[6]

Pros and cons for an entitlements protection scheme

The main problems of setting up an entitlements protection scheme, identified in the Harmer report, 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.

On the benefits side, a general entitlements protection scheme would be likely to:

  • provide a minimum amount of assistance to those who have lost wages but may have less accrued entitlements than longer serving employees, and
  • 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 under an entitlements protection scheme. In implementing some of the Harmer report's recommendations, the Keating 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.

ALP response to insolvency

Issues concerning the loss of employee entitlements in the insolvency of the employer were considered in the 1988 Australian Law Reform Commission's Harmer Report commissioned by the Hawke Government.[7] 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.

A number of private members' bills were introduced to the Australian Parliament regarding the issue. These included the Employee Protection (Wage Guarantee) Bill 1998 introduced to the House of Representatives by the Hon. Janice Crosio MP, in March 1998.[8] Over 1998 and 1999, members of the Australian Labor Party (ALP) introduced private member's Bills (for example the Employment Security Bill 1999) which proposed a system in which employers would take out insurance to protect their employees' entitlements in the event of insolvency. The Bills aimed to strengthen the corporations law and the workplace relations legislation to prevent corporate entities seeking to avoid their responsibilities for their employees' entitlements by asset transfer to associated companies, as occurred in the case of Patrick Stevedores. These Bills were either not debated or lapsed when a federal election was held.

Government proposal

A Ministerial Discussion Paper by the Hon. Peter Reith MP, Minister for Employment, Workplace Relations and Small Business, released in August 1999 discussed the status of employee entitlements in the event of employer insolvency, and the Howard Government's proposals for a safety net scheme.[9] 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 four weeks unpaid wages

–      up to four weeks annual leave (accrued in the last year and not taken)

–      up to five weeks pay in lieu of notice (according to the scale in s170CM of the Workplace Relations Act 1996)

–      up to four 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 ultimately adopted in the form of the Employee Entitlements Support Scheme (see below).

Business response

The peak employers' group, the Australian Chamber of Commerce and Industry (ACCI) 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... 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 ... Option A in the Ministerial Discussion Paper (the Government funded basic payments proposal) was a preferable scheme to Option B (the compulsory insurance scheme). The scheme should operate as a basic safety net and should be capped.

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

... the 50 per cent Commonwealth Government contribution should be drawn from existing general revenue, not from an additional levy or tax on employers and the 50 per cent 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 was not proposed in the paper.

ACCI also rejected the idea that small business should be treated differently, by being excluded from premium levies under the insurance option.[10]

Initial legislative initiatives

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.[11] 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. 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 Howard Government introduced a Bill to tighten obligations on company directors in the event of a corporate insolvency. The Corporations Law Amendment (Employee Entitlements) Act 2000 amended the Corporations Law by introducing Part 5.8A which:

  • introduced a new offence for persons who deliberately enter into agreements or transactions for the purpose of evading payment of employee entitlements
  • allowed a court to order payment of compensation to employees who have lost entitlements because of the agreement or transaction (which breaches the new provision) and
  • extended the duty on company directors not to engage in insolvent trading.[12]

Proposals for a National Insurance Scheme

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 (Ai Group) opposed the scheme and advised its 11 000 business members not to participate.

In 2000, the ALP proposed a scheme to fund an entitlement protection scheme by using existing superannuation funds and marginally increasing contribution rates. The ALP also noted the role of industry trust funds as used in the coal mining industry (and other industries) and appreciated that these could have their roles expanded to cover employee entitlements in the event of employer insolvency.[13]

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 was designed to enable 'practical and effective comprehensive protection' through a 0.1 per cent levy of wages/salaries on all employers to be paid into a central fund managed by an independent body. To assist in start up costs, $50 million would be allocated by the Commonwealth to the fund. Companies could be exempted from levy where they demonstrated that they have provided for protection of all employees entitlements by either participation in industry trust arrangement or participation in insurance arrangements which meet core ACTU principles.[14]

The Employee Entitlements Support Scheme

In light of the pressures and proposals for protecting employee entitlements in the event of employer insolvency, Mr Reith released operational arrangements for the government funded Employee Entitlements Support Scheme (EESS) on 8 February 2000.[15] From the Commonwealth's perspective, this scheme was to operate as an administrative arrangement under the Financial and Management Accountability Act 1997. It was designed to provide a safety net for workers who lose their jobs due to insolvency and adopted 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. The Federal Government also announced its rejection of the insurance model as a viable option. The Coalition Government had been unwilling to legislate and finance a universal scheme to meet lost entitlements, without cooperation (and contributions) from the States.

Mr Reith then advised that the 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 would limit its compensation to 50 per cent of the calculated entitlement in any consequent claim arising from the State/Territory.[16]

Reactions to EESS

National Textiles workers received full entitlements payments made up of contributions from the EESS, the NSW Government and the Federal Government's Regional Assistance Program in March 2000. However, with the legality of the federal contribution being questioned by the media, the Government responded that it had sought advice from the Australian Government Solicitor.[17]

Initially, no state supported the Federal Government's EESS. The ACTU Congress (in 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.[18] Union concern with the 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 ALP Conference on 2 August 2000 resolved not to support the Howard Government's scheme requiring top up contributions from the states.[19] 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 employer does not win subsequent tenders. A lengthy industrial dispute on this issue concerned the preservation of employee entitlements at a train maintenance facility at Auburn, Sydney (Maintrain) in July-August 2001. The settlement to this dispute relied on the use of bank guarantees to protect accrued employee entitlements.

Entitlement schemes: SEES (Ansett) and GEERS

Ansett employees

Ansett Airlines group was placed under administration on 12 September 2001.[20] The Ansett Group's direct staff numbered about 16 000, and 45 000 persons appear to have beeen involved in the provision of services/supplies. The Ansett collapse prompted the Howard Government to reconsider aspects of the EESS arrangements for accessing employee entitlements in the event of employer insolvency. A new strategy to deal with the crisis comprised:

  • establishing a new government-funded employee entitlements scheme, to meet the costs of Ansett staff terminations
  • imposing an airline ticket surcharge of $10.00 to meet the costs of the Ansett terminations and countenancing the imposition of similar surcharges in other industries
  • ranking wage earners ahead of secured creditors in the access to liquidated assets of failed businesses and
  • replacing the EESS scheme with a more generous General Employee Entitlements Redundancy Scheme (GEERS), which was 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 Ansett (SEESA):

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.[21]

The Government, in summary, sought to devise a financial scheme to:

  •  meet the 'most' of the accrued Ansett employee entitlements
  • protect the financial position of the Commonwealth
  • organise a number of loans through the commercial banking sector which would be advanced to Ansett employees in lieu of their accrued entitlements being met from Ansett and
  • finance the monthly costs of these loans by  instituting a levy on airline ticket sales.

In September 2001, federal legislation was passed that introduced a levy on air passenger tickets, bought on or after 1 October 2001, for flights originating in Australia. Collecting the levy was administered by the Department of Transport and Regional Services (DOTARS).[22] The Department of Employment and Workplace Relations (DEWR) was charged with disbursing the SEESA funds by administering a new version of EESS specifically set up for the Ansett employees. At the same time, EESS was replaced by GEERS ie a general purpose entitlements scheme open to other workers. Funds collected from the ticket levy would finance the loan used for SEESA payments to the former employees of companies in the Ansett group. The Government would seek to recoup advances made to the former employees in the Ansett liquidation process. SEESA was designed to ensure that the former Ansett group employees would be paid their following accrued entitlements on the basis of their salaries:

  • unpaid wages
  • annual leave
  • long service leave
  • pay in lieu of notice and
  • redundancy entitlements capped up to the community standard of eight weeks.

This in fact represented a considerable loss of redundancy pay for those employees who had three or more years service.  On the other hand the SEESA scheme was not subject to a salary cap. The value of these entitlements varied significantly between employees. In their third report to creditors, the Ansett administrators initially estimated that unpaid entitlements amounted to $735.8 million. An analysis of entitlements by the Australian National Audit Office (ANAO) showed that the mean value of all employee entitlements owed to Ansett group employees upon termination was about $53 800 and the median was $38 400. While 12 994 terminated employees were paid their entitlements via SEESA, around 9 500 of these would await redundancy payments above the SEESA cap, through the liquidation process. The distribution of entitlements varied widely as could be expected. About 50 workers were owed less than $1 000 each while 120 workers were owed over $250 000 each. The highest individual unpaid entitlement was just over $625 000.[23]

In December 2001, a private sector entity, SEES Pty Ltd (not SEESA), was contracted by the Commonwealth to secure a loan for the purpose of advancing funds to the Ansett administrator. This approach was necessary so that $350 million borrowed for employee entitlements could be paid quickly, given that the revenue forecast of the ticket levy was only $8 million to $10 million per month and would take roughly four years to raise $350 million. The ticket levy would raise $286 million by the time it was terminated in 2003.[24] Most employees received some or all of their SEESA payments in 2002.[25]

General Employee Entitlements Redundancy Scheme

In September 2001, the Hon. Tony Abbott MP, Minister for Employment and Workplace Relations, announced a replacement scheme for EESS. The new scheme the General Employee Entitlements Redundancy Scheme (GEERS), replaced the EESS. The EESS continued to apply to claims lodged in respect terminations (due to insolvency) up to 11 September 2001, and GEERS applied to terminations (due to insolvency) occurring on or after 12 September 2001.

The new scheme met claims for:

  • all unpaid wages
  • all accrued annual leave
  • all accrued long service leave
  • all accrued pay in lieu of notice and
  • up to eight weeks redundancy entitlements (as per community standard).[26]

The previous practice of discounting entitlements under EESS by 50 per cent (due to non-participation of most of the States) was discarded under GEERS. The total government overall payout cap of $20 000 was removed; a new salary cap of $75 200 was substituted for the previous $40 000 salary maximum. The four week maximum redundancy payout was replaced by a 'community standard' of eight weeks.

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

EESS from 1/1/2000

GEERS from 2/9/2001

SEES (Ansett)

Up to 4 weeks unpaid wages

All unpaid wages

All unpaid wages

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

All accrued annual leave

All accrued annual leave

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

All accrued pay in lieu of notice

All accrued pay in lieu of notice

Up to 4 weeks redundancy pay (where eligible)

Up to 8 weeks redundancy entitlements

Up to 8 weeks redundancy entitlements

Up to 12 weeks long service leave (where eligible)

All accrued long service leave

All accrued long service leave

Paid to a maximum salary of $40 000

Paid to a maximum salary of $75 200

No salary cap

$20 000 cap on maximum payout

No capped payout

No capped payout

Ranking secured creditors behind employees

The Howard Government briefly flirted with the idea of ranking workers ahead of secured creditors in respect of 'new' debts.[27] Consultation with the finance industry and the States is needed before any Bill is introduced amending corporations and bankruptcy legislation. The ACTU believed the policy change was an attempt to cover the Government's outlays under EESS/GEERS. The Government was 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. It should be noted that under administrative arrangements underpinning the entitlements schemes, 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 benefitting from 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 in the case of SEESA and any liquidation of assets. In 2004, the then Attorney-General, the Hon Phillip Ruddock MP, denied to the states that the Federal Government had ever made a commitment to rank employee entitlements above secured creditors.[28]

Payments under EESS and GEERS

The then Minister for Employment and Workplace Relations, the Hon. Kevin Andrews MP, claimed in July 2004 that close to $180 million in employee entitlements assistance payments had been made to more than 30 000 Australians who lost their jobs due to their employer's insolvency or bankruptcy.[29]

GEERS was improved in 2005 by providing:

  • assistance for underpaid wages in the three month period prior to the date of employer insolvency
  • coverage for employees who resign or whose employment is terminated up to six months prior to the date of their employer's insolvency
  • assistance that recognised a claimant's entitlement to notice of termination under their terms of employment and
  • assistance for previously ineligible claimants by aligning the definition of 'excluded employee' under GEERS with the relevant definition under the Corporations Act. These changes applied to insolvencies that occurred on or after 1 November 2005 and applied to 'working directors'.[30]

The Howard Government announced these improvements as part of a suite of measures to modernise Australia's insolvency laws to implement the integrated package of insolvency reforms announced by the Government in October 2005. 

On 22 August 2006, Mr Andrews announced a further extension to GEERS. The amount of unpaid redundancy pay available under GEERS was doubled from eight weeks to a maximum of 16 weeks, following the AIRC's new federal redundancy award standard of 2004. This change was applicable to all GEERS claims made as a result of liquidations or bankruptcies that occurred on or after 22 August 2006.[31]

GEERS under the Rudd and Gillard Governments

The main change to the GEERS scheme under the Rudd Government concerned changes to GEERS Operational Guidelines to allow claims for compensation for part wages withdrawn from employee's pay but not forwarded to superannuation funds as employee contributions.

The Hon Simon Crean MP, then Minister for Education, Employment and Workplace Relations, announced in the lead-up to the 2010 federal election that GEERS funding would be increased to cover a higher standard of redundancy pay than hitherto had been the case at an additional cost of $60 million over four years.[32] From 1 January 2011 employees of insolvent businesses will be able to claim under Labor's Fair Entitlements Guarantee:

  • up to four weeks severance pay for each year of service, calculated on annual wages of up to $108,300
  • three months unpaid wages
  • unpaid annual leave
  • long service leave and
  • up to five weeks unpaid wages owed in lieu of notice.[33]

The Gillard Government intends to introduce legislation in 2011 to implement the new arrangements.[34]

The Ai Group has criticised key elements of the federal government's proposed GEERS reforms and questioned its move to announce the changes ahead of its proposed consultation process. Ai Group chief executive Heather Ridout said "the idea that you introduce a change and consult about it afterwards on an issue as important as this is a muddled approach." She said the reforms were unfair, risky, would create major moral hazards, and might end up costing significantly more than the (additional) $60.8 million over four years the federal government has budgeted:

Ai Group is very concerned that the collapse of even one large company could lead to a major funding shortfall and could lead to union calls for the publicly funded scheme to be replaced with a scheme funded by an employer levy ... Replacing the recognised community standard of a maximum of 16 weeks with this extremely generous redundancy entitlement would undoubtedly fuel union claims for employers to agree to such redundancy benefits in enterprise agreements with a consequent increase in disputation and reduction in the ability of companies to restructure to remain competitive.[35]

Related developments in 2011

Through the Government's proposed Securing Super reforms announced as part of the 2010 federal election, employees are to receive:

  • information on their payslips about the amount of superannuation actually paid into their  account and
  • quarterly notification from their superannuation fund if regular payments cease.

The Australian Tax Office and the Fair Work Ombudsman will be given stronger powers to ensure businesses pay their employees' Superannuation Guarantee through:

  • an extension of the directors' penalty regime to cover unpaid superannuation entitlements and
  • improving the capacity of the ATO to conduct proactive compliance activity and investigate workers' complaints.

The Australian Securities and Investment Commission is to be given stronger powers to place companies into liquidation when they have been abandoned by their directors to ensure employees can get swifter access to their unpaid entitlements. The problem of the phoenix company problem was noted in the Coombs Royal Commission on the building and construction industry, that is where a company fails to meet its financial obligations, is placed in liquidation but may re-appear under another name with similar directors engaged in similar activities.[36] The Government has called upon a number of government agencies to consider options to curb the problem and Treasury has released a discussion paper. [37] The Government's response to the discussion paper will examine:

  • an extension of the promoter penalty regime to include schemes to avoid payment of a tax and
  • an extension of the director penalty regime to include PAYG(W), the Superannuation Guarantee and indirect taxes.

GEERS budget

The budget for GEERS has been averaging about $80m annually for some years (sometimes less). However the Rudd Government's economic stimulus package included an increase for GEERS funding. The 2008-09 Budget initially provided $82.8 million for the scheme. The Government then sought an additional $70 million due to the insolvency of the childcare business, ABC Learning, taking total GEERS funding to $152.8 million.[38] The GEERS budget for 2010-11 was set at $178 million, although forward estimates show this figure to be falling back to its average band following recovery from the Global Financial Crisis and some account will need to be made for the impact of the Fair Work Entitlements Guarantee for the second half of the 2010-11 financial year. The number of eligible claims receiving payments under GEERS appears to be averaging about 12 000 per year, with 15 565 claims being met in 2009-10, compared to 9 488 in 2006-07 and 11 027 in 2008-09. The average cost of assistance per claim in 2009-10 was $9 897.[39] The Fair Work Entitlements Guarantee will add at least $16 million to the GEERS budget annually.

GEERS allocations and outcomes

GEERS (from Sept 2001)

Administered appropriations

Budget Allocation $m

(Estimated) Outcome $m

2001–02

40 (EESS)

68.8

2002–03

85.1

73.1

2003–04

74.3

57.9

2004–05

75.9

60.9

2005–06

68.1

49.8

2006–07

85.4

85.4

2007–08

86.5

67.98

2008–09

82.8

135.3

2009–10

106.4

170.0

2010–11

178.3

 

Source: Departmental Portfolio Budget Statements[40]

Other reforms relating to insolvency and entitlements

As noted, the priority of the Tax Office was placed below wage earners following an amendment in 1993 by way of the Insolvency (Tax Priorities) Legislation Amendment Act 1993. The Act amended the Income Tax Assessment Act 1936. It removed the Commissioner of Taxation's priority in the winding up of companies so the Commissioner now ranks as an unsecured creditor, allowing unpaid wages to be paid ahead of the Commissioner.

Corporations Law Amendment (Employee Entitlements) Act 2000. As noted earlier, the provisions of this Act make company directors liable to compensate employees where the directors have entered into uncommercial transactions with the intention of avoiding payments to employees.

Corporations Amendment (Repayment of Directors' Bonuses) Act 2003. Criticism of company directors' remuneration has focused on a number of aspects namely the quantum of remuneration, the level of disclosure to shareholders and the market generally and in some cases, the apparent lack of a relationship between reward and performance. The Howard Government amended the law so that where bonuses are paid in the circumstances of a dramatically failing company financial position, that bonus money will be refundable and can be used to meet the lawful and legitimate entitlements of workers and also the other creditors of the company. The origin of the amendment lies in the collapse of telecommunications carrier One.Tel in May 2001. Shortly after One.Tel went into administration it was alleged that the company's co-managing directors Mr Keeling and Mr Rich had each received $7.5 million in bonuses in a year where the company had lost $291 million.

The Parliamentary Joint Committee on Corporations and Financial Services issued a report entitled Corporate insolvency laws: a stocktake, 2004.[41] Later, the Corporations Amendment (Insolvency) Act 2007 made certain amendments to the corporations law's insolvency provisions concerning GEERS. Employees are not entitled to benefits under the GEERS scheme if the DOCA (Deed of Company Arrangement) does not include the priorities specified in the Corporations Act in relation to the entitlements to be paid to employees in a liquidation. The priority provided for in a liquidation will generally be observed in a deed of company arrangement (DOCA).  To enhance the standing of employee creditors in voluntary administrations, the Corporations Amendment (Insolvency) Act amends the Corporations Act to make it mandatory for a DOCA to preserve the priority available to employee creditors in a winding up unless employees agree to waive their priority.

Assessment

Most of the issues raised at the time the EESS scheme was developed are current some ten years later. The required process of administration of an insolvent business and the assessment of its debts means a considerable delay for employees to receive advances under GEERS. The experience of the Ansett collapse revealed a propensity on behalf of the Commonwealth to sure up its financial base by use of the airline ticket levy where early outlays to employees under a Commonwealth scheme could not be quickly realised through any subsequent administration and liquidation process. Thus some sympathy may reside in the minds of public sector officials for the various union proposals for industry trust funds to protect employee entitlements or other devices such as charges against individual companies against accrued employee entitlements. However the difficulties of implementing such protection arrangements uniformly across hundreds of thousands of separate enterprises probably continue to act as a reality check. Perhaps the broader use of portable leave schemes (evident in the Oakdale mine solution) could serve at some time as de facto entitlement preservation devices. On the positive side, calls on GEERS funds appear to have been less than the higher entitlement loss estimates calculated in the late 1990s. The financial collapse of the ABC Learning child care centres in 2009 did not have the financial consequences of the earlier Ansett collapse and this is probably the basis for widening the redundancy pay formula from January 2011. On the negative side, the scheme continues not to apply to non residents.



[1].      The Federal Government met the costs of stevedore redundancies through bank loans the repayments of which were met through a levy on shipping containers. Federal Court of Australia, Maritime Union of Australia & Others v Patrick Stevedores No. 1 Pty Ltd (under administration) (ACN 003 621 645) & Others, 1998 FCA 378, viewed 14 February 2011,
http://www.austlii.edu.au/au/cases/cth/FCA/1998/378.html

[2].      J Crosio, 'Exicom', House of Representatives, Debates, 6 May 1996, p.356, viewed 22 February 2011,
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[3].      Australian Industrial Relations Commission, PR904915, 28 June 2001.

[4].      Australian Industrial Relations Commission, PR904332, 18 May 2001.

[5].      P Robinson, 'The shirt off their backs' The Age, 4 September 1999, viewed 14 February 2011,
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[6].      Benfield Greig, National Insurance Scheme to Protect Employee Entitlements: preliminary feasibility study - 29 July 1999, viewed 14 February 2011, http://dpl/Books/2001/NatInsSchProtEmpEntit.pdf.

[7].      Australian Law Reform Commission, General Insolvency Inquiry; Report No. 45, 1988,  viewed 14 February 2011,
http://www.austlii.edu.au/au/other/alrc/publications/reports/45/.

[8].      C field, Employee Protection, (Wage Guarantee) Bill, 1998,  Bills digest no.182 1997-98, Parliamentary Library, Canberra, 1998, viewed 14 February 2011
 http://www.aph.gov.au/library/pubs/bd/1997-98/98bd182.htm.

[9].      P Reith, The protection of employee entitlements in the event of employer insolvency, Ministerial discussion paper, 1999, viewed 14 February   2011, http://dpl/Books/2000/ReithProtEmpEntAug99.pdf.

[10].    Australian Chamber of Commerce and Industry, ACCI Submission in response to the federal government discussion paper, 'The protection of employee entitlements in the event of insolvency', unpublished, September 1999.

[11].    S O'Neill and B Pulle, Coal Mining Legislation Amendment (Oakdale Collieries) Bill 1999, Bills digest no. 50 1999-2000, Parliamentary Library, Canberra, 1999, viewed 23 February 2011,
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD050.htm.

[12].    M Tapley, Corporations Law Amendment (Employee Entitlements) Bill 2000, Bills digest no. 125,  1999-2000, Parliamentary Library , Canberra, 2000, viewed 23 February 2011,
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000bd125.htm..

[13].    Australian Labor Party, 'Protecting employee entitlements: a better alternative : the national employee entitlements guarantee model' 2000,  viewed 15 February 2011, http://parlinfo.aph.gov.au/parlInfo/
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[14].    P Robinson, 'Unions in push for employer levy', The Age, 22 February 2000, viewed 15 February 2011,
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[15].    Current and previous operational arrangements pertaining to entitlement schemes can be found at
http://www.deewr.gov.au/WorkplaceRelations/
Programs/EmployeeEntitlements/GEERS/
Common/Pages/OperationalArrangements.aspx
.

[16].    P Reith, 'Federal government confirms employee entitlements support scheme and not compulsory insurance', media release, 27 April 2000, viewed 15 February 2011
http://parlinfo.aph.gov.au/parlInfo/search/
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..

[17].    P Reith, 'Sydney Morning Herald is wrong on National Textiles', media release, 21 June 2000, viewed 15 February 2011,  http://parlinfo.aph.gov.au/parlInfo/search/
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[18].    C Martin, 'Unions in payout call', The Australian Financial Review, 29 June 2000,  http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FVFU16%22.

[19].    M Bachelard, 'Lost entitlements decision put off', The Australian, 3 August 2000, viewed 15 February 2011
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[20].    P Hudson, 'Hope fades as administrators called in', The Age, 13 September 2001, viewed 15 February 2011,
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[21].    J Howard, 'The terrorist attack in the US and the collapse of Ansett', Transcript of a press conference, 14 April 2001, viewed 15 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
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[22].    Air Passenger Ticket Levy (Collection) Act 2001 and the Air Passenger Ticket Levy (Imposition) Act 2001.

[23].    Australian National Audit Office,  'Special Employee Entitlements Scheme for Ansett Group Employees (SEESA) Department of Employment and Workplace Relations and Department of Transport and Regional Services', Audit Report No.21 2003–04, viewed 15 February 2011, http://www.anao.gov.au/uploads/documents/2003-04_Audit_Report_21.pdf.

[24].    Ibid. p.130.

[25].    Ibid. p.115. Insolvency practitioners Korda-Mentha for the Ansett group have secured over $1 billion from the Ansett liquidation and estimate that employees have received $718 million of the $758 million owed. They estimate that employees with entitlements outstanding will receive at least a further $4.9 million over 2011-2012: G Easdown, 'Ansett victims get cash', Herald Sun, 14 February 2010, viewed 21 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/
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.

[26].    T Abbott, 'Even better arrangements to protect employee entitlements', media release, 20 September 2001, viewed 16 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
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[27].    F Buffini and M Fenton Jones, 'New laws change lending outlook', The Australian Financial Review, 18 September 2001, viewed 15 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
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[28].     M Priest, 'States want 'workers first' legislation', The Australian Financial Review, 19 March 2004, viewed 15 February 2011,  http://parlinfo.aph.gov.au/parlInfo/search/
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[29].     K Andrews, 'Labor Scaremongering Obscures Facts On GEERS', media release, 15 July 2004,  viewed 16 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
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[30].    K Andrews 'Government strengthens  commitment to protect employee entitlements', media release, 12 October 2005, viewed 16 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
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[31].    K Andrews, 'Employee entitlement protections boosted', media release, 22 August 2006, viewed 16 February 2011,
http://parlinfo.aph.gov.au/parlInfo/
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[32].    T Sweetman, 'Workers earn the right to justice', The Courier Mail, 30 July 2010, viewed 16 February 2011,
http://parlinfo.aph.gov.au/parlInfo/
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[33].    J Collins, 'Address to Australian Industry Group personnel and industrial relations conference', transcript of address, 18 October 2010,  viewed 17 February 2011,
http://parlinfo.aph.gov.au/parlInfo/
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[34].    J Collins, 'More redundancy pay for Australian workers', media release, 16 November 2010, viewed 23 February 2011, http://parlinfo.aph.gov.au/parlInfo/search/
display/display.w3p;query=Id%3A%22media%2Fpressrel%2F492017%22
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[35].    'AiG warns of 'moral hazards', Workplace express.com.au, 18 November 2010, viewed 16 February 2011.

[36].    T Cole, Final Report of the Royal Commission into the Building and Construction Industry, Commonwealth of Australia, Canberra, February 2003, viewed 23 February 2011, http://www.royalcombci.gov.au/hearings/reports.asp (Vol 8).  

[37].    J Gillard and Labor, 'Protecting workers' entitlements package', 25 July 2010, viewed 18 February 2011, http://parlinfo.aph.gov.au/parlInfo/download/library
/partypol/NQGX6/upload_binary/nqgx60.pdf;fileType=application%
2Fpdf#search=%22securing%20super%22
;  Australian Government, Action against fraudulent phoenix activity, Proposals Paper, November 2009, viewed 18 February 2011,
http://www.treasury.gov.au/documents/1647/PDF/Phoenix_Proposal_Paper.pdf.

[38].    J. Gillard, Government seeks additional $70 million for redundant workers', media release 15 March, 2009. See also: Senate Standing Committee on Education, Employment and Workplace Relations Legislation Committee, 2 June 2009, p. 83, viewed 9 February 2011: http://parlinfo.aph.gov.au/parlInfo/search/display/
display.w3p;query=Id%3A%22committees%2Festimate%2F12056%2F0007%22
.

[39].    Department of Education, Employment and Workplace Relations, Annual Reports. viewed  16 February 2011, http://www.deewr.gov.au/Department/Publications/Pages/CorporatePublications.aspx.

[40].    These figures are administered allocations/outcomes sourced from departmental Portfolio Budget Statements of the Department of Education, Employment and Workplace Relations (and its predecessor departments), viewed 18 February 2011, http://www.deewr.gov.au/Department/Budget/Pages/home.aspx. In addition, $5-$7m pa has been consumed in departmental resource costs. On average, $20 million or less is returned to the Commonwealth annually through the proceeds of liquidations.

[41].    Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: a stocktake, June 2004, viewed 23 February 2011, http://www.aph.gov.au/senate/committee/
corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf
.

 

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