Bills Digest No. 182  1997-98 Employee Protection (Wage Guarantee) Bill 1998


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

Employee Protection (Wage Guarantee) Bill 1998

Date Introduced: 23 March 1998

House: House of Representatives

Presented by: Mrs Crosio

Commencement: On a date fixed by Proclamation, or if such a date is not fixed within 6 months after the Bill receiving the Royal Assent, at the end of that period.

Purpose

To require employers to take out insurance to protect the entitlements of their employees upon the employer becoming insolvent (as defined).

Background

The protection of workers wages and other conditions is not a new phenomena. As early as 1836 the earlier protection for a domestic workers wages for the previous six months under Napoleonic Law was extended to cover other workers under the Napoleonic Code. The preference for workers wages, which ranked fourth after court, funeral and terminal illness expenses, was based on the inability of workers to demand that they be paid before services were performed, whereas commercial suppliers could demand payment before goods or services were provided and that whereas other creditors could spread their risk between various debtors, the employee was (is) unable to do the same. (1)

The protection of wages was endorsed by the International Labour Organisation (ILO) in Convention No. 95 which was adopted in 1949. Wages was given a wide definition in Article 1 of the ILO Convention and Article 11 provides that upon bankruptcy or judicial liquidation, workers employed by the business are to be privileged creditors and also that the priority to be given to wages are to be determined by national laws or regulation. While Australia has not ratified Convention No. 95, it had, as at 1 January 1994, been ratified by 91 countries. Australia is not pursuing ratification of the Convention.(2) The ILO adopted an updated Convention concerning workers' rights on insolvency in June 1992 (Convention No. 173). This Convention provides for national laws to rank workers' claims to have a high level of priority and to rank above those of the State and social security system (Part II). Part III of the Convention provides for the establishment of a guarantee institution to protect workers' claims upon insolvency and covers wages, holiday pay, severance pay and other entitlements. The Convention provides that it may be implemented by means of insurance (Article 11). Australia ratified the Convention on 8 June 1994 but only accepted Part II of the Convention and not Part III.

In 1993, the Corporations Law and the Bankruptcy Act 1966 were amended to change the order of priority on insolvency to remove the priority for the Commissioner of Taxation. In considering the order of priority established under the Corporations Law the distinction must be made between secured and unsecured creditors. Secured creditors will have a right to the assets and property of the company which is based on the terms agreed between the parties. After the secured creditors have been satisfied, and if there are any assets remaining, the Corporations Law will come into effect, section 556 of which provides that the priority of unsecured creditors will be:

  • expenses incurred by the relevant person, eg the liquidator or administrator, in continuing the operation of the business or the costs in winding up the business;
  • debts incurred in the official winding up of the company;
  • remuneration of an auditor appointed for the winding up of the company;
  • other expenses incurred in the winding up of the company;
  • wages and superannuation payments due to the employees of the company (this is, basically, limited to $2 000 by subsection 556(IA) of the Corporations Law);
  • amounts due in respect of injury compensation;
  • subject to a maximum of $1 500, amounts due for leave accrued before insolvency and payable under an industrial agreement; and
  • retrenchment payments payable to employees.

After these amount have been paid, if paid, unsecured creditors will be entitled to a claim on the property remaining. Due to the financial limits imposed by the Corporations Law it is likely that many workers' entitlements would not be fully satisfied under the Corporations Law.

As the above illustrates, employee entitlements take a relatively low level in the matters to which the assets of an insolvent company are to be applied. Where entitlements exceed the amount prescribed under the Corporations Law the amount due to the employee will rank with other unsecured creditors and the chances of full repayment of their entitlements will be remote (if all creditors, including unsecured creditors, were able to receive full payment the company would not be insolvent).

There are a number of international comparisons that can be made regarding wage guarantee systems, especially in European countries. In October 1980, the European Community adopted a directive regarding the protection of employees in the case of their employer's insolvency. The following is a brief summary of some schemes in operation. However, it should also be noted that some of the countries under consideration have a contributory social security system and that wage protection may be added to such contributions.

Austria: There is a central fund financed through a levy on employers. A ceiling is placed on the amount of wages that can be recovered, although wages is given a wide definition and included matters such as severance pay. There is a limit on the period of time for which wages are covered (ie it will only compensate for entitlements arising over the past 3 years). The levy is collected as part of the employer's social security contributions.

Belgium: This country has a Compensation Fund from which a worker's entitlements are payable if the employer becomes insolvent or closes without paying the worker's entitlements. There is a limit on the maximum amount payable to each eligible worker. The Fund is financed by compulsory employer contributions and different rules apply to smaller businesses (the employer's contributions are lower and the guarantee applies only where the business becomes insolvent). To be eligible, a worker must have been employed by the enterprise for at least a year.

United Kingdom: The U.K. fund is known as the Redundancy Fund. The fund applies in conditions other than insolvency, such as when an employer is unable to pay entitlements, but is principally used in cases of employer insolvency. Entitlements under the Fund include back pay, limited to 8 weeks, pay in lieu of notice, holiday pay to a limit of 6 weeks and any payment due for unfair dismissal. There is also a limit on the maximum amount payable in respect of each week subject to the claim. The Fund is financed by employer contributions which are added to national insurance contributions.(3)

Questions have been raised regarding the Commonwealth's Constitutional power to legislate for an insurance scheme that requires all employers to contribute to a fund protecting the entitlements of employees of insolvent businesses. There is little doubt that the corporations power contained in paragraph 51(xx) of the Constitution will allow the Commonwealth to require employers who are corporations to contribute to such a scheme, but this would not encompass other employers, such as individual enterprises, partnerships and trusts. Paragraph 51(xiv) of the Constitution gives the Commonwealth power to legislate in respect of:

insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned.

However, the power appears to be currently restricted to the ability to regulate insurance offerers rather than extend to the requirement that a person take out compulsory insurance (compulsory third-party traffic insurance is imposed under State/Territory laws and do not rely on this power).(4) Against this view it may be argued that the full extent of the insurance power has yet to be tested and may extend to the requirement of employers making compulsory contributions to insurance for their employees.

There would appear to be an alternative method of ensuring that all employers contribute to insurance to protect employees entitlements. Both the training and superannuation guarantee schemes are based on the use of the taxation power to ensure that if an employer does not make a sufficient contribution in respect of these matters (the rate for the training guarantee is currently 0%) then they will be obliged to pay an equal amount as an additional charge to the government, which then may direct the amount collected to the appropriate scheme. In the challenge to the training guarantee scheme, which preceded the superannuation guarantee scheme, the charge imposed was considered to be a tax even though the raising of revenue was a secondary objective of the laws.(5) It would therefore appear quite practicable to impose a charge (tax) on employers who fail to contribute the required amount to the insurance of employee entitlements if an employer becomes insolvent. As with the superannuation guarantee scheme the range of employers covered could be wide and cover all employers and not just companies.

In the first reading speech for the Bill, the Member for Prospect gives a number of examples of recent cases where worker's entitlements are at risk, including:

  • Woodlawn mine: 160 workers with entitlements of approximately $6 million;
  • Cobar mine: 270 workers with entitlements of approximately $6 million;
  • Grafton meatworks: 250 workers with entitlements of approximately $3 million;
  • Rockhampton and Yeppoon nurses: 157 workers with entitlements of approximately $1.4 million; and
  • Sizzler restaurants: 2 000 workers with entitlements of approximately $2 million.(6)

There are no figures available on the total number of businesses that cease operating while owing funds to their former employees and, likewise, there is no way of knowing the average amount of entitlements received by workers of such businesses through their position as creditors of the business.

While expressing support for the general position of protection of worker's entitlements on insolvency, the Government has not supported this Bill. In a Press Release dated 6 April 1998, the Minister for Workplace Relations and Small Business announced that the matter would be referred to the Labour Ministers Council, citing the fact that many of the entitlements are based on State, rather than Federal, awards and that business would be consulted on the matter. The Press Release also questioned the Constitutional validity of the Bill, the entitlements protected and 'that the Bill has an unduly broad application' due to the wide definitions of bankruptcy and insolvency. The Labor party has indicated that it is willing to accept amendments to the Bill.(7)

In relation to the waterfront dispute, Bills were introduced the day after Patrick stevedores retrenched their employees with the aim of guaranteeing the redundancy payments of the dismissed workers. In the second reading speech for the Stevedoring Levy (Collection) Bill 1998 the Minister for Workplace Relations and Small Business indicated that the purpose of that Bill was to allow the funding of redundancy payments that the businesses which previously employed the workers could not currently afford. The Minister stated:

The government also wants to assist restructuring by facilitating access to redundancy funding required to reduce excess labour arising from industry restructuring.(8)

Besides the Corporations power, that legislation can also be supported by the Trade and Commerce Power contained in paragraph 51(i) of the Constitution.

It may also be noted that the Law Reform Commission has proposed that courts be given a wide discretion to order that a company that is, or was, a related company in respect of the insolvent company pay the liquidator all or part of an amount claimed 'if it satisfied that it is just'.(9) This would allow tracing through a corporate group to find funds to satisfy workers entitlements.

Main Provisions

The Bill will not apply to employees of the Commonwealth, State, Territory or local governments (clause 4).

Clause 6 contains a number of definitions of terms used in the Bill, including those for:

  • Contract of employment: this is given a wide meaning and includes a contract of apprenticeship; a contract under which a person works for commission; a contract for the performance or presentation of music, play, dance, sport, physical or other personal skills; and a contract in which a person performs work in connection with the making of a tape, film, disc, or television or radio broadcast;
  • Employer: a person liable to make payment under a contract of employment and includes a former employer;
  • Employee: a person who provides services under a contract of employment;
  • Wages: any payment made, or due to be made, by an employer to an employee under a contract of employment.

Insolvency is defined in clause 7 to occur when a person is unable to pay debts as they fall due. For an individual this will include, but is not limited to, where they become bankrupt or assigned their remuneration to creditors and for a company will include, but is not limited to, cases where the company has made an arrangement with creditors, a receiver has been appointed or a liquidator has been appointed. The inability to pay debts as they fall due is the central part of the definition and gives the term a wide meaning.

Wage protection insurance must protect an employer's workforce on the event of insolvency of the employer and must be taken out from an approved insurer (clause 8). The matters that must be protected are covered by clause 9 and are:

  • unpaid wages;
  • liability arising from termination of employment without notice or insufficient notice;
  • annual and long service leave; and
  • liability to repay any amount paid by the employee to the employer for training.

Employers, other than exempt employers, will be required hold wage protection insurance and the maximum penalty for a failure to do so will be a fine of 150 penalty units (a penalty unit is currently $110) (clause 10). Exempt employers will be those where the employee is not employed for the purpose of trade or commerce and the employer's annual payroll does not exceed $7 800. The calculation of the annual payroll is to be made in accordance with the regulations (clause 11).

Division 3 of Part 3 of the Bill (clauses 12 to 15) provides for the exchange of information, including:

  • employers being obliged to provide information to employees regarding the insurance;
  • insurers being required to notify the Insurance and Superannuation Commissioner (the Commissioner) of the issue of a policy; and
  • the Commissioner providing information to an employee on request.

Part 4 of the Bill (clauses 16 to 22) deals with approved insurers. An approved insurer will be one which enters into an agreement with the Commissioner that the insurer will accept all premiums at a rate not exceeding the maximum set by the Commissioner; undertakes to contribute to the costs of the nominal insurer and the bad risk scheme (see below); and is entitled to receive payments under the bad risk scheme.

The Commissioner is to be the nominal insurer which will be responsible for claims where the employer is an exempt employer or where the employer failed to hold insurance under the Bill (clause 18). Approved insurers must contribute to the nominal insurer on the basis determined by the Commissioner, who is to ensure that the contribution is based on being fair and equitable and, having regard to premium income and contributions to the nominal insurer, is approximately the same for each approved insurer (as the Bill does not refer to a percentage amount being approximately the same, presumably this is a reference to a dollar amount) (clause 19).

Clause 20 provides that the Commissioner may (not must) establish a bad risk cross-subsidisation scheme under which bad risks are 'fairly apportioned between all approved insurers'. A bad risk will arise where the employer becomes insolvent within a year of taking out wage protection insurance or is so classified by the Commissioner. Contributions to the scheme will be on the same basis as described for clause 19. Approved insurers will be entitled to payment under the scheme in relation to bad risks 'to the extent fixed under the scheme' (clause 22).

Part 5 of the Bill contains administrative provisions relating to the making of, and response to, claims.

The scheme is to be administered by the Commissioner, subject to direction by the Treasurer (clause 30). The Commissioner will be given power to all things necessary to for the administration of the Bill, including the monitoring of complaints; review information and returns; monitor legal judgements industry trends and community expectations; and to promote education regarding the scheme (clause 31).The Commissioner will also have power to supervise the scheme and to require the production of information and documents (clause 32).

Approved insurers will be required to provide periodic returns as required by the regulations, and it will be an offence, with a maximum penalty of 150 penalty units, to fail, without reasonable excuse, to provide a return or to include information that is false or misleading (clause 36).

Endnotes

1. International Labour Office, The Protection of Workers' Claims in the Event of the Employer's Insolvency, 1991, 19.

2. Department of Industrial Relations, Conventions in Australia, 212 & 213.

3. Ibid.

4. P. H. Lane, Commentary on the Australian Constitution, 145 & 146.

5. Northern Suburbs General Cemetery Reserve Trust v The Commonwealth (1993) 176 CLR 555.

6. House of Representatives, Hansard, 23 March 1998, 892.

7. Ibid., 6 April 1998, 1782.

8. Ibid., 8 April 1998, 1909.

9. Law Reform Commission, General Insolvency Inquiry, Report No. 45, 146.

 

Contact Officer and Copyright Details

Chris Field
22 April 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.



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