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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
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.
To require employers to take out
insurance to protect the entitlements of their employees upon the
employer becoming insolvent (as defined).
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.
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).
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.
Chris Field
22
April 1998
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ISSN 1328-8091
Commonwealth of Australia 1998
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