Parliamentary Joint Committee
On Corporations and Financial Services

Inquiry into Australia's Insolvency Laws

Submission to Senate Select Committee

Schedule A 

NSW Branch 
Australian Manufacturing Workers' Union
(AMWU)

Table of Contents

Workers Entitlements 	3
What Are "Workers' Entitlements"'? 	3
Why Is There A Problem? 	4
How Big Is The Problem? 	6
The Coalition Government's Position 	7
Overseas Arrangements	10
The General Employee Entitlements and Redundancy Scheme (GEERS) 	11
The AMWU Proposal	13
Corporate Law Reform	15
Examples of Companies Where AMWU Members Have Lost Entitlements 	20

Workers Entitlements 

The AMWU has become increasingly concerned about the ever increasing number of situations where our members are deprived of their accrued employment entitlements because of their employer becoming insolvent.

What Are "Workers' Entitlements"'? 

When trade unions refer to a worker's "entitlements" we are referring to the entitlement to the following payments, which have been legally accrued over the period of the worker's period of employment. 

i) long service leave 
ii) annual leave 
iii) sick leave (where untaken sick leave is an entitlement in the award) 
iv) redundancy payment 
v) payment in lieu of notice 
vi) superannuation 

It is a legal requirement that money to cover these entitlements are set aside for each employee until they are claimed. Usually, claims for sick leave, annual leave and at times redundancy leave are made at various times throughout the worker's working life.

However, long service leave and superannuation are not usually claimed until the end of the worker's working life. Since most companies do not collapse, and most employees do not leave, or become redundant all at the same time, a company would not expect to have to payout all of their entitlement liabilities all at once, and so there is usually not a problem in employees receiving their entitlements when they leave a company. 

Problems arise most often when a company collapses and all employees claim their entitlements at once. Because they cannot claim Social Security for 6 weeks after becoming unemployed, they have no money to live on. Also, particularly in the case of older workers, who may never work again, they had been relying upon their accrued entitlements to payoff mortgages etc. as they enter their retirement. 

Employers are required to pay superannuation payments on behalf of the employee into an approved fund, at least on an annual basis, although the payments may be more frequent. This means that while all other entitlements are lost, usually at least some of the superannuation has been invested properly.

...

Why Is There A Problem? 

It has always been the case that companies establish company structures to limit their liabilities. Since the infamous Patricks Stevedores case, this has become a fine art form, with accountants specialising in arranging company structures specifically to avoid liabilities for employee entitlements in the event of corporate collapse. This is done to protect the assets and legal status of company directors and in order to protect as much of the company as is possible in the event of financial problems. 

In many instances a company faces genuine financial problems, due to the general economic circumstances in an industry , or else there may be financial mismanagement, incompetence or fraud. In each of these cases, if the company collapses, employees have the status of unsecured creditors and they join the queue for lost wages and other entitlements behind banks and other secured creditors. This usually means that they receive nothing, or at best must wait years for the sale of assets etcetera. 

The more sinister problem arises where the directors of a company deliberately structure their company as a series of shelf companies with no assets. These shelf companies carry the major debts of the company. The company's workers are purposely employed by these shelf companies rather than by the parent company, which holds the assets. The parent company has few, if any direct employees. The practical effect of this arrangement is that in the event of corporate collapse, the shelf companies all fall, and have no assets to pay the employees, while the parent company has no direct liabilities .Often these company structures are extremely complex, with the shelf companies owing money to the parent for loans, mortgages, leases on equipment, land etc. 

In addition to accidental financial problems, under arrangements such as Electruck, STP, Patricks and others, company directors are able to use these elaborate structures to allow them to restructure, seek loans, avoid workers' compensation insurance liabilities or make other corporate decisions by deliberately off loading parts of their company, while maintaining the parent intact. These are often called "phoenix" companies, which deliberately collapse and then re establish themselves. This is common in the construction industry , where companies collapse at Christmas time, when there is not much work and so avoid liability for annual leave etc. and then re establish when the industry is profitable again. 

Unions have been seeking changes to Commonwealth Corporations laws for years in order to prevent these company arrangements. There has been an extremely effective corporate lobby group which has worked to prevent these changes, and the current Federal Government is not sympathetic to forcing company directors away from these schemes, or accepting individual responsibility for their consequences. The Coalition's tax payer funded scheme is aimed at further avoiding making company directors responsible for their financial decisions. 

How Big Is The Problem? 

The ACTU and Benfield Greig Reports on lost Employee Entitlements are based upon NSW DIR figures (1999).  They estimate that every year 2,950 companies with 8.75 employees each become insolvent without paying their employee entitlements, giving a total of approximately 26,000 employees. 

This gives a total of $464 million in lost entitlements. The figure isn't necessarily accurate because they are based upon the number of companies that have an Administrator or Receiver appointed (not all of these employees will lose all of their entitlements, although it is fair to say that most will).  They will obviously be higher now due to the increased number of major insolvencies, including major companies such as HIH, Harris Scarf, Ansett and One Tel. 

The Financial Review says that there has been an increase of 139% in insolvencies in the past 12 months, (up to February 2001) 

Using the same basis of calculation as Benfield Greig, 4,200 companies, with 8.75 employees became insolvent in the past 12 months without payment of entitlements, giving a total of approximately 36,750 employees. This would mean a loss of approximately $661 million in lost entitlements over the past 12 months. These figures exclude Ansett, One Tel, HIH and Harris Scarf. Up to 25,000 additional direct job losses resulted from these collapses, with up to 60,000 associated indirect job losses. These associated losses were largely small and medium businesses, which are the groups most likely to not pay lost entitlements.  These figures are based upon national statistics.

The Coalition Government's Position 

The Employee Entitlements Support Scheme ( EESS) 
The Coalition's Employee Entitlements Support Scheme was introduced in January 2000 following the very public collapse of National Textiles. In fact, employees of National Textiles received 100% of their entitlements from a special "one off' Government grant, which has never been repeated. This meant that the company directors' assets (including those of the Prime Minister's brother) did not have to be distributed to employees as they would have if the company had gone into administration or liquidation prior to this grant. 

The scheme was administered through the Department of Workplace Relations. 
The scheme applied to employees of companies in liquidation or administration where accrued entitlements had not been paid. 

The Federal Government called their scheme a "safety net", where unions claim that 100% of entitlements should be paid as a legal right (i.e. not a safety net or charity) Unions emphasise the corporate and moral responsibility of employers, while the Government treats lost entitlements more or less as an extension of the Social Security system.

Payments for which employees were eligible: 

* Up to a maximum of 29 weeks pay for unpaid entitlements, or $20,000 (which ever is less) made up of the following: 
i) Up to 4 weeks unpaid wages, including underpayment of wages 
ii) Up to 4 weeks annual leave accrued over the past 12 months but not taken 
iii) Up to 5 weeks in lieu of notice 
iv) Up to 4 weeks redundancy pay (where this is an entitlement) 
v) Up to 12 weeks long service leave (where this is an entitlement) 
The major loss to employees under this scheme is the capping of redundancy payments at 4 weeks. 

In the case of long standing employees, this would be the major part of their entitlements (up to lOO weeks in some instances ) 
Any payments to employees must be repaid to the scheme in the event that there is a distribution of assets from the company. 

State Governments were factored in as paying half of the entitlement under this scheme. Only the South Australian Government (and the previous Northern Territory Government) signed up to the scheme. The result is that employees of collapsed companies can now only be paid up to a maximum of$10,000 in lost entitlements. 

Even if all of the State Governments had signed up to the scheme, extremely few employees would have reached any where close to the maximum of $20,000. 

The practical application of the scheme is seeing most employees receiving between one quarter and one third of their actual lost entitlements. It is commonly taking up to 10 months for employees to be paid even this small amount. For example, employees of Electruck, who lost their jobs and entitlements in December 2000, finally received their EESS payments in Late September 2001, after considerable pressure from the Union. 

The State Governments (ALP and non ALP) opposed the scheme because it was inadequate and entirely tax payer funded. Even the Court and Kennett Governments opposed the use of tax payer funds in this way. 

The scheme was never legislated, it was entirely an administrative scheme, at the Government's discretion, and was only budgeted for until 2003. 

Overseas Arrangements

Overseas countries have a variety of schemes to protect employees' entitlements, using a mixture of insurance schemes, superannuation style levies on employers and trust funds. Insurance schemes are common. These schemes guarantee 100% of the employees' entitlements. Countries with employee entitlement protection schemes include the UK, Germany, Greece, Italy, japan, the Netherlands, Portugal and Sweden. 

Existing Schemes in Australia

The building industry established a central fund for long service leave, redundancy and most recently in Victoria, sick leave. 

i) NSW Building Construction Industry Long Service Leave Payments Corporation 
Commenced in 1975 and established a portable long service leave payment scheme for building construction workers in NSW. Clients of the scheme are workers and employers in the NSW building and construction industry . 

In 1986, State legislation was introduced to establish that funding of the scheme would come from a 0.5% levy on building and construction work. 

In 1993, the levy was suspended because the scheme was self funding. As of July 1997, a 0.2% levy has been imposed. A similar scheme operates in Victoria. This scheme is self funding. 

ii) Australian Construction Industry Redundancy Trust (ACIRT) 

A national trust, with employers required to contribute an average of $40 per employee per week. Employees are able to access their funds upon termination with their employer . 

iii) There are also a number of state based schemes, such as MERT (NSW) and INCOLINK (VIC). Both of these schemes operate on the same basis as ACIRT. It is noteworthy that these schemes are self funding, generating a considerable amount of money that is then reinvested into the industry in the form of job creation, education and training programs etc. 

The General Employee Entitlements and Redundancy Scheme (GEERS) 

After the collapse of ANSETT, the Federal Government introduced GEERS, which applies to employees who lodge claims after 12 September 2001. 

The details of the scheme are: 

i) There will be legislation introduced to give priority to specified employee entitlements ahead of secured creditors when companies become insolvent 
ii) "Specified entitlements" include unpaid wages, annual leave, long service leave, and pay in lieu of notice 
iii) The scheme is capped at wages of $75,200 (these employees have their entitlements calculated as if they were earning this amount) 
iv) Redundancy payments are capped at 8 weeks 

Again, long serving employees miss out, since it is the redundancy payment that is the major financial benefit to these people. 

Because of the very high media profile of the recent Ansett crisis, and the very high salaries of pilots etc., Ansett workers are exempt from the $75,000 salary cap. 

The Government initially announced that payments to Ansett workers would be paid initially forma special $400 million fund set aside for the purpose and this money would be recouped by the Government out of a ticket levy.  But this is a sensitive issue in light of the other problems facing the tourist industry at the moment and the Government has talked about other means of funding these workers. 

The GEERS scheme in general, however, will continue to be paid for by tax payers. 

The National Employee Entitlements Guarantee Scheme 
The ALP accepts that there is a range of possible schemes, including insurance schemes and trust fund arrangements. It accepts that these should operate co operatively. The preferred scheme is an insurance scheme, delivered through the the existing  Superannuation Guarantee system. 

i) An employer funded insurance arrangement 
ii) guarantees 100% of entitlements, with no cap 
iii) funded through a small increase (not more than 0.1% ) in the Superannuation Guarantee iv) The premium is passed on to an accredited insurer 
v) small businesses with fewer than 20 employees do not pay the charge. The Government makes the payment on their behalf 
vi) Strengthening Corporations Law to protect superannuation funds lost through fraud and theft vii) Requiring superannuation payments to be made more regularly -at least quarterly 
viii) Strengthening of Corporations Laws to prevent deliberate corporate avoidance tactics 

The AMWU Proposal

The Union Believes: 
·	Workers' entitlements should not be an interest free loan to employers
·	The scheme should not be tax payer funded
·	The scheme must be legislated 
·	The scheme must be national
·	The scheme must protect all entitlements
·	The scheme should not be capped
·	There must be Corporations Law reform at a national level to prevent avoidance schemes and punish perpetrators  (see below)
·	Small businesses should not be excluded from the scheme.  This is the level of business most likely to collapse without paying entitlements and is the largest employer in the country
·	The scheme should be portable, so that employees who change employment do not lose their entitlements in a labour market where 30% of the workforce is in precarious employment.

Our Current Claim

When considering how best to protect our members' entitlements, we considered:
Bank Guarantees
Insurance Bonds
Lien over fixed assets
Industry Trust Funds
Our current claim is for past entitlements to be protected by way of a Bank Guarantee or Insurance Bond, with future accruing entitlements being deposited into an Industry Trust Fund 

The AMWU Position

·	NEST (National Entitlements Security Trust)
·	An industry based trust fund, controlled by a Board of Trustees, representing employers and employees, with an independent chairperson (currently His Hon Justice Marcus Einfeld)
·	A national scheme
·	Guarantees 100% or entitlements
·	Guarantees portability
·	Contributions made on a monthly basis by the employer on behalf of each employee
·	No cap
·	Entirely employer funded.  No Taxpayer subsidy
·	Covers businesses of all sizes - no exemption for small businesses
·	Investments leading to surplus funds can be used for job creation, education programmes, R&D, and the scheme becomes self funding, like the NSW Construction scheme

Corporate Law Reform

Issue 1 - Need for Reform of Corporations Law
·	Specifically, we propose a Reverse Onus provision (similar to Part 10A, S298V of the Workplace Relations Act) where in the case of company collapse where creditors (including employees) have not been paid, Company Directors have to prove to an ASIC Inquiry that they had fulfilled all of their fiduciary duties before they are permitted to hold any positions as a company director or officer.  A range of other penalties should also apply.  

·	Individual liability must apply to the directors of companies where employee  entitlements are lost and the company directors and officers have not exercised their fiduciary duty in order to prevent the current trend of "phoenix companies".

·	ASIC must be adequately funded and resourced to allow it to properly investigate blatant breaches of corporations laws, particularly those that lead to loss of employee entitlements.  

·	Investigations and prosecutions of high profile cases such as John Elliott, Rene Rivkin, ANSETT, One Tel etc. are obviously welcome.  But examples like Electruck, STP, Plastyne, Austral Pacific etc. demonstrate that the human and economic losses associated with these smaller companies are at least as significant as the losses in the relatively small number of high profile prosecutions.

·	In the free market economy in which we live, it is accepted and enforced by law that there should be a "level playing field", with no access to undue influence over information etc. in terms of investing.  Thus we have laws against "insider trading" etc. which as we have seen ASIC will apply huge resources to prosecute, even though the financial rewards to Rivkin were relatively small.

·	Without  diminishing the seriousness of Rivkin's or Elliott's offences,  or  suggesting  that they should not have been pursued and prosecuted etc.  with the full force of the law, Rivkin's offences against Corporations Law were essentially victimless property crimes.  Rivkin gained an unfair advantage rather than anyone actually losing anything.

·	At the same time, Corporate Law  protects company directors and officers.  It effectively limits their liability.  The purpose of the "corporate veil" is so that investors will feel safe in investing their funds into the company.  The arguement is that without this protection, investors would not be prepared to risk their funds.  

·	The practical effect of the corporation being regarded at law as a separate legal entity is that company directors are able to separate assets from the corporation, so that when the corporation is placed into administration, the assets are not accessible by employees and other creditors who have not been paid.  This is in broad terms the arrangement infamously put into effect by Patrick Corp, which resulted in the industrial dispute affecting wharves around the country.

Issue 2 - Need for ASIC to be Properly Resourced to Investigate Breaches of the Law

·	ASIC has been under resourced so that it must make decisions about resource allocation.  It has taken an ideological position in allocating its resources.

·	The police must also make decisions about how they allocate their resources.  There is no doubt that they could get more "bang for their buck" by only pursuing major organised crime rather than people who steal cars, break into homes, assault and rape etc.  Yet society certainly would not accept this position.  We have to ask - why the double standard?

·	It is not possible to argue in the face of these facts that the law does not have an ideological position.

·	It is not possible to argue, as David Knott (Head of ASIC) has done, that ASIC will pursue any offender, big or small, without favour.

·	There needs to be a fundamental shift in the values and assumptions underlying Corporations Law.

In many instances, our members are employed through a service company arrangement, and under curent law they have no remedy against a parent or related company despite those related companies remaining solvent and indeed, in many instances having extensive assets.

We are aware that the Federal Opposition (Hon Bob McMullen and Hon Arch Bevis) moved a Private members' Bill (the Employment Security Bill 1998).

Essentially this Bill proposed amendments to the Workplace Relations Act 1996 to enable employees to claim underpayment of award entitlements against a parent or related company of their employer company as if that parent or related company was a principle contractor.
The Bill also proposed amenments to the Corporations Law to enable employees, as creditors of an insolvent company, to directly pursue Directors of the company for their debts in circumstances where the Directors had a role to play in causing the company to become insolvent.
While we support the general spirit and tone of that Private Members Bill, we are concerned that it may well not cover all situations confronted by our members.  Accordingly, we make the following recommendations, suggesting that the Employment Security Bill should be amended in accordance with the highlighted text in the attached copy of the Bill.

The first suggested amendment is based on Section 452 of the Workplace Relations Act (1997) (QLD) and includes a new section 178 B, which would make executive officers of a company liable for any penalty imposed against a company for breach of award or non payment of superannuation contributions.  The amendment would also enable a Court to make an order for underpayment of entitlements directly against the relevant executive officers.

While Executive Officers of a company cannot insure against the imposition of a penalty, they can so insure against the possibility of compensation being awarded against  them in respect of their duties as directors.  Imposing ultimate responsibility for award and superannuation entitlements on directors would, we believe, contribute to a dramatic shift in culture where Directors would either set aside sufficient funds to pay employee entitlements or take our appropriate insurance to cover their potential liability.  This, in turn, would involve insureers in scrutinising corporate accounting systems to ensure that employee entitlements were protected.

The amendments we have suggested in the area of the Corporations Law focuses the Court's attention on the issue as to where there was effectively a service company structure and in those circumstances to place a reverse onus on the parent or related company to establish why it should not be required to satisfy the employee entitlements of its insolvent related company.

We do not see these provisions as displacing the need for an Industry Trust Fund arrangement.  Indeed, the amendments contained in our proposal would support such an arrangement where the Industry Trust Fund is given the right of recovery in respect to any monies paid out to retrenched workers.

The curent Federal Government GEERS scheme is totally inadequate and goes nowhere near the protections afforded under the laws operating in the EEC and the United Kingdom.

The existing laws have proven to be impotent in protecting workers and their families at extremely vulnerable times in their lives.   In many instances, after years of dedicated service, workers are losing their accrued entitlements and facing long-term unemployment because of their age.