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Christopher Symes[*]
Imagine this — you have worked for the same employer for 25 years. You have not taken half of last year’s annual leave and you have 4 weeks due to you for this year. You took some long service leave 10 years ago, and have about 18 weeks owing. You arrive for work on Tuesday morning and are met by a ‘suit’ who tells you that he is the liquidator and the business has closed. Your services are no longer needed. Payday was almost a fortnight ago. What do you expect to receive from the liquidator on behalf of the company?
If your answer is ‘all that is owing to you’, then you will be disappointed. While all of your entitlements have a priority under Corporations Law, you will only be paid if there is enough to first pay the secured creditors, such as the banks and other financial institutions who have taken security, and the administration expenses such as the liquidator’s remuneration. Australia has no other protection in place and, so, employees of insolvent employers miss out on many of their accrued entitlements.
If there was a way that you, as a worker, could be paid some of these entitlements by the government or by an insurance company, should it make any difference if a company, individual or unincorporated body employs you? Should you be paid all of your wages, long service and annual leave? Should you receive an amount for the redundancy and an amount in lieu of notice? All of these topics are now part of a government Discussion Paper[1] which places the protection of workers’ entitlements in the event of employer insolvency clearly on the government’s agenda. Federal Cabinet in February 2000 will discuss the next step.
This issue encompasses the need for social considerations within corporate insolvency. It involves a national approach, which will cover all employees and apply to all employers, whether they employ a large or small workforce and whether they are arranged as companies, unincorporated bodies or individuals. The government has acknowledged that to do something about this issue is a ‘significant expansion of social welfare’.
Protecting employees’ rights in insolvency is not a n[2]ew issue. Priority to employees has been granted since the middle of last century. However, Australia has never had a source of funding to claim from where the employers’ assets are not sufficient to stretch to paying employee entitlements.
Some overseas countries have had schemes in place for up to 30 years. In Europe the first scheme was put in place in Belgium in 1967. Thirty-three years later, Australia finally looks like catching up. The Harmer Inquiry[3] into Insolvency in 1988 recommended that employees would be best protected by the creation of a wage earner protection fund; this recommendation was never implemented.
Unions in the early 1990s lobbied for change, and in 1996 Labor MP Janice Crosio embarked on an awareness raising campaign in Federal Parliament. Her work culminated in a private member’s Bill in 1998 and again in 1999.[4]
Recent high profile business closures of Oakdale Colliery, Cobar Mines, Sizzler Restaurants, Roadmark buses and National Textiles, as reported in the media, demonstrate the problems that arise.
For example, the 260 workers at Cobar Mine were owned $4 million in annual and long service leave entitlements. One newspaper report suggested ‘some who had worked up to 33 years at the mine were owed hundreds of thousands of dollars …’. If the employer does not have the assets to pay entitlements, it is not much help being able to sue, nor having a priority of payment from non-existent assets.
In August 1999 the Minister for Employment, Workplace Relations and Small Business, Peter Reith, released a Ministerial Discussion Paper which proposes two options: the first is a scheme for basic payments to workers by government, and the second is a scheme of compulsory insurance for all businesses, with the exception of small business whose workers would be paid their entitlement by government.
The Discussion Paper explains that neither option would guarantee full payment of all entitlements but promises that a level would be set to provide a ‘fair and reasonable level of protection’. For the basic payments scheme, this ‘fair and reasonable’ level would be ‘capped payments’ paid to workers, and more could be paid if a workplace agreement provided for an amount on top of the government payout. In the insurance scheme, the ‘fair and reasonable’ level would be the amounts paid by the insurance company (or by government for small business) and would be expected to be identical to the ‘capped payments’ in the basic payments scheme.
The ‘capped payments’ or ‘ceiling’ are suggested as a ‘possible framework’ that would guarantee workers up to 29 weeks of pay (at ordinary time rates). This framework would consist of a guarantee to pay up to 4 weeks unpaid wages, 4 weeks annual leave (accrued in the last year), 5 weeks pay in lieu of notice, 4 weeks redundancy payment, and 12 weeks long service leave. The Discussion Paper refers to this as the ‘social safety net’. The ceiling means that workers, who are involuntary creditors, miss out on the full amounts that are rightly theirs; but why should they miss out?
Closer scrutiny of the ‘social safety net’ provides some justification for the limits, although it is disappointing that workers could miss out on the difference between the capped amount and their entitlement.
First, providing 4 weeks of unpaid wages is not too bad. Most commentators argue that unpaid wages have not been the problem. Wages are commonly paid weekly or fortnightly, and workers will tend to withhold their labour if they miss out on being paid for too long after pay day.
Second, payment of up to 4 weeks annual leave accrued over the last year is appropriate. Again, the justification would be that annual leave should be taken regularly and not allowed to accrue excessively. This regular taking of leave is encouraged for the health of the worker and the economic and management benefits of the employer. Almost on ‘public policy’ grounds, this ceiling could be acceptable, although there may be a difference between the ceiling and the amount owed.
Third in the framework is the provision of up to 5 weeks pay in lieu of notice, which is in accordance with the scale in s.170 CM of the Workplace Relations Act 1996. Circumstances will vary, and some may already think that 5 weeks pay in lieu of notice is nowhere near enough. However, workers in an insolvent company would receive identical treatment to those who work for solvent companies and who are given pay in lieu of notice.
Fourth, the framework offers up to 4 weeks redundancy pay to eligible workers. It is this element of the framework that appears to be constrained and proscriptive. The outcome of redundancy negotiations outside insolvency might gain the worker far more than 4 weeks pay, but the limit probably reflects the coalition government’s wider industrial policies.
Finally, the framework makes provision for payment of up to 12 weeks long service leave for an eligible worker. Here, the amount of leave presumably falls into the ‘fair and reasonable’ level: 12 weeks is the equivalent of 10 years service and, for many Australian workers, this corresponds with the time when it can be taken as leave.
Again, it might be assumed that, like annual leave, almost on ‘public policy’ grounds the worker should not accumulate more than 10 years of long service entitlement without risking the non-payment of the balance should their employer become insolvent. However, in some of the recent instances accrued long service leave has been a major component of the entitlements missed out on by workers. For example, in the Exicom company liquidation, 680 workers were owed $6m in annual and long service leave entitlements. Most of the workers were from non-English speaking backgrounds and had worked on the factory floor for over 20 years. Applying the framework to such a situation, the shortfall may well be smaller than if no social safety net was in place, but missing out on, say, 10 years long service leave would still hurt.
The Discussion Paper suggests maximum rates of payment for each week of entitlements, and that the maximum corresponds to an annual wage in ordinary time earnings of $40,000 a year. No justification for this figure is provided, although in the Exicom example this maximum would be sufficient for most of the workforce, as well as for meat workers at Grafton, the restaurant staff at Sizzlers and Bells and the textile workers at National Textiles. In other recent instances, however, some of the workforce may have been enjoying an annual wage over $40,000, like the mineworkers at Oakdale or Cobar and nurses at Yeppoon.
In any event, surely neither option can attempt to cover all workers and match their annual wage or salary. It really is a matter of setting premiums in the compulsory insurance scheme to take into account the salary spread of the workforce. The basic payments scheme is already capped by weeks for wages, annual leave and long service leave; surely this is enough of a restriction. The government, in funding the basic payments scheme, must be able to calculate salary spread and so avoid having another restriction. If annual salary capping is needed for workers’ payments it could be set at a higher amount, say $80,000, and be on par with the Family Tax Allowance.
The final ‘capping’ is that the maximum payment to any individual be set at $20,000. Again, no justification or reasoning for this is given in the Discussion Paper. The assumption is that capping will identify a maximum contingent liability for the insurers and government, once they know how many workers are affected.
It will be of some comfort to Australian workers to know that if their employer ‘goes broke’, they can get a maximum of $20,000. However, as 29 weeks is the maximum for all entitlements, $20,000 is sufficient only for those on a weekly wage below $690 a week. Workers will lose out although those with large amounts of long service leave or generous redundancy entitlements stand to lose the most.
Of course, neither option will remove the right of all workers to sue their employers for the monies owed but not paid. However the ability to sue is one thing, and the likelihood or desirability of doing so is another, particularly as the workers are likely to scatter after the close of business and to focus on seeking new work.
The Discussion Paper does not hint at which of the two options the Commonwealth government prefers. The basic payments scheme has nine dedicated paragraphs in the Discussion Paper; the insurance scheme has eighteen. The Discussion Paper acknowledges that many overseas countries have similar basic payments schemes.
Perhaps in an effort to share the cost, and to overcome perceived jurisdictional problems, this option is to be funded jointly by ‘all Australian governments’. The Discussion Paper suggests that a basic payments system would share the burden among Australians through taxation. In this time of great change in taxation systems, funding the payments system as in the basic payments scheme is just another alteration. For example, Australia is developing a GST with some connected changes to State taxation systems, and the Ralph Report recommends a new business taxation system which includes changes to depreciation and capital gains tax. These macro changes could surely accommodate a new basic payments system.
According to the Discussion Paper, another advantage is that a basic payments system paid out by government does not impose additional ‘costs on ethical employers which might lead to reduced employment’. This is true of direct expenses, in that there will be no requirement on any employer to ‘write out cheques’ to pay into the system. However, indirectly, there will be additional costs by way of taxation. Here, the option is able to protect workers regardless of the employers’ motives.
Of course, those unethical employers who avoid tax will indirectly avoid contributing to the basic payments system. For the government, however, the important advantage is to be seen as not providing any change that reduces employment. One good thing about the basic payment system is that there is no incentive to engage in a ‘Patrick’ tactic of shifting assets into other companies within the same group of companies and, therefore, legally avoiding the existing entitlements to a workforce left behind in a mere shell of a company. If employment rates are not affected, and the workers are not affected by unethical company practices, then the basic payments scheme is attractive to governments and workers.
Another advantage, according to the Discussion Paper, is that the basic payments scheme would minimise the amount of red tape for business by using the taxation system to collect the insurance. This is clearly advantageous, as businesses are already well versed in the process of forwarding tax payments, and the government has the administrative infrastructure in place. Asking business to return a separate payment, say on a monthly basis, into a central administration for processing would be inefficient. The benefit of the basic payments scheme is that limited government resources would be required, given that the administrative structures already exist.
Under the basic payments scheme, the government will fund the payments of entitlements and be subrogated to pursue the employers. This is an important feature that is essential to the operation of the scheme. Certainly overseas systems, such as in France and England, provide for the scheme to subrogate or ‘stand in the shoes’ of the employee, once they have been paid. In France, it is reported that the rate of recovery by the scheme is as much as one third of its total payouts; in Belgium it is ‘about 10%’ and Spain ‘merely 1%’.[5]
The Discussion Paper suggests the UK recovery rate is 15% of payouts, and this figure has been used for ‘indicative costings’ for the basic payments scheme. With a 10% administrative cost, and some savings from the social security section of the Commonwealth budget, the Discussion Paper suggests an overall cost to governments ‘in the order of $100m’ a year, with an average claim of $6784.
It could be argued that this is a small price to pay for workers’ protection, and for providing the government with peace of mind. Implementing the option would see the end of government interventions, such as the Oakdale payments from a Separate Fund, and the ASIC brokered Cobar settlement. It would see the end of the intense media spotlight on the government each time a large employer closes its business without the funds to meet these entitlements.
One issue not addressed in the Discussion Paper is the ‘promptness’ of payout that could be expected in such a scheme. From a worker’s viewpoint they want to be paid as promptly as possible. Once the necessary documentation is completed, the system must ensure prompt payments to workers and it will be interesting to know what sort of turnaround time for payment is planned. The French model pays workers in five to ten days.[6] Could this be expected from an Australian government administered scheme?
The insurance scheme would cover all private sector employees via a ‘two-stream approach’: businesses with more than a threshold number of employers (20 is the suggested number) would be required to take out insurance with private insurers to protect their workers’ entitlements. Businesses employing fewer than this threshold would have the government protecting their workers.
Again, the Commonwealth sees this option as involving the State governments for legislation and funding. The payouts involve those ‘capped amounts’ mentioned above. The Discussion Paper acknowledges that this is a major innovation in the insurance market. Insurance based wage protection is a model used in some overseas countries, and formed the basis of the Crosio Private Member’s Bill, the Employee Protection (Wage Guarantee) Bill of 1998. Government employees are not covered by such a scheme as they have no real risk of missing out on entitlements due to employer insolvency.
The Discussion Paper lists the main advantages of the insurance scheme. First, the costs are shared by employers and the general taxpayer through the government bearing the risk of the small employers’ insolvencies. The idea of sharing the burden is attractive to government; they would then avoid the need to collect and fund all large and medium sized employers, while maintaining their commitment to helping small business by picking up responsibility for ‘small’ employers’ worker entitlements.
The definition of ‘small business’ is troublesome. In the Corporations Law, ‘small business’ has fewer than 50 full-time equivalent employees. Yet the insurance scheme suggests fewer than 20 employees, without specifying whether these are full-time equivalents or not. Of course indirect costs will flow to all businesses from the government’s involvement in meeting the needs of small business. If government is going to fund small business commitments to employee entitlements then all taxpayers will pay, including small businesses themselves; the cost is shared with large and medium sized employers. The Discussion Paper argues that this is in line with the principle that employers should be required to meet the costs of their workers’ entitlements — very different from the basic payments scheme where taxpayers are meeting the cost.
Clearly the insurance scheme will cost the Australian taxpayer less than the basic payments scheme. The scheme does not impose a uniform cost on all businesses, as the cost would vary according to the risk of them becoming insolvent and failing to pay their employee entitlements. The insurance scheme could provide incentives for businesses (for example, reduced premiums) if they reduce their exposure to the risk of insolvency.
It is of concern that, at the outset, the Discussion Paper suggests that ‘excess’ provisions for claims would be entertained by the government. This would limit small claims, which are administratively inefficient. The idea that workers should not be able to claim against the insurance scheme for entitlements which are rightly earned, just because they do not amount to much, should be rejected from the start. Minimum thresholds have their place in normal insurance claims, but surely not when a worker is owed a few weeks annual leave which he or she is unfortunate enough not to have taken in the weeks or months before their employer became insolvent.
It is appropriate that subrogation to the insurers is included in the scheme so that they can recover funds for unpaid entitlements from defaulting employers. This could reduce both the cost of providing insurance and the tendency of some employers to risk employee entitlements money to meet their other debts, that is, to use it as working capital.
The Discussion Paper suggests a variable premium to reflect risk in certain industries. This has proven appropriate for workers’ compensation, and has had the effect of usefully modifying behaviour. As the Discussion Paper notes, employers with a higher risk of default would pay higher premiums and would, therefore, have an incentive to reduce the amount of outstanding entitlements payable to employees and to take other steps to reduce their risk of default. This would certainly be advantageous for the Australian worker.
The Discussion Paper acknowledges that private insurers are going to be cautious initially and so the initial premium costs are likely to be high. However, once a claims history is established, they should settle and the government could monitor the premiums and competition between insurers.
Unlike the basic payments scheme, the insurance scheme requires a direct expense to be met by the employer, which is tax-deductible. But there is the issue of non-compliance, which does not occur with the basic payments scheme.
To prevent non-compliance with the insurance scheme, the penalties should be high enough to be an effective deterrent to employers who avoid their responsibilities to workers. Unfortunately, the Discussion Paper says little on this. The aim of achieving worker protection through fairness and compassion is mentioned a number of times in the Discussion Paper: this must surely extend to workers of large or medium sized enterprises whose employer fails to take out compulsory insurance.
With the government already committed to a protective role for employees of small business, perhaps they should be the ‘nominal insurer’ for non-compliant large and medium sized employers. In addition, fines and personal civil liability for directors should be part of the enforcement measures to ensure that non-compliance is not a consequence just for the company, given its troubled state.
Furthermore, there should be contemplation of insolvency of insurers. It would not be any advance on the existing situation if workers were to claim against insurers only to find out that they miss out from their employer and its insurers because they are both insolvent.
The government should consider taking a statutory charge in its favour if there is a non-complying business. It would then have some chance of recovering the entitlement. If there were a statutory charge, the financiers of the business would also have some incentive to ensure compliance by their customers. They could, for example, require sighting the insurance premium receipt as a condition precedent to lending and at various periods throughout the loan.
Government acknowledges small business as a special subset of the business world; for example, there is the Small Business Guide within the Corporations Law. The Discussion Paper claims that the government is determined not to impose additional costs and red tape on this sector.
Unfortunately many small businesses fail, particularly in the first five years, which means that workers would be unlikely to have large long service leave entitlements. However there are exceptions, such as family businesses, which are often small businesses that remain in the family for generations with employees who have substantial entitlements due to long-term employment. The insurance scheme treats small business in a similar way to the basic payments scheme: the government will meet the entitlements through direct payments to employees and all taxpayers will contribute through the various governments’ taxation systems.
Small businesses are often in no position to accept further government-imposed administration, and so it makes sense to relieve them of the burden of paying into a central fund or taking out private insurance. One aspect the government may have to monitor is the avoidance of insurance premiums if the business remains below 20 employees. There is the possibility that a company director could create a number of businesses which all had less than 20 employees so as to avoid the premium and a harsher non-compliance regime.
The Discussion Paper mentions the possibility of ‘top up’ insurance, where employees could opt for further cover in relation to entitlements by taking out extra insurance with the private insurer. While this sounds good for the workers of medium and large employers, it may be unfair to those workers who work for small employers unable to take out the extra cover.
The insurance scheme is expected to cost in ‘the same order of magnitude’ as the basic payments scheme; an optimistic view is that it will cost less over time, as insurers reduce premiums.
We can speculate that a coalition government, with a stronger commitment to business than to social policy, might be attracted to the insurance scheme. It would mean less government involvement from a day to day administrative viewpoint and is less draining on the federal budget. It is attractive to the small business sector and their lobbyists, and is couched in terms to allow those employees who have already made adequate alternative arrangements to be exempted. This sounds like the government’s current approach to industrial relations, and perhaps the insurance scheme ‘meshes’ better with those policies.
While nationalised or socialised schemes are generally not the Coalition’s choice, the basic payments scheme does mean a reduction in the flak the government receives each time a sizeable business folds owing employee entitlements. It has the attraction of fixing a problem that even earlier Labor governments did not fix.
The advantages of providing protection of employees’ wages and entitlements when insolvency of the employer strikes have been obvious to a limited group, but predominantly those supporting workers, for many years. However the need to take action has now become an agenda item for government that cannot be ignored. Members of Parliament representing affected workers, the media keen to show images of struggles and conflict, limited academic comment, and union pressure, have all contributed to getting the issue on the government’s agenda.
The government, for its part, has described the issue as having ‘no easy answer’ and requiring ‘prudent assessment’. It has accused earlier Labor governments of ‘toying’ with the problem and doing nothing, and failed to support a Private Member’s Bill for reasons that included constitutionality and the inequity in placing a financial burden on the ‘good’ employers to subsidise the ‘bad’.
The Discussion Paper states that apart from tightening the Corporations Law, the government ‘intends to act to ensure guaranteed security to worker entitlements’, which means that some legislation must be forthcoming. The media has recently reported that it is on the Cabinet’s agenda. Both options presented in the Discussion Paper would assist workers in failed companies in similar ways, and there is probably not much difference in the two schemes from a worker’s point of view. Perhaps ‘top up’ insurance in the insurance scheme provides more of an opportunity to get closer to a 100% return of the amounts owed. The basic payments scheme could be favoured from the point of view that no one will ‘fall through’ a gap if their employer failed to contribute to the insurance scheme.
Where the workers stand to lose or gain is in the capping of amounts. Unions, worker representatives and workers themselves should look at the experience of past scenarios to judge whether the ‘caps’ are fair and reasonable. Unfortunately, there is no resource data to show clearly how much Australian workers miss out on entitlements, and perhaps government should address this.
Despite the lack of data, now is the time to decide on one of these schemes, implement it and provide the much-needed protection for workers. If there are adjustments to be made later, then some tinkering with issues like the capped amounts is less important than having no scheme and a substantial number of workers going without their entitlements.
References
POSTSCRIPT
The first Cabinet meeting of 2000 resulted in the government choosing to introduce an interim administrative scheme based on the taxpayer-funded basic payments option. This offered a solution to the immediate problem of National Textiles but not the situation of workers affected by other recent insolvencies. The government will continue to ‘actively consider a compulsory insurance scheme’, ie the second option with a limit on payments of $20,000. In response, Labor has promised to have a scheme that fully pays entitlements. • CS
[*] Christopher Symes teaches commercial law at Flinders University of South Australia.
[1] ‘The protection of employee entitlements in the event of employer insolvency’, August 1999 <www.dewrsb.gov.au/ministers/reith/ mindiscu/emp-insolvency.htm>.
[3] Australian Law Reform Commission Report No. 45.
[4] See (1998) 23(4) Alt.LJ 198, and (1999) 24(4) Alt.LJ 190.
[5] Bronstein, ’Wage Guarantee Funds in Belgium, Spain and France: A Comparison’, (1986) 3-4 SLB 481 at 484. Note also in Belgium it was ‘about 10%’ and Spain ‘merely 1%’ at 485.
[6] Bronstein at 483.
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