Symes, Chris --- "Workers7 entitlements: Probation period over" [2001] AltLawJl 106; (2001) 26(6) Alternative Law Journal 298

• WORKERS’ ENTITLEMENTS
• Probation period over
• Postscript

WORKERS’ ENTITLEMENTS
Probation period over

CHRIS SYMES^[*] assesses the federal government’s solution to workers’ entitlements and insolvency.

Over the last few years, this journal has monitored the issue of what happens to employee entitlements when their corporate employer becomes insolvent.^[1] At the beginning of last year, the federal government went ahead with an administrative process entitled the Employees Entitlement Support Scheme (the Scheme). The first report on this scheme’s initial year of operation (the Report) has been released and so it is timely to review whether the government’s move is working.^[2]

Just after the February 2000 Alternative Law Journal hit the streets, the government announced the establishment of a scheme for employees who were terminated on or after 1 January 2000 as a result of their employer’s insolvency. This was unfortunate for those put off just before the start date but a line had to be drawn somewhere. The first payment was made in March 2000 and by June 2000 there were 134 employers across Australia whose former employees had made claims against the Scheme. The number of employees making claims by June 2000 was 892. These figures include, for example, the workers at National Textiles where the total amount paid from the Scheme was approximately $166,000 with the Commonwealth paying an average of $530.30 per employee. Yet the average loss per employee, according to the calculations used by the Scheme, was $12,779.55 and these figures are significantly less than the entitlements actually owed by the employers. As the Report observes, ‘there was a significant demand for assistance from employees’ even in the early months of its operation.

In the period from July to December 2000, there were 308 employers whose insolvency resulted in a claim upon the Scheme and this represented 2499 employees. An attachment to the Report records the government’s processing of payments to 99 employers throughout this period at an average level per eligible employee of $2177. This, the Report said, represented ‘a significant proportion of their outstanding entitlements for the … Scheme’s components’.

However, the Report reveals some disappointment. For example, a business listed as Budnick and Ranson shows that the amount paid under the Scheme totalled $7744, yet the loss per employee was $57,050.^[3] A further example is Perry Engineering. For this employer the total amount paid was $286,177, with an average of $5840 per employee, although the average loss per employee was $38,236.

These examples confirm the fears expressed prior to the introduction of the safety net, that in some cases workers are still missing out on substantial amounts when their employer becomes insolvent. The problem is only partly fixed by this Scheme. It is important to remember that the priority provided by the Corporations Act for these entitlements is seen as being of limited value because, in many cases, the assets of the employer have been used to pay creditors with higher priorities.^[4]

One of the major issues that the government identified was that there is a lack of statistics to describe how big the problem really is. This first Report has allowed some insight into the size of the problem. The Report notes that it is too early to accurately predict the extent of lost employee entitlements in the Australian community. The Report then criticises the earlier estimations by the ACTU and the NSW Department of Industrial Relations stating that the figures in 2000 show that these earlier estimations were excessive. This is a tough criticism given that the government acknowledges it is still too early to use the quantitative data collected in 2000. The Report then jumps to the conclusion, based on the data for one year, that ‘the large majority of Australian employers plan for and meet their obligations’. Despite this claim the Report indicates that claims are likely to cost $30–$40 million in the first year.

The Report acknowledges that over the last six months of the year 2000, the government received approximately 400 claims a month from employees. The cases processed in 2000 suggest that the average number of employees in each insolvent company is 16 and the great majority of cases relate to small and medium enterprises. Companies with fewer than 20 employees represent some 83% of those with workers who have entitlements outstanding and the value of these outstanding entitlements is said to be ‘relatively low’. The Report suggests that 50% of employees have a claim of less than $5000; however, we do not know whether this is a calculation of the total owing to the employee or of the capped amount under the Scheme which includes limits of four weeks wages and four weeks annual leave.

Final figures are not yet available for the first 12 months of the Scheme but the Report states that the best estimates suggest that the total entitlements lost annually for the components covered by the Scheme are in the ‘order of $50–$60 million’. The 2000/2001 Federal Budget has committed $55 million to the Scheme for the financial year. Certainly, this is down on the ACTU’s estimate of $140 million and that of the NSW Department of Industrial Relations of $464 million, but those earlier estimates are based on total losses without taking account of the caps and limits imposed by the federal government.

The Report has used the statistics produced to portray the federal government in a positive light. For instance, the Scheme was introduced with the government expecting that State governments would contribute on a 50:50 basis. Because all States (except SA) have declined up to this point to contribute along such lines, the statistics highlight this lack of contribution by showing what the employees would have received if their State had participated.

The Report notes that the costs in 1999/2000 to administer the Scheme were absorbed within funds allocated to the Department. In the six months to 31 December 2000, approximately $960,000 was spent on costs associated with the Scheme. This does not seem excessive for the government to bear and there are obviously establishment costs within this figure that will not be repeated in later years. This was an area that was presented as a concern before the Scheme was implemented as any new scheme was supposed to be cost neutral. It does not appear to have achieved this in its first year.

One issue that arose during the consultation period in 1999 was subrogation. The options presented at the time envisaged that the payout to employees would be followed by recovery from the funds of the insolvent business. The Scheme, therefore is not meant to be just taxpayers’ money being spent on paying employee entitlements because of their employer’s inability. The federal government is trying to recover funds from the relevant insolvency practitioner in the insolvent company when these become available. The Report suggests they do this to ‘protect the taxpayers’ interests and maintain an obligation on insolvent [I think this is meant to be ‘solvent’] companies to meet the claims of employees where possible’. While it is acknowledged that the winding up of companies can take a number of years and so there will sometimes be a significant delay from the time of paying the employees through the Scheme and the recovery from funds of the insolvent company, the start has been small and slow. The Report records that the federal government has been subrogated to the tune of just $2331 so far. When this figure is considered against the amount of $2.6 million paid out under the scheme up until 31 December 2000 then the recovery rate so far is less than 0.01%.

The comments in the Report on the recovery from employers are curious. The Report acknowledges that the quantum of recovered moneys is modest at this stage, and goes on to suggest that taxpayers’ money should be recouped where possible and that any employers that thought the Scheme would remove their obligation to pay were ‘deluding themselves’. However, unless the more substantial amounts are recouped, the Scheme runs the risk of entitlements being funded almost entirely by the federal government. It is possible that on reading this Report an employer in difficult financial straits could form the opinion that the loss to their employees is not going to be too bad upon insolvency and alter their behaviour accordingly.

If the Scheme could be seen to have served its probation period, then the outcome of such a probation must be to persist with the Scheme. It is a mechanism that is helping workers to get something out of their employer’s insolvency whereas in the past they were left to the mercy of being paid from the already limited funds of the insolvent business. However, as was stated when the Scheme was first contemplated: why should there be a cap that sees some workers miss out on substantial amounts? Despite this, the Commonwealth has done well to fine-tune the Scheme, publicise it and make the Report publicly available. Now that the probation is over, perhaps it is time for most of the States to join SA and the Commonwealth and come on board and contribute so that more of the shortfall between total entitlements owing and the Commonwealth’s contribution can be paid to the deserving workers.

Postscript

Since the release of the Report the major insolvencies of One Tel, HIH and Ansett have continued to keep employee entitlements in the media spotlight. Very recently the Commonwealth announced a new Scheme called the General Employee Entitlements and Redundancy Scheme (GEERS). The new scheme will provide ‘enhanced’ levels of assistance for those workers who lost their job through employer insolvency after 12 September 2001. The Commonwealth is now committing to all wages, annual leave, pay in lieu of notice and up to eight weeks redundancy pay and all long service leave. A cap exists on salary so that GEERS applies to those under $75,200. Using the experience of the Employee Entitlements Support Scheme the Commonwealth believes ‘over 90% of employees will receive their full entitlements to the five components’^[5]. In 12 months time, and with the benefit of a similar report, hopefully a better report card can be produced.

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^[*] Chris Symes teaches Law and Legal Studies at Flinders university of South Australia.

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© 2001 Chris Symes (text)

^[1] See, for example, Symes, C., ‘Workers’ Entitlements: The Government’s Options’, (2000) 25(1) Alt.LJ 14; Symes, C., ‘Insuring Wage Robbers’, (1998) 23(4) Alt.LJ 198.

^[2] Department of Employment, Workplace Relations and Small Business, Employee Entitlement Support Scheme: Year One Activity Report, January 2001. Available at <http://www.dewrsb.gov.au/ workplacerelations/ employeeentitlements/ default.asp> .

^[3] Although the company appears to have had only a few employees (perhaps only one).

^[4] Corporations Act 2001 (Cth), s.556(1) provides for payments for administration expenses before employees’ wages and other entitlements.

^[5] Department of Employment, Workplace Relations and Small Business, letter to all insolvency practitioners, dated 15 October 2001, signed by Assistant Secretary Employee Entitlements Branch.