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Forsyth, Anthony --- "Accountability to employees" [2006] MonashBusRw 36; (2006) 2(3) Monash Business Review 30

Accountability to employees

Anthony Forsyth

Unless stronger legal measures are adopted, employees continue to face uncertain times when companies become insolvent or restructure, says Anthony Forsyth.

As well as being a boardroom topic, Corporate Social Responsibility (CSR) is squarely on the corporate law reform agenda in Australia. Two federal government inquiries have examined the legal framework for CSR and among the questions considered in these inquiries is whether directors’ legal duties should be modified to permit – or require – them to take into account broader interests than simply those of shareholders when making management decisions.

Arguments abound as to the need for CSR to be transformed from an essentially voluntary or self-regulatory phenomenon into a body of legal rules that recognise the obligations of companies to their employees, consumers, local communities, the environment and other stakeholders. Any move in this direction is strongly resisted by business leaders who argue that their compliance burden in respect of these diverse interest groups is already onerous and that further regulation will stifle innovation and risk-taking in corporate management.

The way that businesses treat their workers and their rating as ‘employers of choice’ are widely considered to be important indicators of overall CSR performance. Employment and industrial issues, including compliance with core international labour standards regarding collective bargaining, recognition of unions and equal opportunity, are also highlighted in the various CSR codes and principles in operation globally. However, employees are largely ignored in Australia’s regulatory system of corporate governance. Following the Anglo-American shareholder primacy model, employees (along with other non-shareholder stakeholders) have traditionally been treated as the ‘outsiders’ of corporate enterprises. In recent years, the high-profile collapses of companies like Ansett and One.Tel have exposed the vulnerability of employees within this model. Regulatory responses to these and other corporate failures have primarily sought to improve corporate governance standards for the benefit of shareholders.

How much protection for employees?

The minimal recognition of employees within Australian corporate regulation is best illustrated by the narrow focus of directors’ common law and statutory duties to act in good faith and in the best interests of the company. These duties require company directors to treat shareholders’ interests as paramount.

Of course, the greatest threats to the welfare of employees are posed when companies run into financial difficulty and face potential insolvency. At this point, workers’ jobs, wages and accrued leave, redundancy and other employment entitlements are placed at considerable risk. Australian case law requires directors to consider creditors’ interests when a company is insolvent or near insolvency. However, the cases stop short of establishing a duty that is enforceable at the instance of creditors. Under the Corporations Act 2001, employees do have limited status as priority creditors. However, the claims of secured creditors such as banks and other financiers, and costs incurred in the insolvency process, take precedence over those of employees.

In a series of high-profile company collapses – including National Textiles in early 2000 and One.Tel and Ansett in 2001 – thousands of Australian workers lost not only their jobs, but also their accrued leave and redundancy entitlements. These outcomes often resulted from deliberate corporate strategies to avoid meeting their obligations to employees or in circumstances where directors had diverted company funds to ensure that payments were made to themselves. The political fallout from these events led the federal government to adopt the following initiatives to enhance employee protections.

The Corporations Law Amendment (Employee Entitlements) Act 2000 built on the existing duty of directors to prevent companies from trading while insolvent by imposing personal liability on directors where they enter into ‘uncommercial transactions’, or agreements, transactions, or corporate restructures intended to prevent workers from accessing their employment entitlements. Heavy penalties (fines and imprisonment) deal with breaches of these provisions and employee creditors can initiate legal proceedings with the liquidator’s permission. However, it is very difficult to prove that directors acted with the requisite intention under these provisions. In 2004, the Parliamentary Joint Committee on Corporations and Financial Services recommended that the provisions be reviewed to determine their effectiveness in deterring companies from adopting corporate structures to avoid meeting employee entitlements (such as ‘phoenix’ company arrangements).

The government also passed the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003. This enables the recovery by a liquidator of excessive payments made to directors, where a company is in no financial position to make such payments. The trigger for this measure was the One.Tel case where the company’s joint managing directors paid themselves $7.5 million each in bonuses, in a year when One.Tel had lost $291.1 million. The new statutory provision prevents companies from providing directors or their associates with payments or other benefits (such as shares), in a situation where no ‘reasonable person in the company’s circumstances’ would enter into such transactions. Again, the effectiveness of this provision is far from clear.

In the wake of the Ansett collapse just before the November 2001 federal election, the government announced a raft of measures. These were intended to assist the 16,000 unemployed Ansett workers whose employment entitlements were threatened. First, the government established the Special Employee Entitlements Scheme for Ansett Group Employees to ensure the recovery of their entitlements. Secondly, it replaced the Employee Entitlements and Support Scheme (established in 2000) with the General Employee Entitlements and Redundancy Scheme (GEERS), a more comprehensive scheme enabling employees of other insolvent companies to claim recovery of their unpaid entitlements from a government fund.

Under GEERS, employees can recover unpaid wages; unpaid annual leave; unpaid long service leave; payments in lieu of notice; and up to 16 weeks’ redundancy pay. Employees must have a legal entitlement to receive such payments under their employment contract, or an applicable industrial award or statutory agreement, or relevant legislation. An overall ‘cap’ of $98,200 (indexed annually) applies to the level at which entitlements paid out under GEERS are calculated.

The establishment of a ‘safety net’ mechanism such as GEERS represents a welcome improvement in the level of protection offered to Australian employees in the event of employer insolvency. However, the scheme operates subject to a number of important limitations. Most importantly, the establishment of GEERS as a policy instrument, rather than under legislation, means that it is a precarious form of protection. In a 2005 decision, Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (Receivers and Managers Appointed), the Federal Court of Australia observed that “[GEERS] is a voluntary scheme. No employee has a right enforceable by action in a court of law to obtain any payment from the money granted by parliament.” In that case, the court found that the federal government’s priority right to recover funds paid to employees under GEERS did not extend to situations where a ‘deed of company arrangement’ was entered into by creditors. The government’s rights of recovery only applied where the insolvency process proceeded to the stage of liquidation of the relevant company.

The decision in Commonwealth v Rocklea Spinning Mills was widely considered to threaten the future viability of GEERS, as the federal government’s priority creditor rights constitute a key feature underpinning the entire scheme. In response, the government changed the scheme from 1 November 2005, to prevent employees from accessing GEERS payments while the employing entity is under administration or receivership, or is subject to a deed of company arrangement. Claims under GEERS can now only be made once a liquidator has been appointed to ‘wind up’ the company. GEERS has also been extended to enable employees to recover any wages unpaid in the three month’s prior to the employer’s insolvency; and to make employees who resigned or were dismissed within six months prior to insolvency eligible to recover any unpaid entitlements.

A further observation, by way of assessment of GEERS, is that the existence of a government-funded scheme arguably discourages directors from taking greater responsibility for ensuring that companies have sufficient assets to meet their employees’ entitlements. While the outcome of GEERS in terms of increased employee protection is commendable, the public policy benefit of effectively transferring directors’ potential liability to taxpayers is questionable. The 2004 review of GEERS by the Parliamentary Joint Committee on Corporations and Financial Services found widespread support for the scheme. At the same time, it was recommended that alternative mechanisms for safeguarding employee entitlements should be explored, such as industry trust funds, insurance schemes and employer levies.

The third measure announced by the federal government in response to the Ansett collapse was a promise to place employees’ claims to recover unpaid wages, notice and leave entitlements ahead of those of secured creditors, in the statutory priority list for distribution of assets upon the insolvency of large companies – the ‘maximum priority proposal’. In late 2005, after four years of consideration, the government accepted the Parliamentary Joint Committee’s recommendations that the maximum priority concept not be adopted. The committee had been influenced by business interests opposing the proposal. Concerns that were raised included its potential negative impact on lending practices by banks and other finance providers. It was argued, for example, that they would make loans only to companies holding assets without employees, or seek security over the personal assets of proprietors and directors. This would act as a handbrake on entrepreneurship, and lead to reduced investment levels across the economy.

In summary, the various statutory and policy measures adopted in recent years have improved the position of Australian employees in the event of employer insolvency. In particular, GEERS represents an important step forward, ensuring that most workers receive at least a basic level of return of their employment entitlements. Overall, however, the federal government’s new measures are hedged about with limitations and uncertainties that significantly hamper their effectiveness as protective devices for employees.

The defeat of the maximum priority proposal illustrates the extent to which business interests continue to hold sway under our shareholder-centred corporate law model. The influence of such interests has also led one of the federal government inquiries into CSR to recommend that no legislative changes are necessary to support the extension of CSR practices. The recent Australian experience of efforts to change formal rules of corporate regulation to accommodate employee interests, points to the obstacles that stand in the path of translating theoretical constructions of CSR into effective legal measures.

MBR subscribers: To view the full academic paper, email mbr@buseco.monash.edu.au

Public access: www.mbr.monash.edu/previous_issues.php (six month embargo applies)

The Corporate Law and Accountability Research Group (CLARG) was established in the Department of Business Law and Taxation at Monash University in November 2005.

CLARG provides a focus for collaborative research in the broad fields of corporate governance, regulation and accountability, and the debate over corporate social responsibility. For further detail visit www.buseco.monash.edu.au/depts/bit/clarg/index.php.

Cite this article as

Forsyth, Anthony. 'Accountability to employees'. Monash Business Review. 2006.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 30–33. DOI:10.2104/mbr06036

About the author

Anthony Forsyth

Dr Anthony Forsyth is a Senior Lecturer and Director of the Corporate Law and Accountability Research Group in the Department of Business Law and Taxation at Monash University. His research interests cover all aspects of employment and workplace law, and the intersection between labour law and corporate law.


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