Unions

The Shaw Plan

Jeff Shaw unveils his national plan to protect workers entitlements.

	Jeff Shaw - Moving on Entitlements

Introduction: Issues in Context

The Sydney Morning Herald put the matter aptly in its editorial of 7 July 1999, when it said the entitlements of workers "need not and should not be smashed to pieces in the carnage." [of company insolvency] and that the dilemma was "a scandal that must quickly be addressed".

The June 1999 closure of the Oakdale coalmine near Camden, NSW, where $6.3 million is outstanding in employee entitlements, is just the latest example and reinforces the need for measures to secure the payment of employee entitlements.

There was the earlier closure of the CSA Copper Mine at Cobar in 1998, where after much time and heartache employees were eventually paid out most of the approximately $10.5 million owing in accumulated employee entitlements, there has also been the closure of Gilberton Abattoir at Grafton involving $3 million in unpaid employee entitlements, and the Woodlawn copper, lead and zinc mine at Goulburn, where an estimated $6 million was due to employees. 157 Hospital workers at Rockhampton and Yeppoon lost $1.4 million, and thousands of Sizzler Restaurant employees lost $2 million worth of entitlements.

The 1998 waterfront dispute highlighted the need for measures to prevent the manipulation of company structures or the closure of businesses, where that leads to the avoidance of legal entitlements.

It is a fact of commercial life that not all businesses succeed. This is often the case despite the best efforts of company directors and management. But even where no-one is at fault, there is force in the proposition that employees deserve special protection in relation to their earned entitlements.

It is important that the response to this problem be a national one.

It must be recognised that this is not a matter for industrial law alone. Amendment of the Corporations Law is a necessary part of any package of reforms aimed at resolving these issues.

In recognition of the need for a national framework for company law, legislative amendment of the Corporations Law aimed at protecting employee interests requires the agreement of all Australian jurisdictions. Under the Heads of Agreements on Future Corporate Regulation, the States have undertaken not to legislate on matters which might affect corporations without the approval of the Ministerial Council for Companies and Securities.

Better securing the rights of employees requires corporate and industrial legislative reform at the federal level. I would argue that there is an urgent need to look at these specific reforms:

- That company directors could be held personally liable where, for example, a director has not acted with due diligence to make provision for the payment of entitlements.

- Related entities within a corporate group may be held liable for unpaid employee entitlements.

- An anti-avoidance provision could be inserted into the Workplace Relations Act to invalidate a contract or arrangement whose purpose or effect is to avoid legal obligations to pay employees their industrial entitlements.

- Measures could be introduced to require employers to make provision for employee entitlements as they accrue, to avoid the possibility that there will be nothing left for workers to claim against.

- Finally, the establishment of a federal wage earner protection fund of of entitlement insurance should be considered.

A Federal Proposal for the Corporations Law

Two options for the amendment of the Corporations Law were identified by the Federal Treasurer in April 1999, and raised at the Ministerial Council for Corporations. Both options are designed to assist in the protection of employee entitlements.

These were to:

- create a civil or criminal penalty, specifically designed to prevent the misuse of company structures by directors to avoid payment of employee entitlements; and

- strengthen the related party and insolvent trading provisions in the Law, so that directors would be in breach of the existing insolvent trading provisions if they gave a financial benefit to a related party or entered into a commercial transaction, which caused the company to become insolvent.

NSW has written to the Federal Treasurer and indicated a number of deficiencies with these proposals . The first proposal does not assist the recovery of unpaid money. Such a provision would primarily have a deterrent role. The second proposal does not focus specifically on the protection of employee entitlements. Rather, it aims to tighten insolvency law in a way which would assist all creditors.

Until more details are available, it will not be possible to determine whether the proposal improves the existing position of creditors.

The priority for policy makers at this stage should be to find ways to achieve recovery of entitlements for employees, rather than simply to penalise unscrupulous directors.

The Law as it Stands

An insolvent corporation is one which is unable to pay all its debts as and when they become due and payable The unpaid employee is, almost always, an unsecured creditor.

Due to amendments in 1993, the priority of the Commissioner of Taxation over employee creditors seeking payment of their entitlements has been abolished.

After the costs of the administrator (the costs of winding-up), employee entitlements rank first among unsecured creditors. Due to application of the pari passu principle, there is equal sharing of available assets between creditors of the same class. This means that employees, who are given a priority status as a class of unsecured creditors are, after the costs of winding-up, ranked next as the class of creditors amongst whom available funds are distributed.

Secured creditors, however, have priority over all unsecured creditors. This scheme of priority has been well summarised as having "been erected in a legal vacuum, without regard to the possibility that no money will be left in the corporate pot once secured creditors or the liquidators are satisfied."

Some have proposed affording employee creditors priority over secured creditors.

The International Labour Office uses the term "super-privilege" or "absolute priority" to describe this type of arrangement. A report to the 1991 International Labor Conference by the International Labor Office identifies a number of countries that have adopted such a system, "...mainly French and Spanish speaking countries, whose labour legislation is modelled on Mexican and French law. " Generally only part of the outstanding entitlement is protected by the super-privilege - for example only the previous year's wages may be protected .

Caution should be exercised before considering this type of approach. The application of secured creditor arrangements is fundamental to commercial lending arrangements. The impact of such a scheme on the lending practices of banks and other creditors would be a relevant consideration.

How effective those laws have been in practice in securing payment of employee entitlements would also be useful to know. Such issues are beyond the scope of this paper.

Option of Director Liability where a Corporation Fails to Pay Employee Entitlements

No matter what priority might be given to employee rights on insolvency, the fact remains that there may not be enough money in the company to satisfy their claim.

One measure to address this would be to hold directors personally liable in cases where they have not made proper provision for, and paid, employees' wages due and owing. Directors are already personally liable under some statutes and I accept the argument that the corporate veil should be pierceable on this important issue.

An exception could be made where a director can satisfy the court that the director:

* was not in a position to influence the conduct of the corporation in relation to making provision for wages and other entitlements due and owing, or

* the director, being in such a position, used all due diligence to make provision for wages and other entitlements due and owing.

There is already such legislation operating in Queensland. Canada also has directors' liability legislation of the kind contemplated here.

One Canadian legal text - and this is relevant to the Australian position - has described the position as follows:

"In many such cases the small asset base will not make it worthwhile for the creditors or the corporate employer itself to commence ... proceedings. Consequently, a hollow corporate shell will remain, against which creditors' claims are seldom recoverable.

To overcome this unsatisfactory effect upon employee creditors, most Canadian jurisdictions have established a legislative framework which enables employees to pierce the corporate veil and pursue their claims against the officers and/or directors of the corporate employer."

The Need for an Anti-Avoidance provision in the Workplace Relations Act

Appropriate legislation is necessary to prevent corporate restructuring conduct which leaves employees without their entitlements. This need was highlighted recently in the Patrick case .

Despite that case, artificial corporate restructuring of the type alleged in MUA v Patrick may, depending on the circumstances, still be permitted by current corporations law.

The proposal to introduce an anti-avoidance provision into the Workplace Relations Act would address the problem of artificial corporate structures being adopted to avoid employee rights and entitlements. It would allow a Court to declare void any contract or arrangement, the purpose or effect of which is to avoid the payment of employee entitlements, and seek to have a deterrent effect against corporate structures being so used.

Part IVA of the Income Tax Assessment Act demonstrates that the federal legislature in other contexts has experience in dealing with artificial mechanisms for avoiding the scope of relevant legislation.

Related Company Liability for Outstanding Employee Entitlements

There is much to be said for the objectives of the Employment Security Bill 1998 (Cth) of extending "employer" liabilities for entitlements to related companies by seeking to amend the Corporations Law to enable an application to be made to a competent Court for a related corporation to pay the debts of an insolvent company.

Again, this approach is not a panacea, but is an important component in the package of reforms proposed.

Consideration should be given to providing an employee, group of employees, or a registered industrial employee organisation, with the ability to apply to the Federal Court for an order that a related body corporate pay the outstanding entitlements due to employees of the employer company.

There is also a need to examine, and perhaps strengthen, provisions in legislation that provide for transmission of conditions on transmission of business to prevent companies avoiding entitlements by artificially transferring employees from employer to employer.

Mechanisms for ensuring that workers are paid

One of the biggest problems for workers is the fact that, even if they know that their organisation is about to fold, they have no legal right to have most entitlements paid until they are actually terminated - when the money may have gone.

Securing the Prompt and Regular Payment of Occupational Superannuation Contributions

There is currently no mandatory and universal statutory obligation that superannuation contributions be paid promptly and on a regular basis. Employees may not be aware that contributions are not being made. It is only at the end of the financial year that an employer who has failed to make superannuation contributions into a fund as required must pay the equivalent as a tax with interest, charges and a penalty.

This matter has recently been raised with the federal Treasurer by the NSW government. It was proposed that there should be a federal legislative requirement that superannuation contributions be mandatorily paid by employers on a regular basis, such as monthly.

This is a simple reform, but one that would make an enormous difference to many workers who find out too late that their employer has not being paying their super.

Protecting general entitlements

Employer-based or industry-based trust funds

This approach would involve corporations, on an individual company basis, holding the accrued entitlements of their employees in trust so that other creditors (secured and unsecured) could have no claim against these funds in the event of insolvency.

It is most readily applied to entitlements like annual leave, which is normally accounted for progressively in any case, and long service leave, where the entitlement arises on a specific date.

There are some limitations in this approach. Periods of leave are paid for (or paid out) at the employee's salary at the time of payment. However contributions in relation to that leave may have been made some years before. Smaller fund will find it harder to achieve sufficient earnings to pay the full entitlement. It may be difficult to require the making of progressive contributions in relation to redundancy where the liability may be substantial (for example, three weeks for each year of service), but may never arise. The administrative costs of establishing and maintaining a small fund could also be substantial. The argument may be made that contributions at the rate required to cover anything more than very basic leave entitlements would place a substantial impost on working capital available to companies.

Industry funds, such as those proposed by the AMWU, allow for economies of scale which may better address the needs of companies and of workers..

Wage Protection Insurance

The Employee Protection (Wage Guarantee) Bill 1998 (Cth) (the Crosio bill) seeks to set up a system of compulsory insurance to ensure payment of employee entitlements if a company becomes insolvent and has insufficient funds to pay employee entitlements.

This approach seeks to provide a remedy to all employees who would otherwise not recover entitlements, irrespective of the reason for the company's failure.

Compulsory insurance would necessarily impose a cost burden on all businesses, including those that are both solvent and responsible. Further costings and actuarial advice are needed to assess the cost of this option.

Depending on these costings, this option could be less of a financial burden for employers than either the employer-based trust model or the wage earner protection fund model.

A Wage Earner Protection Fund

A wage earner protection fund scheme involves individuals having the ability to claim against a general pool of funds. The "wage earner protection fund" approach was raised in the Australian Law Reform Commission's 1988 General Insolvency Inquiry Report. The key architect of that report, Mr Ron Harmer, wrote in a 1993 article that :

"... The ALRC, while it concluded that the interests of employees would be best protected by the creation of such a fund or alternative social welfare legislation, stopped short of making a recommendation because it considered that the issue was "a matter of policy that is more appropriate for the government to determine as part of, or in the light of, its social welfare and income support policies."

It is time for us to have that policy debate.

Ireland, Belgium Finland, Germany, Sweden, and Norway operate a fund for entitlements (funded in different ways, with a cap on claims):.

It is difficult to assess the costs of a wage earner protection fund. There are no accurate estimates of the value of lost employee entitlements due to insolvency. Neither ASIC has nor Australian Bureau of Statistics have reliable data. Nor does the Department of Social Security collect information as to claims for benefits by employees retrenched due to company insolvency, although it is worth remembering that the establishment of a wage earner protection fund would mean fewer claims on the social security system.

Depending on the costs involved, we may have a number of options. A statute-based wage earner protection fund could operate on a universal employer levy system. This could operate in combination with alternative effective mechanisms, allowing employers to opt for other models. For example, an employer and union may set up a trust fund or the employer might take out appropriate insurance.

Alternatively, and depending on costs, the Federal government could establish a government funded scheme. This could provide immediate relief to workers owed entitlements, and then pursue the relevant employer, directors, or related companies for recovery of the entitlements. Under this system the bulk of the burden would fall on the relevant employers, as is appropriate.

It is untenable that Australia continues to fail to develop and implement a scheme to meet the serious industrial and social difficulties that arise in practical terms on a regular basis in Australian workplaces from the failure to pay employee entitlements. To maintain a void in this area is in stark contrast to other nations.

The States need to work co-operatively with the Commonwealth on these complex issues to develop reforms that secure payment of employee entitlements, without acting as a disincentive to business investment and without adversely increasing business costs.

Jeff Shaw is NSW Attorney General and Minister for Industrial Relations. He will take his plan to a meeting of Coporations Ministers in Sydney this week.

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  Issue 22 contents

»	Workers' Rights Butchered
»	Unions Back Shaw Plan
»	Buddy�s Buddy Still Singing Blues
»	Labour Calls Labor to Account
»	Olympic Gear - Labor Standards Should Apply
»	Ship of Shame into Darling Harbour
»	Cardboard King Seeks Warehouse Showdown
»	Nurses Enter New Years Fray
»	University Under Fire For Union-Busting Tactics
»	Inquiry to Lift the Lid on Public Service Bargaining
»	Currawong Back on Agenda
»	APHEDA Seeks Campaign and Marketting Officer

»	Guest Report
»	Sport
»	Trades Hall
»	Piers Watch

»	Youth Wages Campaign a Must for the Union Movement
»	Cheers for Piers
»	Cheers from Geneva

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