If anything good has come from the demise of Ansett, it would have to be the federal Government's new scheme to protect employee entitlements against future corporate collapse.
The General Employee Entitlements Redundancy Scheme replaces the Employee Entitlements Support Scheme. It will enable employees to recoup a greater proportion of the entitlements they might otherwise lose through their employer becoming insolvent.
Under GEERS, employees of insolvent companies can apply to receive all unpaid wages, accrued annual leave, accrued long service leave, accrued pay in lieu of notice, and up to eight weeks' redundancy (as per community standard).
The new scheme is a substantial improvement on the EESS, but not as generous as the Ansett bailout, where an estimated $400 million in unpaid employee entitlements is guaranteed by way of a $10 levy on domestic airline tickets. Nor does it provide the 100 per cent protection promised by Labor and sought by unions.
GEERS, like the EESS, is taxpayer funded. However, it does not rely on the states or territories to contribute 50 per cent of the funds: the commonwealth will meet the full cost. Under the EESS, a maximum of $20,000 per employee was payable, and employees often only received 50 per cent of this due to the Labor-governed states'
unwillingness to support the scheme.
The upper limit of GEERS is calculated on the wage of $75,200. Employees earning more than this will not receive their full entitlements. Further, employees who have worked at large companies for a long period may be entitled to more than eight weeks' redundancy pay and will not be fully covered by the scheme.
The Opposition's approach is to increase employer contributions to the compulsory Superannuation Guarantee. This would provide a premium to be passed on to an accredited insurer, who would offer a product providing insurance for employee entitlements. Employers bear the cost of this scheme, and businesses that will never face
insolvency have to pay for the sins of those that do. Wisely, small business is excluded from having to contribute to the scheme.
Industrial action to protect entitlements led to the adoption of Labor's approach by the manufacturing company Tristar earlier this year. However, the cost was greater than Labor's proposed 0.1 per cent of each employee's wage, and would be prohibitive for many small to medium companies.
A taxpayer-funded scheme such as GEERS offers a better approach, provided it is combined with sufficient incentive for employers to take primary responsibility for entitlements. The Government has also announced it will improve the priority of entitlements.
Employee entitlements at present rank as unsecured creditors, but can be paid from assets covered by a floating charge. Providing employees with priority over secured creditors will ensure entitlements are paid more frequently from assets of the insolvent company. It is also likely, however, to increase the cost of finance, and
will have an effect on the free flow of capital through the economy that comes from providing lenders with first rank security. So, although this is a step in the right direction, it is fraught with difficulties.
Lenders will have to adjust to make sure their net security position takes into account the prior claims of employees. To ensure the change in priority does not inhibit companies' ability to obtain finance, small-to-medium business should be excluded from the change, or at least provided with limited application where only a
proportion of entitlements receive priority over secured creditors.
Two measures should be adopted to decrease reliance on GEERS and ensure the emphasis is on the company and its participants to take primary responsibility for entitlement obligations. First, those involved in deliberately avoiding such payments must be made personally liable. Second, courts should be given the power to order
contributions to be made from holding or related companies.
Last year the Government amended the Corporations Act, making any person involved in a transaction or agreement with the intention of depriving employees of their entitlements personally liable for loss suffered by employees. The effectiveness of the amendment is yet to be fully tested by the courts, but it would appear a
significant failure of the legislation is that the test for determining an accused person's intention is subjective. Subjective intent is difficult to prove, particularly when dealing with a corporation where intention by a number of individuals may need to be established.
The test needs to be made objective, tested against what a reasonable person's intention would be for entering into a transaction or agreement. It would be up to the courts to balance the competing interest of impugning transactions that deprive employees of their entitlements, and allowing companies to make commercially legitimate
Finally, the courts should be given the power to make holding companies and related companies contribute to the loss of employee entitlements. This lifting of the corporate veil would ensure that companies in a group scrutinised the affairs of each other to ensure sufficient funds to meet entitlements. In the Ansett case,
contribution orders could possibly be used to make Air New Zealand pay for lost entitlements.