Employee entitlements update on current status

Since July, 1999, the Federal Government has actively sought to address the serious issue of the protection of employee entitlements.

This issue received a lot of media focus following the high-profile Patricks, National Textiles and Oakdale Mines cases. After producing a discussion paper The Protection of Employee Entitlements in the Event of Employer Insolvency in August 1999, the Government invited submissions from business groups and peak organisations including the Australian Institute of Company Directors. The message the Government wanted to send to employers who deliberately avoided their obligations to employees by entering into arrangements or transactions that avoided payment of employee entitlements was clear - deliberate avoidance is unacceptable and amendments would be made to the Corporations Law to expand a director's personal liability for unpaid entitlements. Moreover, longer-term measures such as a taxpayer funded National Safety Net Scheme, to cover unpaid entitlements, were also proposed.

In response to the Governments' discussion paper, the AICD in its submission of 17 September 1999 (AICD Website) stated that - while this issue was very important and the stated objectives laudable - the AICD was not in favour of the Government's proposal. The AICD argued that the Government solutions would impose an industry-wide regulatory burden to solve what appeared to be a relatively isolated problem. Furthermore, in the process, the Government would impose significant extra costs and complexity on industry at large - penalising all employers for the actions of a few. The points raised in the AICD submission and before the public hearing in Canberra did not go unnoticed. The AICD lodged a further submission (on AICD website) to the Parliamentary Joint Statutory Committee (PJC) on the 16 March, 2000 entitled Corporations Law Amendment (Employee Entitlements) Bill 2000 (the Bill). In this submission the AICD expressed concerns that the Government was proceeding with ad-hoc law reform based on unsound policy. The AICD urged the PJC not to limit its consideration solely to a review of the Corporations Law but also to examine the entire strategic approach towards the protection of employee entitlements. The AICD also had some very specific concerns with the Bill, especially the amendments to s588G(1A) whereby a company will be deemed to have incurred a debt for the purposes of the insolvent trading provisions when it enters into an uncommercial transaction.

This particular proposal introduced the potential for directors to be judged with the benefit of hindsight for decisions taken in good faith, and with due diligence, at an earlier time. As a result, directors could face personal liability for decisions taken in good faith. The potential increase in risk aversion at critical times by a company's directors was pointed out by the AICD to be a damaging unintended consequence of this proposal. The AICD also objected to subsequent last-minute proposed amendments by the Senate regarding making companies within a group contribute to paying out employee entitlements for a failed company within the group. The AICD believed that such contribution orders within corporate groups further undermined the crucial concept of "limited liability", a vital component of a forward moving economy, especially in encouraging new ventures. After much debate in Parliament, the Corporations Law Amendment (Employee Entitlements) Bill 2000 was passed without the Senate amendments. Unfortunately the s588G(1A) amendment regarding uncommercial transactions remains, as the AICD's concerns (supported by the Law Council of Australia) were not addressed in the final legislation.

In a press release of 28 June 2000, Financial Services and Regulation Minister Joe Hockey advised that the new legislation (outlined above) would protect employee entitlements by the addition of a new offence aimed at catching agreements and transactions entered into for the purpose of avoiding payment of employee entitlements. The AICD has no quarrel with this particular amendment or the wider stated goal of employee entitlement protection. The AICD however cannot support the Act's retention of the s588G(1A) "uncommercial transaction" section for the reasons stated above and in AICD submissions and in Company Director (March 2000). The longer-term solutions, such as the Government's National Safety Net Scheme proposal (touched upon above) need far greater community and business consultation and debate. The AICD has and will continue to represent directors views in this crucial matter.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.