Employee protection and market realities

Wednesday, 01 March 2000


    Given the timing, it was inevitable that the difficulties of National Textiles and the remuneration of former AMP CEO, George Trumbull, would be linked and politicised.

    Unfortunately, in the ensuing furore, the need for sound policy is a prime casualty. The loss of employee entitlements on insolvency is a serious issue, with a long-term solution urgently needed. Until this is put in place, we will continue to see ad-hoc policy making which is unfair to the employees, damaging to business and government and open to abuse.

    AICD was not in favour of the two solutions proposed in the government discussion paper in August 1999, namely :

    * a scheme for basic payments by government; or

    * a compulsory insurance scheme, with direct payment by government to employers of small businesses.

    Both schemes would impose significant additional costs and complexity on industry at large, penalising all employers for the actions of a few. They would send the wrong signals by allowing reckless employers to abrogate their responsibilities at the expense of the more responsible. Regrettably, Minister Reith announced on 8 February 2000 that an interim scheme along the former lines would be introduced, backdated to 1 January 2000, while continuing consideration was also given to the latter, with a choice between the two being made in due course. As a matter of principle, employers should take responsibility for meeting the entitlements of their employees and not be bailed out by industry-wide funds. The establishment of complex national schemes is unnecessary; rather, the matter should be handled using market-based structures which give employers the incentive to solve the problem in a manner appropriate to their particular circumstances.

    There is a tendency to lump together unpaid wages, annual leave, long service pay, pay in lieu of notice and redundancy pay. However, whereas unpaid wages, annual leave and long service pay are accrued benefits, pay in lieu of notice and redundancy pay are not. In its September 1999 submission, AICD proposed that these two categories be handled differently. First, accrued benefits should be handled by modifications to section 556 of the Corporations Law, on priority payments for unsecured debts and claims in the event of insolvency, to place employee entitlement claims, excluding redundancy payments and pay in lieu of notice, above the priority accorded to debts secured by a floating charge. This would be similar to the preferential status of employee entitlements under the United Kingdom Insolvency Act 1986. The priorities could possibly be altered further to place these employees' entitlements before those of secured creditors. A maximum payment should be set for claims, with courts given discretion to lift this maximum in certain circumstances taking into account the reasonableness of this action in the particular context. While AICD recognises this proposal may have some adverse implications with regard to capital raising, companies and their financiers would adjust to the proposal over time; it would also introduce greater discipline into bank lending and credit practices.

    Second, redundancy pay and pay in lieu of notice are not accrued entitlements and in principle should be protected through appropriate insurance arrangements entered into between the individual company and insurance companies or other financial institutions, and/or by means of workplace agreements. These arrangements should include a commitment by both employer and employees to act in good faith to further the interests of the company. Insurance market solutions would emerge once demand was articulated. AICD considers that directors, as part of their normal duty of care, should be responsible for ensuring an adequate scheme is implemented within their company, in line with the above principles, to safeguard redundancy entitlements and pay in lieu of notice. As part of this process they should disclose to employees the arrangements entered into, with periodic review to ensure its effectiveness. Small business would carry some of the burden arising from this solution, but the data suggests a significant part of the problem arises in the small business arena. If Government wishes to help small business, it should do so through other less intrusive avenues; it should not weaken the obligation on small business to treat their employees equitably. In similar vein, care should be taken to clearly separate issues of corporate insolvency from re-adjustment support for industries in depressed areas.

    To make this system work effectively, AICD would support government initiatives also announced by Minister Reith, to:

    * strengthen the existing prohibition against insolvent trading, so that directors would be breaking the law if they entered into an uncommercial transaction which led to the company's insolvency.

    Fairness to employees, and corporate credibility, are primary reasons to implement realistic employee protection as AICD has suggested. However there are other compelling reasons which so far have received little attention. Much of our job and wealth creation in the next few years will come from the New Economy characterised by the application of high technology, rapid innovation, speed and flexibility. Inevitably this means that the failure rate of companies will increase, with commensurate increase in costs to the taxpayer for safety-net schemes along the lines now proposed by the Government. Even more importantly, these schemes add to the potential for imprudent risk-taking and reckless behaviour on the part of unscrupulous companies and directors in what is already becoming an overheated market. The potential for abuse along the lines of the 1970s and 1980s booms, with a subsequent regulatory backlash, is obvious.

    At present our culture and legislative structures focus on preventing rather than enabling innovation, on eliminating risk rather than recognising risk as an essential driver of the market economy, with failure continuing to be seen as a stigma. If we are going to prosper in the New Economy, this must change to the point where we encourage innovation, accept risk, and educate the investing community to understand it, recognising that failure, far from being a stigma, is often a prerequisite for success, witness Silicon Valley. When failure does occur, we need to encourage rapid corporate re-organisation on a fair and equitable basis, while at the same time providing checks and balances to prevent abuse of power and to maintain the integrity of our markets. With today's speed of change, this cannot be done by prescriptive legislation. To be effective, these structures must be market-orientated, with companies and directors being held clearly accountable for their actions. The current proposals for the protection of employee entitlements are moving in entirely the wrong direction and AICD urges the government to fundamentally re-think the approach.


    Chief Executive Officer


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