Australia: Fair Entitlements Guarantee Act 2012: generous severance pay entitlements pose risk to scheme

In brief - Employees made redundant by insolvency event entitled to generous payout

Changes to the General Employment Entitlements and Redundancy Scheme (GEERS) mean that employees are probably better off being made redundant by an insolvency event rather than as a result of a normal workplace restructure.

Act puts existing GEERS scheme into legislative form

The Senate recently passed the Fair Entitlements Guarantee Act (26 November 2012), which confirms the rights of employees to recover, through the Commonwealth, their monetary statutory entitlements in the event of an act of insolvency which renders an employer unable to pay them.

In essence, the Act puts into legislative form the scheme that was established by the Howard government in 2000, the General Employment Entitlements and Redundancy Scheme (GEERS). The Gillard government promised to improve GEERS during the 2010 election since it was an administrative scheme and liable to government dismantling. The Act now makes the scheme part of the legislative framework for insolvency practitioners to deal with in their practice.

Main provisions of the Fair Entitlements Guarantee Act

Apart from now being underpinned by legislation, there are a number of practical differences in the scheme. Some significant traps also exist which were not present before.

A summary of the main provisions is below.

  • Like the administrative scheme, the Act provides that advances from the Commonwealth can be made to employees who lose their jobs due to an insolvency. The Commonwealth can then recover such payments from a liquidator as a matter of priority.
  • An entitlement to a payment occurs if the employment ends due to an insolvency event (or occurs within six months of the appointment of an insolvency practitioner).
  • An "insolvency event" means the appointment of a liquidator or a trustee in bankruptcy in the case of an individual or group of partners.
  • An "insolvency practitioner" is defined as including the liquidator, administrator, receiver or a person in control or possession of property for purposes of enforcing a charge or mortgage.
  • An entitlement to an employee is triggered when employment "ends" due to an "insolvency event". When an employment ends now includes a period before the appointment of an insolvency practitioner. Just like a relation back period, employees who have been terminated in the six months before the appointment of an insolvency practitioner are entitled to make a claim.
  • The Act excludes certain individuals. There is nothing new here. Those who were or are directors of the company in the 12 months up to the appointment of the insolvency practitioner and the directors' relatives are denied the scheme's benefits. So are employees who have recently converted from being contractors.
  • There is no change in position in relation to companies under voluntary administration or undergoing a process which will lead to a deed of company arrangement (DOCA). The priority that employees enjoy under section 556(1) of the Corporations Act 2001 remains. The government clearly has not allowed either employees or taxpayers to be exposed to a potential diluting of employee entitlements pursuant to an administrative process.

What GEERS will now pay to employees

There have been some changes here.

Payments of accrued but untaken annual leave and long service leave are a given and do not change. Neither has pay in lieu of notice which can be up to five weeks (consistent with the provisions of the National Employment Standards (NES) under Part 2-2 of the Fair Work Act 2009).

However, allowance for severance payments is substantially more generous. Here GEERS significantly moves away from the NES and allows up to four weeks' pay for each year of service for employees who have been made redundant as a result of an insolvency event.

The NES on the other hand provide a table in section 119 of the Fair Work Act, which entitles an employee to be paid up to six weeks' pay if made redundant normally in 2012.

It is likely that some powerful unions have managed to lobby for more substantive benefits for employees made redundant which exceed the benefits under the NES. Such employees are now not going to miss out on their more generous benefits which may have been bargained into Collective Agreement.

Implications for business of increased limit on severance pay

This increased limit on severance pay is regrettable for business. Most employees do not have the right to be paid such payments. In fact, most employees would probably be better off being made redundant by way of an insolvency event rather than as a result of a normal workplace restructure.

For example, workers made redundant seven months before the employment of an Insolvency Practitioner will be in a worse position to those terminated upon the Insolvency Practitioner's appointment or within six months of such appointment.

An employee who had, say, ten years' service and was made redundant seven months prior to an insolvency practitioner's appointment would only be entitled to seven weeks' severance pay in 2013. An employee with the same period of service terminated two months later would be entitled to up to 40 weeks' severance pay.

Employees may use a range of tactics to delay termination

This begs the question as to what potential action a disadvantaged worker could seek in the circumstances. If the employee has an inkling that the business is likely to fail, he or she may try to delay the termination as long as possible. Feigned sickness or workers' compensation claims may abound, as this would effectively make termination unlawful.

Insolvency practitioners being appointed will then have to consider closely all current workers' compensation and absentee employees. This may have an impact on the payment of benefits.

Impact of increased severance pay on DOCA negotiations

Significantly as well, this puts potential DOCA negotiations under increased pressure. Employees with significant service are likely to lobby for payment of severance payments that they would receive at liquidation under GEERS rather than pursuant to the NES entitlements.

Insolvency practitioners will also need to be careful of such risks. A payment made under the Act by the Commonwealth will be a provable priority payment of the Commonwealth if it is made in advance to the employee.

Under the Act, insolvency practitioners however are given some respite in that they do not have to pay benefits to employees who have been able to have their employment transmitted where they are doing similar work on similar terms.

Additionally, the Act allows benefits to an employee to be reduced by any amount that that employee otherwise owes an employer.

Advance payments and recovery by the Commonwealth

The Commonwealth can make an advance payment to an employee if it is of "low risk and value", but otherwise the payment must go through the insolvency practitioner. Any amount paid by the Commonwealth is recoverable by it as it stands in the shoes of the employee and has the benefits of the priority created in Section 556(1) of the Corporations Act.

Severance payments have potential to deplete the scheme's budget

The Act largely reflects the administrative scheme that preceded it.

However, generous severance pay entitlements may put the viability of the scheme that it administers at some risk.

Employers' representatives have already speculated that a large business closure in Australia with hundreds of employees losing their jobs could, if the workplace was mature in years and with substantial service periods, substantially deplete the Commonwealth of its $87 million budget allocation for the scheme in its first year.

That could in turn put insolvency practitioners under pressure if public sector officers operating the scheme came after payments which they considered had priority.

Sam Ingui
Workplace relations
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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