Working Without a Safety Net

DATE: 1 March 2000

An abridged version of this paper was published in The Australian.

The difficulties at National Textiles and the ensuing furore have meant that, with the proposal for the safety net scheme for workers recently announced by the Federal Government, sound policy has been put at risk.

The loss of employee entitlements due to insolvency, and associated director responsibilities, is a serious issue and needs sustainable long-term solutions. Otherwise we will continue to see ad-hoc policy making which is unfair to employees, damaging to business and government, and open to abuse.

In the rush to find political solutions, critically important longer term issues are being overlooked.

Much of our job and wealth creation in the next few years will come from the New Economy characterised by high technology, rapid innovation, speed and flexibility, often in smaller companies. Inevitably this means that the failure rate of companies will increase, with further controversy and corresponding costs to the taxpayer for safety-net schemes along the lines now proposed. These schemes will 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, with a subsequent regulatory backlash, is obvious.

At present our cultural, political and legislative structures focus on preventing rather than enabling innovation, on eliminating risk rather than recognising it as an essential driver of the market economy, with failure continuing to be seen as a stigma.

It also tends to assume that failure must automatically be due to negligence or incompetence on the part of directors and hence directors should be made personally liable irrespective of the circumstances.

In reality, the reasons for failure are manifold and cases of negligence are rare. The vast majority of directors strive to do a competent and honest job in a rapidly changing world. The more onerous their obligations are made, by continually increasing personal liability, the less inclined good people will be to take up the role, which would be a major setback for our community.

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, whilst at the same time providing checks and balances to prevent abuse and to maintain the integrity of our markets. With today's speed of change, this cannot be done prescriptively with safety-nets. Solutions should be market-orientated, with companies and directors being held accountable for their actions.

The Australian Institute of Company Directors 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 send the wrong signals by allowing reckless employers to abrogate their responsibilities at the expense of the more responsible, whilst imposing significant additional costs and complexity on industry at large. 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.

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.

These two categories should be handled differently. Accrued benefits should be handled by modifications to the Corporations Law to place these claims above the priority accorded to debts secured by a floating charge, similar to the U.K. The priorities could possibly be altered further to place these accrued benefits before those of secured creditors, and thus near the top of the queue when a company is placed in voluntary receivership or liquidation. A maximum payment should be set for claims, with courts given discretion to lift this in particular circumstances.

While 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 should be protected through appropriate insurance arrangements and 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.

Directors, as part of their normal duty of care, should be responsible for ensuring an adequate scheme is implemented within their company.

Small business would carry its share 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.

The current proposals for the protection of employee entitlements are moving in entirely the wrong direction. AICD urges the government to fundamentally re-think the approach.