Insuring entitlements AICD Review

  • Date:01 Jul 2005
  • Type:CompanyDirectorMagazine
The payment of employee entitlements is non-negotiable but the manner of how companies or the government can ensure that there are sufficient funds is open to debate.

Insuring entitlements

The payment of employee entitlements is non-negotiable but the manner of how companies or the government can ensure that there are sufficient funds is open to debate. John Arbouw reports

During the past few years there have been several instances of companies, even large ones, becoming insolvent and employees discovering that their entitlements have not been accounted for. The result is that this debt to employees ranks far behind the banks and other creditors when it comes to salvaging anything out of the financial wreckage.

More than 6000 companies become insolvent each year with around 4000 ending up with the liquidators or receivers. According to research from the Institute of Actuaries, redundant employees are owed an average $18,400 in entitlements.

When people lose their jobs and lose the money they thought was rightfully theirs it becomes a political issue, so the Federal Government introduced the Commonwealth's General Employee Entitlements and Redundancy Scheme (GEERS).

This scheme went some way to addressing many of the difficulties previously facing employees who had been retrenched due to insolvency. GEERS applies to employees who have been terminated from their jobs on or after 12 September 2001, and applies for up to 12 months after the employer's insolvency. The only employees who are not eligible are shareholding directors of a company or a direct relative of the employer (relative meaning spouse, parent, child or sibling).

GEERS is not intended to relieve employers of their responsibility to meet employee entitlements to the extent that there are sufficient assets available to do so. GEERS will seek to recover its payments to employees made redundant through insolvency. For this purpose, there may be a need for the employee to sign over to GEERS their right to recover monies owed by the employer. This assignment of rights would only be to the extent that GEERS meets the employer's legal obligation and GEERS will seek recovery to that extent only.

GEERS is not intended to be a scheme to "top up" unpaid employee entitlements over and above the standard adopted by the scheme as outlined above. Employees will not receive payments under GEERS for any component that has already been paid out unless this amount is less than the GEERS standard.

For example, if an employee is legally entitled to 12 weeks redundancy pay and the employee is paid out four weeks redundancy pay by the employer when retrenched, GEERS will only pay out another four weeks to a total of eight weeks (per its asserted "community standard"). GEERS will not pay out the other outstanding four weeks to discharge the employer's legal liability to the employee for redundancy pay.

A valuable feature of GEERS is that employees no longer have to wait on the liquidation of assets - funds can be advanced to employees and later recovered from the business in liquidation as part of the distribution of assets. If eligible, employees can claim from GEERS:

  • All unpaid wages (subject to a cap - see below)
  • All accrued annual leave
  • All accrued long service leave
  • All accrued pay in lieu of notice; and
  • Redundancy entitlements up to eight weeks (GEERS asserts eight weeks is the community standard).
As indicated above, there is a cap which is indexed annually. For 2001-2002, the cap was $75,200 a year or $1446 a week, which was indexed to $81,500 a year or $1567 a week for 2002-2003. If an employee earns more than this maximum, a claim can still be made but the GEERS payments are calculated as if the employee earned the amount of the cap.

For companies there is an obvious shortfall between what GEERS will provide for and the potential for further claims. It is also the issue of distinction between accrued and non-accrued entitlements. For instance accrued entitlements include unpaid wages, annual leave and long service leave. Non-accrued entitlements include redundancy pay and pay in lieu of notice.

As the AICD pointed out in its submission to the Inquiry in Australia's Insolvency Laws in 2003, redundancy payments are made in extraordinary circumstances rather than in the course of business and it is therefore inefficient to set aside a company's capital for this contingency.

AICD's position was that non-accrued entitlements should be protected by insurance arrangements between the company and the insurer. With the GEERS scheme covering only a part of this, this gap needed to be filled either by setting aside much needed funds or through insurance coverage.

This month ASSETinsure, an APRA-regulated insurance company plans to launch EESB (Employee Entitlements Shortfall Bond) aimed at filling the gap. In essence the insurance product delivers a bond that cover the shortfall between employee entitlements and GEERS.

According to ASSETinsure the benefits are:

  • Simple to implement.
  • Pitched at shortfall of Employee Entitlements and GEERS; it utilises the Government's safety-net and thereby avoids unnecessary cost to the employer.
  • Pricing of the bond is based on the credit profile of the company (about 0.1 percent to 0.35 percent of total payroll cost).
  • The exposure becomes transparent; directors know the extent of the contingent liabilities.
  • Bond can be utilised by management as a sweetener in EBA negotiations.
  • Bond constitutes a comfort factor for directors (both executive and non executive).
Whatever arrangements are made, the end result should be that employees are given their due. If in the process companies do not need to put aside funds to meet employee entitlement shortfalls and this capital can be used to further the long-term business prospects of the company, then everybody wins.

* Editor's note: The AICD believes insurance cover is a possible answer to the shortfall, but it does not officially endorse any specific product and suggests companies do their own insurance product evaluations

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