The protection of employee entitlements is based on the unique position that employees hold in the insolvency framework. It is well accepted that the employment relationship is different from other relationships encountered in the commercial world, because employees have not consciously and voluntarily accepted the risk of default as compared to other creditors associated with a company. Employees provide involuntarily working capital to the company in the form of unpaid entitlements. Being external creditors and at the same time internal participants in a company, they suffer the double loss when their employer becomes insolvent. They lose their entitlements and they lose their employment.
Providing protection of employee entitlements is an integral part of encouraging work and industriousness and ensuring employees do not “jump ship” when their skills and labour are necessary for the continued sustainability of the company or for maximising returns to other creditors.
Furthermore, employees in general are not in the position to have access to the financial information required to assess the viability of a company as compared to other creditors or take remedial action for being a delinquent debtor. Nor do employees have the financial resources to enforce their legal rights as compared to external creditors.
Although, the Corporations Act provides for employees to have a priority pursuant to section 556(1), it is common that employees are often unpaid for their entitlements from the company’s assets. This is due to a number of reasons such as insufficient or over-encumbered assets. As is often the case, companies in financial problems will sell assets or borrow against them to continue to trade.
GEERS provides prompt financial assistance to employees whose entitlements remain unpaid and who may not have been paid wages in the final stages of the company trading.
In reference to the Objectives of GEERS, employers retain the primary responsibility for the payment of employee entitlements. GEERS is only for those situations where an employer is unable to meet their obligations due to an insolvency event. GEERS is not intended to supplement business restructuring. The Commonwealth subrogates employees’ rights against an insolvent company.
GEERS has undergone a number of changes and has evolved over the period since its inception approximately five years ago. However, the latest developments have been significant. From 1 November 2005, GEERS will be expanded in a number of ways.
Therefore, in summary due to the increase propensity for more individuals to benefit from GEERS, Department of Employment and Workplace Relations (“DEWR”) will be looking very closely at the insolvency event, the timing of the insolvency event and the effects that it has on employees and excluded employees. The DEWR and the insolvency practitioner will be very mindful of business restructuring scenarios.
Directors and their advisers should beware of the selling of a business to a new entity as there may be implications that employees may have also been transferred. As a result, the employees will be unable to claim under GEERS and the new entity may be responsible for all of the employee entitlement liabilities. Just how the new Industrial Relations laws relate to this area may be the subject of another article. Ensure that there is a clear delineation between the previous entity and the new entity both in substance and form. Furthermore, in the light of my previous article, ASIC is closing the circle on ‘phoenix companies’ and directors who persist in utilising this strategy to avoid their corporate responsibilities will be pursued vigorously and result in their disqualification from managing a corporation for up to five(5) years.