Workers’ entitlement scheme open to bosses’ abuse

Entitlements open to abuse

It’s a shame that Labor’s Brendan O’Connor chose shabby politics over sensible policy last week after Queensland Nickel collapsed. Labelling the Townsville-based MP Ewen Jones “pathetic” for shedding tears over the hundreds of job losses in his Queensland electorate betrayed the calculated ignorance of Labor’s employment spokesman on a critical matter. Rather than stick the boot into Jones for low-rent political reasons, Labor’s employment spokesman might try to muster some real conviction about the importance of the Turnbull government’s pursuit of Clive Palmer.

O’Connor was determined to make a cheap political point by attacking the Coalition over a measure in the 2014 budget that hasn’t passed. That measure sought to achieve almost $80 million in savings for taxpayers by bringing the cap on paying out workers’ entitlements under the Fair Entitlements Guarantee in line with national employment standards in the Fair Work Act.

Looking out for workers is commendable. But what about looking out for taxpayers who foot the bill for FEG?

Therein lies the flaw at heart of Labor, best personified by O’Connor who appears to be clueless about the moral hazards inherent in a scheme where taxpayers pick up the tab for unpaid workers’ entitlements when companies go bust. A well-meaning administrative scheme of last resort — the General Employee Entitlements and Redundancy Scheme or GEERS — introduced by John Howard in 2000 following the collapse of National Textiles — capped redundancy entitlements in line with the National Employment Standards. Under Labor, that morphed into FEG, a legislative scheme of first resort in 2012 which removed that cap.

Since its inception, taxpayers have paid out $1.88 billion to workers under the original scheme and its successor FEG. Only a fraction — $225.8m or 12.19 per cent has been recouped from those responsible for the corporate failures. And in a further snub to taxpayers’ interests, the former Labor government stripped funds from the Department of Employment necessary to recover money paid out under FEG. By contrast, the Abbott government set aside $16m in the last budget to bolster efforts to recover money paid out under FEG.

Operating like a litigation arrangement, the commonwealth funds liquidators to pursue its rights more aggressively. Given that the commonwealth has already recouped from corporate collapses more than the cost of recovery efforts, this pilot program must surely become more permanent in the May budget.

Indeed, the importance of the recovery program has been cemented following the collapse of Queensland Nickel and the record $73m that the Turnbull government will pay to sacked workers for unpaid entitlements. Moreover, it costs money to chase money. Employment Minister Michaelia Cash has appointed a special purpose liquidator to pursue potential litigation and to recover money from those responsible for the collapse of Queensland Nickel.

Why? Because the moral hazard implicit in FEG demands it. After all, the Administrator’s report to creditors released on April 12 concluded that Clive Palmer and his nephew and Queensland Nickel managing director, Clive Mensink, “appear to have been reckless in exercising their duties and powers as directors”.

The government’s pursuit of Palmer is not a political witch-hunt. There are bigger issues at stake than Clive. Chasing down those responsible for the collapse of Queensland Nickel is about curbing the moral hazard of a well-intentioned federal scheme.  After all, when a company goes broke and a government fund automatically kicks in to pay millions of dollars to workers to cover unpaid entitlements, those payments sends a couple of messages. First, that the government will cover at least part of their unpaid entitlements. And second, that if a corporate boss mismanages a business, or worse, if they are a crook or a spiv and fail to pay workers their entitlements, taxpayers will pick up the tab for their financial failures.

O’Connor doesn’t need a degree in rocket science, or even in economics, to understand these unfortunate but undeniable incentives to corporate crooks. And as fun as it was for those on ABC’s Insiders last weekend to laugh at the “show us the cash, Cash” line, deeper political analysis might explore how the Fair Entitlements Guarantee is an invitation to corporate crooks to keep repeating their crooked behaviour in full knowledge that taxpayers will pay for unpaid workers’ entitlements.

Using the recovery program to protect the interests of taxpayers, former Employment Minister Eric Abetz commenced the investigation of directors involved in the collapse of Bruck Textiles in Victoria. In the Federal Court since last September, this less high profile collapse squarely raises the moral hazards at stake under FEG.

Throughout the compulsory investigation, the liquidator’s counsel, Peter Kulevski, forensically questioned Bruck’s lawyers, its accountant, chief financial officer and chairman, uncovering evidence that directors may have deliberately undertaken a corporate restructure and liquidation of the Wangaratta textile-maker to avoid paying employee entitlements. The public investigation extracted this evidence from one of Bruck’s lawyers during restructuring conversations: a file note written by Rick Catanzariti in 2013 recorded Bruck chief executive Geoffrey Parker as saying: “We need to take a number of people out. It will cost a fortune.” The people are Bruck employees. The file note also records Parker saying: “Lots of core businesses go into administration and use GEERS to supplement it.” Parker meant FEG but same sentiment.

And that’s exactly what transpired when, on July 10, 2014, Bruck sold its business and assets to Australian Textiles Mills, a related company of its parent company for the princely sum of $1. In return, ATM agreed to assume some $11m in liabilities. While many Bruck employees moved across to ATM, 58 were not offered employment. The next day, Bruck was entered into liquidation, unable to pay the entitlements of the 58 workers, leaving the government to pay $3.5m under FEG. Meanwhile, Parker became chief executive of the new textile business.

The ultimate shareholder in the textile group, before and after the restructure, is Philip Bart, who fronted the public investigation earlier this month. Remember that name? Bart was the principal owner of National Textiles which went bust in 2000 owing $11m to workers, a collapse that gave rise to GEERS.

And now Bruck has gone broke. ASIC and the federal government are investigating whether its liquidation and the Phoenix-style rise of ATM is a flagrant abuse of the FEG scheme. This is a litmus test of section 596 of the Corporations Law which prohibits transactions intended to avoid the payment of employee entitlements. Lawyers suggest that if section 596 doesn’t kick in here, the law may need changing.

While we await the liquidators report into a classic example of directors privatising corporate profits and socialising corporate loses, the Turnbull government is also determined to ensure that taxpayers don’t get fleeced in Queensland Nickel. And that may not be the end of battles over entitlements. If South Australian steelmaker Arrium goes under, the payout to Queensland Nickel workers may look like peanuts.

Which is why it’s high time Labor put some meat on its bony claim of being a prudent economic manager. To be sure, it’s laudatory to look out for workers. But what about curbing moral hazard too? In layman’s terms that means looking out for taxpayers.

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