10.15 Fair Entitlements Guarantee Scheme

The Fair Entitlements Guarantee Scheme was introduced, via legislation, in late 2012 and replaced the former General Employee Entitlements and Redundancy Scheme.

Under the Fair Entitlements Guarantee, an advance may be paid to former employees of a liquidated company in relation to their leave and redundancy entitlements.

Where a firm enters into liquidation after 5 December 2012 and is unable to pay employee entitlements, the Fair Entitlements Guarantee Scheme provides the following payments to eligible workers:

  • redundancy pay of up to four weeks per full year of service;
  • up to 13 weeks’ unpaid wages;
  • annual leave and long service leave payments; and
  • payment in lieu of notice – up to five weeks (Department of Employment, 2014).

While the Fair Entitlements Guarantee Scheme largely picked up the conditions in the General Employee Entitlements and Redundancy Scheme (as well as providing a legislative basis for the scheme) it also increased the level of generosity in payments from the General Employee Entitlements and Redundancy Scheme, particularly in relation to the uncapping of redundancy pay. The previous cap was 16 weeks, but is now effectively unlimited in certain circumstances.

One concern with the design of the scheme is that it may reduce the incentive for companies to guard against risk because they are protected from the consequences by the government. It could be argued that with the government picking up the tab for a major portion of all redundancy entitlements, companies have less incentive to worry about this aspect of costs if they are in a marginal financial position.

Claimants under the Scheme have 12 months after the end of their employment or an insolvency event to lodge a claim for an advance. A special subset of the Fair Entitlements Guarantee Scheme for workers in textile, clothing and footwear industry was created in May 2013.

In 2012-13, payments were made to 16,023 individuals under the scheme. Total payments were around $260 million. In this same financial year, around $37 million was recovered from liquidated companies’ assets (Department of Education, Employment and Workplace Relations, 2013).

Total payments under the General Employee Entitlements and Redundancy Scheme and Fair Entitlements Guarantee Scheme have increased significantly since 2007-08, even though growth in the number of insolvencies has been relatively stable.

Chart 10.15.1: Costs under Fair Entitlements Guarantee compared to insolvencies

This chart shows that payments under the Fair Entitlements Guarantee Scheme and its predecessor increased from around $45 million in 2001-02 to over $260 million in 2012-13, and have quadrupled since 2007-08, while the number of companies entering external administration increased at a much slower and more constant rate over the same period.

Source: Australian Securities and Investments Commission, 2014; Department of Finance.

Payments under the scheme have increased by 330 per cent in the five years since 2007-08 and by 34 per cent in one year alone in the most recently completed financial year.

Provision is made in the forward estimates for expected payments under the Fair Entitlements Guarantee Scheme but as it is a demand driven programme, actual payments will reflect the total number of eligible recipients in that year.

Under the Fair Entitlements Guarantee Scheme, someone who has worked with the firm for 25 years could theoretically receive the equivalent of full pay for 100 weeks, plus other entitlements. By contrast, the amount of redundancy pay under the National Employment Standards is capped at 16 weeks (Australian Government, 2009).

Concerns have been raised that the uncapped nature of the Scheme, combined with the fact that recoveries are quite low, means that there could be moral hazard for company directors (Wellard, 2013).

Prior to the year 2000, no such government scheme existed. The Fair Entitlements Guarantee Scheme is now an uncapped guarantee in respect of redundancy pay. Consistent with the principle that government should not and cannot eliminate or insure every risk to the community, the Commission considers that there is a strong case for reintroducing caps into the payments available under the scheme.

A cap of 16 weeks for redundancy pay could be introduced, with a 26 week cap for total payments under the scheme.

A further option would be to change the wage base upon which the Fair Entitlements Guarantee Scheme applies. Currently the entitlements are paid up to a maximum wage of $2,451 per week (Department of Employment, 2014). This could be changed to Total Average Weekly Earnings, which are currently $1,105 per week (Australian Bureau of Statistics, 2013).

The low level of recoveries from liquidated companies (generally around 10 per cent of total outlays over recent years) suggests that there could also be merit in examining ways to increase amounts recovered. Wellard (2013) notes that changes could be made to the Corporations Act 2001 which would go in this direction.

The Commission also acknowledges the importance of the Australian Securities and Investments Commission enforcing the penalties companies and directors face when they trade while insolvent.

References

Australian Bureau of Statistics 2013, Average Weekly Earnings, Australia, May 2013, cat. no. 6302.0, Canberra.

Australian Government 2009, Fair Work Act 2009, Canberra.

Australian Securities and Investments Commission 2014, Australian Insolvency Statistics – Series 1: Companies Entering External Administration, January 1999 – November 2013, Canberra.

Department of Education, Employment and Workplace Relations 2013, Annual Report 2012-13, Canberra.

Department of Employment 2014, Eligibility for FEG Assistance, viewed January 2014, <http://docs.employment.gov.au/documents/eligibility-feg-assistance-fact-sheet>.

Wellard, M 2013, Bailing Out The FEG: Is The Fair Entitlements Guarantee (Formerly GEERS) Approaching Its Own Fiscal Cliff? Insolvency Law Bulletin, Vol. 13, Issue 7.