'EMPLOYEE ENTITLEMENTS - A DISCUSSION PAPER BY THE AUSTRALIAN

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					'EMPLOYEE ENTITLEMENTS -
A DISCUSSION PAPER BY THE
AUSTRALIAN LABOR PARTY'

                        __________________

                             ACCI SUBMISSION
                              TO THE
                      AUSTRALIAN LABOR PARTY
                        __________________




Commerce House, 24 Brisbane Ave, Barton ACT 2600 z PO Box E14, Kingston ACT 2604 Australia
     Telephone: 61-2-6273 2311 z Facsimile: 61-2-6273 3286 z Email: acci@acci.asn.au
‘EMPLOYEE ENTITLEMENTS – A DISCUSSION PAPER BY THE AUSTRALIAN LABOR PARTY’


                      Background

                      The Australian Chamber of Commerce and Industry (ACCI) is the peak
                      council of Australian business associations. ACCI’s members are
                      employer organisations in all States and Territories and all major sectors
                      of Australian industry.

                      Through our membership, ACCI represents over 350,000 businesses
                      nation-wide, including the top 100 companies, over 55,000 enterprises
                      employing between 20-100 people, and over 280,000 enterprises
                      employing fewer than 20 people. This makes ACCI the largest and most
                      representative business organisation in Australia.

                      Membership of ACCI comprises State and Territory Chambers of
                      Commerce and national employer and industry associations. Each ACCI
                      member is a representative body for small employers or sole traders, as
                      well as medium and large businesses.

                      ACCI Response to ‘Employee Entitlements – A Discussion paper by the
                      Australian Labor Party’

                      The ALP Proposals

                      The ALP has issued a paper in response to the federal Government’s
                      discussion paper which proposes what they refer to as a ‘third option’.
                      The paper does seek to address in a constructive fashion an extremely
                      difficult issue of public policy, difficult because of the range of laws
                      which are involved, and difficult because of the federal/State implications.

                      The ALP proposal appears to be a variant of the federal Government’s
                      insurance option, and is described by the ALP in a detailed paper, which
                      includes the following:

                              ‘Consideration should be given to these funds being required to
                              take out compulsory loss of entitlements insurance. These funds
                              could meet the insurance premium through a small increase in
                              the Superannuation Guarantee payable by employers with more
                              than 20 employees. The premium payment could then be passed
                              on to an accredited insurer who would offer the insurance
                              product. Employees in the event of insolvency could make a claim
                              for their entitlements directly from the insurer. The insurer would
                              assess the claim and make the payment through the
                              superannuation fund.

                              The fund’s administration costs could also be met by the small
                              additional Superannuation Guarantee payment. The provision of
                              the insurance product should be cost neutral to the fund. There
                              should be no reduction in a fund member’s retirement savings.

                              There is precedent for this. Currently, some superannuation funds
                              offer death and disability insurance. These funds are able to
                              negotiate this form of insurance with a third party provider on a


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‘EMPLOYEE ENTITLEMENTS – A DISCUSSION PAPER BY THE AUSTRALIAN LABOR PARTY’


                              group basis. This enables the funds to negotiate the lowest
                              possible premiums on behalf of their members. The third party
                              enters into a contract with the trustees of the fund to provide
                              death and disability insurance cover for fund members.

                              The advantages of using the existing superannuation fund
                              structure to offer loss of employee entitlements insurance are self
                              evident. Premiums would be kept low because superannuation
                              funds are able to negotiate premiums on the basis that the
                              insurance is offered on a group basis. The insurance would
                              appear on their regular superannuation statements. Employers
                              would still need to make only the one payment to the
                              superannuation fund. No new Commonwealth-State arrangements
                              would be needed, no earmarking of payroll tax and no extra
                              bureaucracy. The solution would be national and utilise an
                              existing efficient and effective administrative structure.’ [p.6]

                      There would also be an exemption where ‘satisfactory arrangements’
                      have been made in particular industries and enterprises, for example trust
                      funds. [p.7]

                      The ALP indicates that the cost would be only 0.1% of payroll, with the
                      total net cost of the scheme $174 million.

                      It also indicates that additional measures are needed, including:

                      •   more frequent Superannuation Guarantee payments, ie. quarterly,
                          more often than the current requirement of payment up to 12 months
                          after it falls due. The paper states that this was the original intention
                          of the system, and that in any event awards and superannuation trust
                          deeds often require more regular contributions. This change it is said
                          would remove the risk to employee superannuation contributions in
                          the event of the employer becoming insolvent;

                      •   continuation of 100% protection of superannuation savings from theft
                          and fraud;

                      •   more stringent legal supervision of corporate behaviour – the ALP
                          will support Government proposals in this respect.

                      The ACCI Policy Position

                      In 1998-1999 ACCI specifically recognised, as it did in 1992 with respect
                      to changing the order of priorities of assets in the event of insolvency, that
                      a constructive forward looking approach had to be taken by the private
                      sector to these issues, without of course overreacting or damaging the
                      private sector, and employment and investment. The private sector is after
                      all overwhelmingly interested in fair treatment of employees. As in 1992,
                      ACCI proposed a forward looking solution, which included a proposal
                      that in cases of demonstrated ‘harshness’ in employer conduct, related
                      companies would be responsible for unpaid employee entitlements of
                      other companies in the corporate group.


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‘EMPLOYEE ENTITLEMENTS – A DISCUSSION PAPER BY THE AUSTRALIAN LABOR PARTY’


                      ACCI responded to the federal Government Discussion Paper on the basis
                      that the Government proposed first option, a fully Government funded
                      safety net scheme with strict ‘caps’ or limits, is far preferable to placing
                      new obligations on employers to make insurance contributions, in other
                      words that it is the ‘least worst’ option. The insurance option had real
                      problems, including that it would be a new tax on employers with
                      implications for employment and investment, the premium income would
                      be too small to make the scheme attractive to private sector insurers, there
                      would be difficulty in calculating risk, the insurance industry are cautious
                      at best in their support for the scheme, there would be additional
                      administrative costs, and those least likely to keep up insurance
                      contributions would be the ones most likely to be drawers on such a
                      scheme. Some of these objections to the federal Government’s insurance
                      option have clear application to the insurance option proposed by the
                      ALP, and the proposal cannot be supported for that reason. The fully
                      Government funded ‘safety net’ option remains a better alternative.

                      However, the ALP approach involves additional problems. Firstly, the
                      ALP appears to propose a scheme which has no ‘caps’ or limits, in other
                      words not a safety net scheme but a full system of compensation. The cost
                      implications of such an approach would be extremely serious. The
                      potential would be for the employer paid charge relating to protection of
                      employee entitlements to be increased substantially if the costings proved
                      not to be correct.

                      A very important issue related to this is that many redundancy schemes
                      are extremely generous, and the full amounts payable under those
                      schemes would have to be covered by the proposed insurance. There is
                      also the potential for employers to agree to extremely generous
                      redundancy payments prior to insolvency, whether formally or informally,
                      in the knowledge that the insurance scheme would have to cover the
                      amounts of redundancy payments regardless of the amount. In some
                      instances redundancy agreements are extremely large, for example they
                      can be up to 3-4 weeks pay per year of service with no upper limits in
                      some cases, or extremely generous upper limits. In many cases these
                      extremely generous redundancy agreements apply to employees on
                      extremely high wages, in fact it is probably the case that the most
                      generous redundancy schemes apply to the highest paid employees. These
                      extremely generous redundancy payments would have to be covered by
                      the insurance scheme. The potential for abuse of this feature of the
                      proposal has to be very large. What is to stop a business agreeing to an
                      extremely generous redundancy package in the knowledge that the
                      business was in difficulties, likely to fail, and that the insurance scheme
                      would cover the extremely generous redundancy payments? Many
                      businesses have a high level of commitment to their employees which
                      might lead to such action being taken. One might also ask how actuarially
                      risk can be calculated when this sort of abuse is a real possibility.

                      The point should also be made that redundancy payments are qualitatively
                      different to ‘earned’ entitlements such as wages, superannuation, and
                      leave. These are fully vested entitlements, based on terms and conditions




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‘EMPLOYEE ENTITLEMENTS – A DISCUSSION PAPER BY THE AUSTRALIAN LABOR PARTY’


                      of employment. Redundancy payments are contingent payments
                      developed on a different basis.

                      Secondly, the ALP perhaps does try to address a problem raised by ACCI
                      that the main drawers on such an insurance scheme would be the very
                      ones most likely to default on superannuation contributions through a
                      proposal that the frequency of superannuation contributions be increased.
                      However, this probably does not address the issue. There are cost
                      implications in the proposal to increase the regularity of superannuation
                      contributions. It would in addition still be the case that insurance and
                      superannuation contributions would be the sort of payment that a business
                      would be most likely to default on in the event of the business developing
                      financial difficulties. If an employer was in default presumably the
                      insurance cover would not exist. Even if it did exist it would then be as a
                      result of cross-subsidisation by other businesses, which is inequitable.

                      Thirdly, the proposal is that the current Superannuation Guarantee
                      Legislation be not only maintained but extended in its coverage and scope
                      to deal with additional matters. The proposal to consolidate and extend
                      this legislation to cover new areas and perform new functions, and do so
                      through additional charges on employers, has to be of particular concern.
                      If it is extended in its application to deal with the issue of insurance to
                      protect employee entitlements there is no reason in principle why it could
                      not be extended to deal with many more issues, and some could be
                      extremely costly and undesirable impositions on the private sector.
                      Legislation designed to deal with the uniquely important issue of
                      retirement incomes, in the context of an ageing population needing to self
                      fund retirement in the future, should not be used as a vehicle for
                      transferring costs to the private sector to fund any purpose which is
                      currently the focus of public debate. Exactly what would be the potential
                      limits of use of such a legislative scheme? It is not possible to predict the
                      future course of events with the Superannuation Guarantee scheme if
                      additional purposes are added on to it as a convenient vehicle for any
                      social concern which is the subject of public debate.




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