Employee entitlements under administration

by Tania Cini

More specifically, the Court stated that the Commonwealth does not have any right in a DOCA (in the absence of specific contractual terms) under or by analogy with section 560 of the Corporations Act (CA) to stand in the shoes of the former employees to the extent that it has already made payments under the GEERS and that a redundancy payment can be an implied term of a contract which will bring that payment within the terms of s556(1)(h) of the CA.

Background

Seventeen former employees made claims under the DOCA for redundancy payments. Those claims had already been rejected by GEERS. The plaintiff, the administrator of the DOCA, sought either advice and directions from the Court, or a declaratory order, that it would be justified in making redundancy payments having the level of priority accorded by s556(1)(h) CA.

GEERS provides for payment by the Commonwealth Department of Employment and Workplace Relations (Department) of entitlements to employees whose employment has been terminated as a result of the employer's insolvency. Those entitlements are:

(a) payment to employees of all unpaid wages, annual leave, long service leave, payment in lieu of notice and up to eight weeks redundancy pay, subject to a defined salary cap; and

(b) recovery of funds from the realisation of assets or other proceedings.

GEERS paid some of the former employees entitlements, but declined to pay any entitlement in respect of the redundancy component of retrenchment pay on the basis that there was no provision for redundancy pay in their employment contract. A document prepared by the Department which describes the main features of GEERS contained a statement that s560 CA would be relied upon to enable advances paid by GEERS to employees to be recovered.

Section 560

In a liquidation, s560 CA enables a person who advances money to pay employee entitlements to enjoy the same priority the employee would have enjoyed for those amounts. However, section 560 only applies in a liquidation and not under a DOCA. Here Justice Austin stated that the Department did not have any rights under or by analogy with s560 to stand in the shoes of the former employees, to the extent that it had already made payments under GEERS in satisfaction of their claims for such matters as annual leave, payment in lieu of notice and long service leave. His Honour made this finding as there was nothing to suggest that the deed imported into its contractual provisions the statutory rights conferred by section 560.

Creditors under DOCA

The central issue upon which the plaintiff's application rested was whether the 17 former employees were Priority Creditors under the DOCA. If the former employees received payment from the plaintiff in respect of the redundancy claims, there would be nothing left for the unsecured creditors generally. The judge found that the former employees were Priority Creditors under the DOCA, not because their claims fell within s556(1) CA, but because the provisions of the DOCA imported the system of ranking in s556(1) CA as a matter of contractual covenant.

Section 556(1) CA provides that the debts and claims listed in that subsection must be paid in priority to all other unsecured debts and claims. Section 556(1)(h) provides for priority payment of 'retrenchment payments payable to employees of the company'. The expression 'retrenchment payment' is defined in s556(2), in relation to an employee of the company, to mean an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employee's employment by the company. 'Industrial instrument' is defined in s9 CA to mean (a) a contract of employment, or (b) a law, award, determination or agreement relating to terms or conditions of employment.

Justice Austin found (where those administering GEERS had not) that the contract of employment of each of the former employees was partly in writing and partly implied, and there was an implied term of the employment contract that if made redundant, employees would be entitled to a payment calculated on the basis of three weeks wages for each year of service, rounded up to the nearest year.

Outcomes

This case is important in that it clarifies some aspects of the GEERS as it relates to deeds of company arrangement. It suggests that in the absence of legislative intervention, where possible the Commonwealth Department of Employment and Workplace Relations will need to have section 560 specifically incorporated into the contractual terms of deeds of company arrangement if it wishes to recoup any payments made by it under GEERS.

Another option which the Commonwealth could consider is obtaining an express written assignment from each employee of his or her rights - this will at least ensure that the Commonwealth can vote on the DOCA as a creditor to the value of the total claims it has paid out and that it can prove in the DOCA. The DOCA will still need to expressly provide for the relevant priority for the Commonwealth to get the priority treatment usually afforded to employees.


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