Status of Redundancy Payments Bill

Status of Redundancy Payments Bill Member s Bill As reported from the Commerce Committee Recommendation Commentary The Commerce Committee has examined the Status of Redundancy Payments Bill and recommends that it be passed with the amendments shown. Introduction This commentary focuses on the major issues we examined and discusses the amendments recommended to the Status of Redundancy Payments Bill. We have also recommended some technical amendments, which are not covered by this commentary. In considering this bill, we have been conscious of the work undertaken to review insolvency law. The insolvency law review was initiated in 1999 and considered a number of topics, some of which are covered in this bill. We considered the overview of the insolvency law review decisions, and have incorporated the amendments suggested in the review. Background The purpose of the bill is to amend the preferential claim provisions of personal and corporate insolvency legislation to introduce preferential status for employee redundancy entitlements. The amendment gives employee redundancy claims priority over other unsecured claims, and some preferential claims, in an insolvency situation. The bill removes the current limit of $6,000 on preferential claims made 13 2

2 Status of Redundancy Payments Commentary by an employee in a corporate insolvency under the Companies Act 1993. The bill repeals the Insolvency Amendment Act 1978 and section 104(1)(e)(ii) of the Insolvency Act 1967. Clauses 2(i) and 8 from the seventh schedule of the Companies Act 1993 are also repealed. Priority for redundancy compensation We recommend that redundancy entitlements be included within the employee priority. We consider that such entitlements form part of a contractually negotiated package for employees, which may have included trade-offs in relation to wages or salary. Submitters were divided about including employee redundancy payments as a priority. Some submitters argued that it will have an effect on other creditors, and on the cost of capital, and may restrict the availability of capital. This would be a gain to the individual at the expense of other secured creditors, potentially leading to secondary liquidation. A number of other submitters strongly supported employee redundancy payments becoming a priority. We considered the issues raised and on reflection felt that the financial dependence of employees on their employer is greater than that of other creditors who are likely to have many sources of income. We also recommend the exclusion of company directors and controllers from the employee priority. Several submitters raised the possibility that company directors or controllers could use a priority debt provision for redundancy to award themselves redundancy payments, thus circumventing the claims of other creditors. We agree there is a risk of this occurring. Cap on employee priority Submissions were also divided on whether the current $6,000 cap on the employee priority in the Companies Act 1993 should be removed, adjusted, or maintained at its current level. The cap has been set at $6,000 since 1988. We consider the cap should be raised to $15,000. We recognise that the removal of the cap may detrimentally affect other creditors, but a $15,000 payment would be sufficient to allow employees to find their feet after a redundancy. We also recommend that the same cap should be inserted in the Insolvency Act 1967.

Commentary Status of Redundancy Payments 3 A number of submitters agreed with the decision made by the Government in 2001 that the level of the cap should be subject to periodic review, so that it does not decrease in real terms as a result of inflation. We recommend a clause be inserted in the bill requiring a review of the level of the cap every 3 years in accordance with increases in average weekly earnings. Pay in lieu of notice Contractual payments in lieu of notice 1 are generally treated in law as payments of wages or salary for the notice period. While an employee has a legal entitlement under the Wages Protection Act 1983 for payment for work done, or for the period of notice given, these wages will have priority in an insolvency only if they fall within the wages and salary priority debt provisions of the Companies Act 1993 or the Insolvency Act 1967. This provision only provides a priority for wages and salary (and therefore contractual payments in lieu of notice) accrued in the 4 months prior to the commencement of the liquidation or bankruptcy. The insolvency law review proceeded on the key principle that, with limited exceptions, a debtor s assets should be distributed to all creditors equally in proportion to the size of their admitted claims. This recognises the effect of priority debts on other unsecured creditors, and the concern that unsecured creditors will not participate in the insolvency system if they believe they will be unable to recover debts due to them. This can discourage financing and investment and therefore inhibit business innovation. We considered extending the priority for wages and salary past the point of commencement of the liquidation or bankruptcy. However, taking account of the criteria for the introduction of new priority debts, we do not consider that the potential benefits to employees would outweigh the costs in terms of uncertainty and effects on the rights of other unsecured creditors. We do not, therefore, recommend extending the priority of wages and salary past the point of commencement of the liquidation or bankruptcy. 1 Payments in lieu of notice are payments that an employee would receive instead of wages or salary for a contractual period of notice prior to termination of employment.

4 Status of Redundancy Payments Commentary Appendix Committee process The Status of Redundancy Payments Bill was referred to the committee on 5 March 2003. The closing date for submissions was 17 April 2003. We received and considered 13 submissions from interested groups and individuals. We heard 7 submissions. Hearing of evidence took 1 hour 47 minutes and consideration took 55 minutes. We received advice from Ministry of Economic Development. Committee membership Mark Peck (Chairperson) Gerry Brownlee (Deputy Chairperson) Brent Catchpole Russell Fairbrother Rodney Hide Darren Hughes H V Ross Robertson Hon Maurice Williamson Sue Bradford was a member of the committee for the purpose of its consideration of the bill, but without the right to vote on any question before the committee.

Mark Peck Status of Redundancy Payments Bill Member s Bill Contents 1 Title Part 2 2 Commencement Amendments to Insolvency Act 1967 Part 1 6 Insolvency Act 1967 called princi- Amendments to Companies Act 1993 pal Act in this Part 3 Companies Act 1993 called principal Insolvency Act 1967 Act in this Part 7 No lien over bankrupt s books, etc 4 Meaning of director 8 Priorities 5 Seventh Schedule amended Consequential repeal 9 Insolvency Amendment Act 1978 The Parliament of New Zealand enacts as follows: 1 Title This Act is the Status of Redundancy Payments Act 2002. 2 Commencement This Act comes into force on the 60th day after the date on which it receives the Royal assent. Struck out (unanimous) 3 Purpose The purpose of this Act is to protect the status of redundancy of all workers by amending the schedules of preferential claims in both the Companies Act 1993 and the Companies Act 1955 to include redundancy payments as negotiated in, or documented within or in addition to, the relevant employment agreements when companies go into liquidation or receivership. Companies Act 1955 4 Sections to be read with Companies Act 1955 This section and the next succeding section are part of the Companies Act 1955 (in that section referred to as the principal Act ). 13 2 1

cl 5 Status of Redundancy Payments Struck out (unanimous) 5 Redundancy payments Clause 2 of Schedule 8C of the principal Act is amended by inserting, after paragraph (b), the following paragraph: (ba) amounts due to any employee in respect of any redundancy agreements or clauses that were either: (i) negotiated or documented as part of any relevant employment agreements; or (ii) negotiated or documented as separate agreements:. Companies Act 1993 6 Sections to be read with Companies Act 1993 This section and the next succeeding section are part of the Companies Act 1993 (in that section referred to as the principal Act ). 7 Redundancy payments (1) The Seventh Schedule of the principal Act is amended by inserting in clause 2, after paragraph (b), the following paragraph: (ba) amounts due to any employee in respect of any redundancy agreements or clauses that were either: (i) negotiated or documented as part of any relevant employment agreements; or (ii) negotiated or documented as separate agreements:. (2) The Seventh Schedule of the principal Act is amended by repealing clause 6. Part 1 Amendments to Companies Act 1993 3 Companies Act 1993 called principal Act in this Part In this Part, the Companies Act 1993 1 is called the principal Act. 1 1993 No 105 2

Status of Redundancy Payments Part 1 cl 5 4 Meaning of director (1) Section 126(1)(b) of the principal Act is amended by omitting the words and 385, and substituting the words 385, and clause 12(ab) of the Seventh Schedule. (2) Section 126(1)(c) of the principal Act is amended by omitting the words and 385, and substituting the words 385, and clause 12(ab) of the Seventh Schedule. (3) Section 126(1)(d) of the principal Act is amended by inserting, after the expression 149, the words, and clause 12(ab) of the Seventh Schedule. 5 Seventh Schedule amended (1) Clause 2 of the Seventh Schedule of the principal Act is amended by inserting, after paragraph (b), the following paragraphs: (ba) subject to clause 6, any compensation for redundancy owed to an employee that accrues before or by reason of the commencement of the liquidation: (bb) subject to clause 6, any reimbursement or payment provided for, or ordered by, the Employment Relations Authority, the Employment Court, or the Court of Appeal under section 123(b) or section 128 of the Employment Relations Act 2000, to the extent that the reimbursement or payment does not relate to any matter set out in section 123(c) of the Employment Relations Act 2000, in respect of wages or other money or remuneration lost during the 4 months before the commencement of the liquidation:. (2) Clause 2(i) of the Seventh Schedule of the principal Act is repealed. (3) Clause 6 of the Seventh Schedule of the principal Act is amended by (a) omitting the words clause 2(a), (b), (d), or (e) of this Schedule, and substituting the words any, or all, of paragraphs (a), (b), (ba), (bb), (d), and (e) of clause 2 ; and (b) omitting the expression $6,000, and substituting the expression $15,000 ; and 3

Part 1 cl 5 Status of Redundancy Payments (c) inserting, after the word prescribed, the words under clause 6A. (4) The Seventh Schedule of the principal Act is amended by inserting, after clause 6, the following clause: 6A The sum stated in clause 6 must be adjusted as follows: (a) subject to paragraph (d), an adjustment must be made, by the Governor-General by Order in Council, after the 3-year period starting on 1 July 2003 and ending on 30 June 2006 and after every 3-year period following that (an adjustment period): (b) subject to paragraph (d), the Order in Council must be made within 3 months of the end of an adjustment period: (c) each adjustment must reflect any overall percentage increase, over the relevant adjustment period, in average weekly earnings (total, private sector), calculated by reference to the last Quarterly Employment Survey published by Statistics New Zealand (or, if that survey ceases to be published, a survey certified by the Government Statistician as an equivalent to that survey) within the relevant adjustment period: (d) if, in an adjustment period, there is no change, or an overall decrease, in the percentage movement in average weekly earnings (total, private sector), as so calculated, no adjustment may be made for that adjustment period: (e) if, in accordance with paragraph (d), no adjustment is made, the next adjustment made for any succeeding adjustment period must reflect any overall percentage increase in average weekly earnings (total, private sector) between the date of the last adjustment and the end of the relevant adjustment period for which the adjustment is to be made: (f) all adjustments are cumulative and must be rounded to the nearest $20: (g) any correction to a Quarterly Employment Survey upon which an adjustment is based must be disregarded until the adjustment that takes effect in the following adjustment period which must reflect the corrected 4

Status of Redundancy Payments Part 2 information in the calculation of that adjustment and must otherwise be made in accordance with this clause. (5) Clause 8 of the Seventh Schedule of the principal Act is repealed. (6) Clause 9(a) of the Seventh Schedule of the principal Act is amended by inserting, after the words themselves and, the words, subject to any maximum payment level specified in any Act or regulations,. (7) Clause 12 of the Seventh Schedule of the principal Act is amended by inserting, after paragraph (a), the following paragraph: (ab) employee means any person of any age employed by an employer to do any work for hire or reward under a contract of service (including a homeworker as defined in section 5 of the Employment Relations Act 2000); but does not include a person who is, or was at any time during the 12 months before the commencement of the liquidation, a director of the company in liquidation, or a nominee or relative of, or a trustee for, a director of the company:. (8) The Seventh Schedule of the principal Act is amended by adding the following clause: 13 This schedule, as in force on the date of commencement of a liquidation, continues to apply to that liquidation regardless of any amendment to this schedule that comes into force after the date of commencement of the liquidation. Part 2 Amendments to Insolvency Act 1967 6 Insolvency Act 1967 called principal Act in this Part In this Part, the Insolvency Act 1967 2 is called the principal Act. 2 1967 No 54 5

Part 2 cl 7 Status of Redundancy Payments Insolvency Act 1967 7 No lien over bankrupt s books, etc Section 73(2) of the principal Act is amended by omitting the words subparagraph (iii) of paragraph (d) of subsection (1) of section 104 of this Act, and substituting the words section 104(1)(d)(v). 8 Priorities (1) Section 104(1) of the principal Act is amended by repealing paragraph (d), and substituting the following paragraph: (d) fourthly, in payment rateably of, (i) subject to subsection (1A), all unpaid wages or salary of any employee, whether or not earned wholly or in part by way of commission, and whether payable for time or for piece work, in respect of services provided to the bankrupt during the 4 months before the adjudication: (ii) subject to subsection (1A), any holiday pay payable to an employee (or, if the employee has died, to any other person in the employee s right) on the termination of the employment before or by reason of the adjudication: (iii) subject to subsection (1A), any compensation for redundancy owed to an employee that accrues before or by reason of the adjudication: (iv) subject to subsection (1A), any reimbursement or payment provided for, or ordered by, the Employment Relations Authority, the Employment Court, or the Court of Appeal under section 123(b) or section 128 of the Employment Relations Act 2000, to the extent that the reimbursement or payment does not relate to any matter set out in section 123(c) of the Employment Relations Act 2000, in respect of wages or other money or remuneration lost during the 4 months before the adjudication: (v) all sums payable under section 73(2): 6

Status of Redundancy Payments Part 2 cl 8 (vi) subject to subsection (1A), all amounts payable to the Commissioner of Inland Revenue in accordance with section 163(1) of the Child Support Act 1991: (vii) subject to subsection (1A), all amounts payable to the Commissioner of Inland Revenue in accordance with section 167(2) of the Tax Administration Act 1994 as applied by section 25 of the Student Loan Scheme Act 1992:. (2) Section 104(1)(e)(ii) of the principal Act is repealed. (3) Section 104 of the principal Act is amended by inserting, after subsection (1), the following subsections: (1A) The total sum to which priority is to be given under any, or all, of subparagraphs (1)(d)(i) to (iv), (vi), and (vii) must not, in the case of any one employee, exceed $15,000 or any greater amount that is prescribed under subsection (1B) at the date of adjudication. (1B) The sum stated in subsection (1A) must be adjusted as follows: (a) subject to paragraph (d), an adjustment must be made, by the Governor-General by Order in Council, after the 3-year period starting on 1 July 2003 and ending on 30 June 2006 and after every 3-year period following that (an adjustment period): (b) subject to paragraph (d), the Order in Council must be made within 3 months of the end of an adjustment period: (c) each adjustment must reflect any overall percentage increase, over the relevant adjustment period, in average weekly earnings (total, private sector), calculated by reference to the last Quarterly Employment Survey published by Statistics New Zealand (or, if that survey ceases to be published, a survey certified by the Government Statistician as an equivalent to that survey) within the relevant adjustment period: 7

Part 2 cl 8 Status of Redundancy Payments (d) if, in an adjustment period, there is no change, or an overall decrease, in the percentage movement in average weekly earnings (total, private sector), as so calculated, no adjustment may be made for that adjustment period: (e) if, in accordance with paragraph (d), no adjustment is made, the next adjustment made for any succeeding adjustment period must reflect any overall percentage increase in average weekly earnings (total, private sector) between the date of the last adjustment and the end of the relevant adjustment period for which the adjustment is to be made: (f) all adjustments are cumulative and must be rounded to the nearest $20: (g) any correction to a Quarterly Employment Survey upon which an adjustment is based must be disregarded until the adjustment that takes effect in the following adjustment period which must reflect the corrected information in the calculation of that adjustment and must otherwise be made in accordance with this section. (4) Section 104(2) of the principal Act is amended by omitting the words servant or worker wherever they occur, and substituting in each case the word employee. (5) Section 104(3) of the principal Act is amended by (a) omitting the words For the purpose of paragraph (d) of subsection (1) of this section, and substituting the words In this section ; and (b) inserting, before paragraph (a), the following paragraph: (aa) employee means any person of any age employed by an employer to do any work for hire or reward under a contract of service (including a homeworker as defined in section 5 of the Employment Relations Act 2000):. (6) Section 104 of the principal Act is amended by adding the following subsection: (5) This section, as in force on the date on which a person is adjudicated bankrupt, continues to apply to that bankruptcy regardless of any amendment to this section that comes into 8

Status of Redundancy Payments Part 2 cl 9 force after the date on which the person is adjudicated bankrupt. Consequential repeal 9 Insolvency Amendment Act 1978 The Insolvency Amendment Act 1978 (1978 No 99) is repealed. Legislative history 7 November 2002 Introduction (Bill 13 1) 5 March 2003 First reading and referred to Commerce Committee Price code: J Wellington, New Zealand: Published under the authority of the House of Representatives 2003 13bar2.pag 28-JUL-03 9