Views on the bill
3.1
A number of submitters to the inquiry supported the bill and the policy outcomes it seeks to achieve. Industry stakeholders and other witnesses emphasised the need for greater transparency and more robust financial governance frameworks to ensure that worker entitlement funds were well-administered. In setting out this position, several submitters cited the vast amounts of money held by funds and emphasised the importance of the bill in addressing the existing regulatory gap. They highlighted the need for stronger regulation in order to better protect the $2 billion dollars in redundancy pay, sick leave and other benefits held for workers in a number of industries.
3.2
For example, the Australian Chamber of Commerce and Industry (ACCI) made clear its support for the intent of the bill:
This bill will close an important regulatory gap in the holding in trust of more than $2 billion contributed by employers for the benefit of working Australians. It will ensure that the administration of various funds is above reproach and is seen to be above reproach and that employers putting money in and employees expecting to take money out can have greater confidence in the various forms of funds that have evolved across recent decades.
3.3
Master Builders Australia highlighted the need for the bill, emphasising the importance of transparency and accountability for good governance:
There are some [worker entitlement] funds that have got upwards of $1.5 billion or $2 billion worth of workers money under control, and it's appropriate that there be specific legislation to deal with this specific and reasonably unique feature of this system. We agree that there needs to be better disclosure, transparency and accountability in relation to the way that these funds are run, and that some of these funds, in the way they operate right now, leave themselves open to some questions about governance. We also agree that workers should be assured that contributions that are made on their behalf to these funds are managed appropriately.
3.4
The Chamber of Commerce and Industry of Western Australia (CCIWA) also expressed support for the bill, stating that it did not believe the concept of transparency was difficult or controversial. It noted:
CCIWA believe that it's important that there is appropriate regulation to ensure transparency in the operation of worker entitlement funds. We believe that there's an expectation by both workers and employers who benefit from and/or contribute to such funds that the monies paid into them are appropriately managed and used for the purpose for which the funds were made.
3.5
The Australian Industry Group (Ai Group) stressed that the reforms proposed in the bill were both necessary and overdue, particularly in light of the recommendations made by the Heydon Royal Commission. It stated:
We very strongly support this bill. It is designed merely to protect workers' entitlements. There is a raft of what we see as spurious arguments and attempts to confuse the situation, but the nub of this bill is about protecting workers' entitlements. There's no suggestion whatsoever that these funds are not going to be around. All that this bill would do is to implement appropriate standards of governance on these funds that now hold $2 billion worth of workers' entitlements. They're workers' entitlements, as the name suggests. They don't belong to unions. They don't belong to employer associations. They belong to workers.
3.6
The Menzies Research Centre also supported the bill and emphasised the need for reform to address the concerns raised by the Heydon Royal Commission. It noted that the provisions in the bill would increase transparency in an area that had been 'largely opaque for a very long time'.
3.7
However, a number of other submitters expressed concerns with the bill in regard to its intent, practical operation, and potential consequences.
3.8
Several worker entitlement funds indicated that while they supported initiatives directed at improving transparency and good governance, they did not believe the bill represented a balanced, genuine attempt at reform. For example, Protect, a worker entitlement fund operating predominately in the electrical industry, noted:
Protect supports regulation and formalisation of good governance of Worker Entitlement Funds, insofar as it is in-line with standards which apply to other corporate or investment entities. However, there are many examples where the bill is out of line with standards applying to other businesses…
3.9
Similarly, Reddifund, a Western Australian worker entitlement fund open to employers in the building and construction industry, stated that it supported any initiative that genuinely sought to improve the performance of worker entitlement funds by providing greater certainty and standardised governance practices across the sector. However, it argued that the intent of the bill was not about good governance, but rather about 'restricting the legitimate uses of income and imposing additional costs that far exceed what is expected in other regulatory or corporate environments'.
3.10
Evidence from worker entitlement funds indicated that there were significant differences in how funds chose to treat surplus income generated through the investment of employer contributions.
3.11
For example, Protect noted:
With the introduction of the Bill and faced with the threat of eliminating the ability of a trust to distribute surpluses to its sponsors/beneficiaries, extraordinary distributions of current and prior year income were made as have been disclosed in the accounts of the ETU [Electrical Trades Union] and NECA [National Electrical and Communications Association]. In respect of the financial year ended 30 June 2017, Protect distributed $12.8m and $4.3m to the ETU and NECA respectively. Following a very strong investment year to 30 June 2018, distributions of $31.5m and $10.5m were paid to the ETU and NECA respectively.
….
Due to strong investment performance, the Protect fund generated surpluses, which accumulated in excess of the amounts needed to fund workers’ entitlements and cover the costs of administering the fund. The Trust had a surplus of assets over the liabilities owing to workers.
3.12
Protect further outlined:
In making a decision to distribute surpluses from the Trust Fund, the trustees/directors foremost consideration is the interests of the members of the fund. Before declaring a distribution, directors satisfied themselves that there would be sufficient funds available to pay the entitlements of worker entitlements as well as other liabilities.
Valid trust distributions must be unconditional – that is, the trustees cannot impose a condition on the distribution such as how the proceeds are used. Use of the proceeds is a matter for the recipients.
Trusts in other fields, or corporations who pay dividends, do not impose conditions on their shareholders as to the use of their dividends.
Unions and employer associations are best equipped to then re-invest in the industry through training and welfare programs, something Protect is not equipped to do. A distribution [is] a valid method we have available to re-invest in industry, albeit indirectly.
3.13
In contrast to this approach, the Contracting Industry Redundancy Trust (CIRT) informed the committee that the contributions paid to it are paid by employers, who are members of the fund, and employees are not entitled to those funds until a relevant trigger event, such as a redundancy, occurs.
3.14
Mr Kirby Leeke, Company Secretary and Administrator for CIRT, stated that he fundamentally supported the legislation on the basis that it would provide greater transparency for worker entitlement funds. At a public hearing he commented:
The question you asked earlier with regard to the previous people about $44 million paid to the union or something, to me, is abhorrent.
3.15
This chapter will now examine two of the key issues raised in evidence.
Authorised uses of income – prohibition on gifts or donations to charities
3.16
Proposed section 329LD of the bill relates to authorised uses of worker entitlement fund income. It specifies that fund income can be used for training or welfare purposes, provided that the payments meet certain criteria.
3.17
Some submitters expressed concern that implementation of the measures contained in the proposed section would prohibit worker entitlement funds from using fund income for gifts or donations to charities, given that subsection 329LD(2)(b) requires that training and welfare services be provided at 'market' value' and 'on commercial terms'.
3.18
MATES in Construction (MATES) is a non-partisan charity that aims to prevent suicide and improve mental health and wellbeing in the building and construction industry through free services. It explained that this section of the bill would have 'very serious and unintentional consequences' for its funding profile and operations.
3.19
The MATES submission detailed these consequences:
A substantial amount of the MATE's funding is received from the Redundancy Funds by way of gift. Because each of the entities in MATES are endorsed as DGRs (deductible gift recipients), the Redundancy Funds are afforded a tax deduction for these donations. If the Redundancy Funds are prohibited from making donations to MATES, the overall funding would be significantly reduced.
3.20
MATES calculated the impact of the funding reduction as a result of the bill as follows:
Queensland – 40 per cent cut in staffing and services (mainly frontline);
Western Australia – 25 per cent cut in staffing and serviced (mainly frontline); and
South Australia – the organisation would become inviable and be forced to close.
3.21
Mr Chris Lockwood, Chief Executive Officer for MATES, provided the committee with additional detail on how proposed section 329LD would impact the MATES fee-free, multimodal model of operation :
It's important to our outcomes that we're free—the program is offered free of charge—that we are across the industry and that we are totally independent of both unions and employers. We're there on behalf of the whole industry. If we change any of these parameters, the effectiveness of the program could be genuinely compromised. The comprehensive nature of MATES in Construction multimodal intervention provides training, supportive volunteers and sites doing their bit. It provides supports to individuals, providing information and support at an industry level, which is heavily featured in our published evaluations. If we change the nature of the program to services that could be purchased for a market-value price, it would fundamentally change the program and potentially invalidate much of the successful evaluation that's been done today, demonstrating the return on investment as well as reduced suicides.
3.22
Mr Lockwood stated that the implementation of the bill's provisions would require the MATES industry program to be redesigned as a service provided on commercial terms. He further explained:
And, if we were able to actually perform that reconfiguration, one thing that is black and white is that the implication in terms of the tax deduction associated with current donations would see 47 per cent less in funds available to actually serve this particular purpose – that being the rate of tax applied to those funds. MATES in Construction is a DGR registered charity, so a deduction is able to be made for those funds.
3.23
The committee queried whether MATES could quantify its costs and move to a fee-for-service model, potentially on a regional or state basis. Mr Lockwood advised that being able to put a market rate on a program that is offered free of charge in commercial terms would be inherently difficult given the complex nature of the program, particularly as services offered across worksites differed in accordance with the specific needs of workers at each location.
3.24
Mr Lockwood elaborated on the complexities involved in operating on commercial terms. He indicated that the measures proposed in the bill would jeopardise the flexibility and responsiveness of the MATES model.
3.25
A number of other submitters raised similar concerns regarding the bill's impact on the viability of MATES, given that it would prohibit donations from worker entitlement funds.
3.26
Submitters also commented more broadly on the perceived difficulties with the 'market value' and 'on commercial terms' criteria contained in proposed section 329LD.
3.27
For example, Incolink, a joint enterprise of employer associations and industry unions, is a worker entitlement fund operating in the commercial construction sector in Victoria and Tasmania. It informed the committee it was the largest investor in construction industry training in Victoria, providing equal funding to employer association and union run specialised training facilities.
3.28
Incolink indicated that it had concerns with the intersection of the 'market value' requirement in the bill and the occupational health and safety outcomes in the context of the training it funds. It noted:
In particular, the inclusion of the term 'at market value' and 'at commercial terms' does not in itself assure a comparison of equal quality between training providers. We have concerns that the quality of industry training may reduce to the lowest cost provider as a result. These criteria overlook the fact that with respect to occupational health and safety training and awareness, the objective is to save lives and it is the quality of the training that is the most important aspect that needs to be considered.
3.29
Incolink observed that the bill was 'not prescriptive' about what 'market value' may mean in the legislative context, and that in the absence of this guidance it felt 'significant uncertainty' about how the value would be assessed.
3.30
However, industry stakeholders informed the committee that they believed the changes necessitated under proposed section 329LD were reasonable and able to be appropriately managed by the worker entitlement funds and the charities they support.
3.31
ACCI described the transition MATES would have to undertake as 'entirely navigable'. Mr Scott Barklamb, Director of Workplace Relations at ACCI explained:
The way we understand it, the transition they [MATES] would have to make is that they would have to commence billing for a more expressly identified service to the funds. It would require an exercise in invoicing to link their services more directly to the funds and for the funds then to meet those invoices in accordance with prescribed policies on expenditures and renewed financial and constitutional arrangements. But we would note that, between the 2017 iteration of this bill in the 2019 iteration, the transitional period has been expanded to 12 months precisely to allow not only the funds but those who work with them to adjust their accountancy and financial arrangements.
3.32
Similarly, Mr Stephen Smith, Head of National Workplace Relations Policy for Ai Group, commented:
I can't see why MATES in Construction or any other organisation could not arrange their affairs so that the services that they're providing are really being provided in a commercial way. They're obviously provided valuable services. We don't see this [the bill] causing problems for those arrangements.
3.33
The Attorney-General's Department (the department) reassured the committee that the importance of training and welfare payments was recognised in the bill. It emphasised that the bill seeks to ensure appropriate oversight of these funding arrangements.
3.34
In response to the concerns raised in some evidence, Ms Rachel Volzke, Senior Executive Lawyer in the department's Industrial Relations Legal Division, clarified how the 'market value' term would operate:
The market value term is basically what is the best price that's reasonably attainable for that product or service in the general market. It doesn't mean that the service has to be the lowest-cost one; it just has to be what is reasonably appropriate in an open market. So, it doesn't mean that you have to engage the service that is the cheapest on offer.
3.35
At the public hearing in Hobart, Ms Volzke provided further clarification on this matter:
…some have expressed concern about payments for training and welfare services being at market value. Essentially, market value is aimed at ensuring that workers get value for money. Market value is the best price reasonably obtainable for a particular product or service in the general market. It does not require the fund to choose the cheapest or
inferior-quality option. Funds will still be able to choose the best and most appropriate welfare and training services in the circumstances.
Single-employer funds
3.36
Some employers elect to establish and contribute to funds that hold entitlements solely for their own employees. These funds are known as single-employer funds.
3.37
The bill allows for single-employer funds to elect to be registered and regulated by the Registered Organisations Commission (RO Commission). If an employer elects to be registered and regulated, their contributions to the fund will be eligible for the fringe benefit tax (FBT) exemption.
3.38
Proposed section 329LA of the bill specifies that six of the 22 initial and ongoing conditions for the registration of a worker entitlement fund will apply to single-employer funds.
3.39
Some submitters raised a number of concerns with these elements of the bill, including:
that single-employer funds could choose to operate wholly outside the registration scheme proposed by the bill;
that single-employer funds that did choose to be registered would not be regulated to the same standard as multi-employer worker entitlement funds;
that the bill would encourage a proliferation of single-employer funds which would undermine the viability of existing multi-employer worker entitlement funds; and
that sham single-employer funds may be created by employers acting in bad faith which would not adequately protect entitlements for workers.
3.40
For example, the National Entitlement Security Trust (NEST), a worker entitlement fund which secures worker entitlements primarily in the manufacturing industry, had 'significant concerns' about the creation of single-employer funds. It highlighted that single-employer funds would not provide portability of entitlements to workers as they moved between employers, a feature which is a core benefit of multi-employer funds.
3.41
NEST also posited that single-employer funds could prove a threat to the security of worker entitlements, particularly in a situation involving employer insolvency. It argued that single-employer funds would not prevent reliance on the Fair Entitlements Guarantee (FEG) scheme in cases of corporate collapses or illegal phoenixing activities. It explained:
It is unclear how single-employer funds, where they are controlled entirely by the employer, with funds entirely drawn from the company's finances, in an unregistered trust will be able to separate from the other parts of the corporation in cases of insolvency. This may lead to cases where employees' entitlements are not paid in a timely manner when a company goes into administration or receivership. In many cases, it can take months for legal questions around company assets to be resolved, leaving workers without access to their funds. In some cases, a poorly established single-employer fund may lead to worker entitlements being reabsorbed into the corporate entity and distributed to creditors, rather than paid to employees.
3.42
The Australian Council of Trade Unions (ACTU) asserted that the bill could encourage a potential proliferation of funds (such as commercial offerings and unregulated single-employer funds), which could have negative impacts on the actuarial underpinnings of established funds due to a reduced capacity to spread risk evenly, or reduced commerciality as a result of declining fund membership.
3.43
However, in its written submission the department explained why it was appropriate that single-employer funds that elected to be regulated were subject to fewer conditions than multi-employer funds:
The less onerous regulation for single-employer funds is appropriate. The funds are set up by an employer to protect the entitlements of that employer's own employees. In contrast, multi-employer funds hold millions of dollars' worth of entitlements, accept contributions from many employers for thousands of workers and are generally 'joint ventures' between unions and employer groups.
3.44
The department also made clear that registered single-employer funds would still be required to comply with items six and seven of the conditions for worker entitlement fund registration (set out in proposed section 329LA), which require that a fund adheres to a written constitution that ensures contributions and income are used appropriately.
3.45
The department emphasised that any single-employer fund that chose not to be registered under the scheme proposed by the bill would not be eligible to claim the FBT exemption. It observed that the FBT exemption would act as an 'incentive' to encourage employers to register their individual funds with the RO Commission.
3.46
Additionally, the department reiterated that an employer putting money aside for entitlements into a single-employer fund would be doing something 'above and beyond' the basic legal requirements required of employers under the Fair Work Act 2009.
3.47
ACCI also highlighted the point that employers that established single-employer funds, even if not registered, would be going 'above and beyond' what every other employer is already required and legally obliged to do.
3.48
The department also clarified the registration arrangements:
Terms of a modern award, enterprise agreement or contract of employment cannot require payments into an unregistered single-employer fund. To be clear, this means that single-employer funds must be registered if the employer wants their fund to be specified in such a term. A registered single-employer fund is also required to comply with the same restrictions on the use of contributions and incomes that the larger multi-employer funds are required to comply with. If a single-employer fund fails to comply with these conditions, they can be deregistered.
Committee view
3.49
The committee recognises the value of worker entitlement funds in securing the entitlements of workers, particularly those in transient industries. For this reason, the committee considers it imperative that such funds are held to high standards of governance and are run for the benefit of all workers.
3.50
The committee supports the bill's objective of ensuring that money held in worker entitlement funds is managed responsibly, transparently and in the best interests of workers. It commends the bill for addressing a number of recommendations from the Heydon Royal Commission.
3.51
The committee notes the concerns raised by submitters in regard to proposed section 329LD. In particular, it acknowledges the concerns about the prohibition on gifts and donations in the context of the valuable work carried out by MATES in Construction in the building and construction industry.
3.52
However, noting the assurances of the department, the committee is of the view that the wording in proposed section 329LD will still allow for MATES in Construction to continue their work, provided they take steps to convert their operations into a 'fee-for-service' model which would qualify as services provided at market value on commercial terms.
3.53
Similarly, the committee acknowledges the concerns of some witnesses regarding the operation and regulation of single-employer funds. However, the committee is reassured by evidence given by the department that those employers that do establish single-employer funds and elect to register with the RO Commission will still be required to ensure that contributions and income are used appropriately.
3.54
The committee considers the regulation imposed by the bill to be balanced and proportionate. It is of the view that the measures contained in the bill are necessary in order to provide for greater transparency and accountability, and to assure workers that their entitlements are secure and well-administered.
3.55
Additionally, the committee is satisfied that the bill incorporates adequate time for worker entitlement funds, as well as those organisations that work closely with them, to transition to the new regulatory scheme.
3.56
The committee recommends that the Senate pass the bill.
Senator the Hon James McGrath
Chair