Committee Reports > List of Committees > Joint > 1978 > Committee on the Secondary Legislation of the European Communities > Report No. 30 - Protection of Employees in the Event of Insolvency of their Employer

REPORT

Introduction

1. The Joint Committee has examined the Commission’s proposal for a Council Directive on the approximation of the laws of Member States concerning the protection of employees in the event of the insolvency of their employer [R/859/78 (SOC 101)].

2. The Commission’s proposals are based on Article 100 of the EEC Treaty which requires the approximation of national laws which directly affect the functioning of the common market. Detailed investigations by the Commission into the law and practice in the Member States had led it to conclude that employees’ claims arising from their contracts of employment are inadequately protected in the event of the bankruptcy or insolvency of their employers.

3. The Joint Committee is informed that consideration of this proposal at Community level will not commence until 1979.

Contents of Proposal

4. The proposed Directive would oblige Member States to set up institutions to satisfy the unfulfilled claims of employees arising before the onset of the employer’s insolvency in respect of

(a) remuneration or payments arising from a training relationship (covering at least three months);

(b) other cash or equivalent benefits in connection with sickness, holidays or termination of employment, or gratuities, bonuses or indemnities (covering at least twelve months).

5. The guarantee institution must not be financed solely by employee contributions and its assets must be inaccessible to insolvency proceedings. It must be required to meet undisputed or substantiated claims on the employee’s verbal request and payment must be made irrespective of whether the employer concerned has discharged his obligations to the institution or not. Applications by employees must be admissible from the onset of insolvency and within six months thereafter.

6. The proposed Directive would oblige Member States to ensure that the employer’s failure to pay social security contributions before his insolvency does not affect his employee’s benefit entitlement. It would also require the Member States to protect pension rights of employees and former employees which are outside the State’s own social security system.

Position in Ireland

7. Irish law accords preferential status in bankruptcy and winding up proceedings to certain debts owed to employees. Wages or salary of a clerk or servant for four months, subject to a maximum of £50, and wages of a labourer or workman for two months, subject to a maximum of £25, rank as preferential payments in bankruptcy by virtue of the Preferential Payments in Bankruptcy (Ireland) Act, 1889. A somewhat similar provision relating to the winding up of limited companies including industrial and provident societies appears in the Companies Act, 1963, as amended, but with the differences that the period is four months, whether the employee be “clerk or servant” or “workman or labourer”, subject to a limit of £300.

8. Labour legislation administered by the Department of Labour does not extend to protection of workers in bankruptcies—although certain Acts e.g. the Unfair Dismissals Act, 1977, and the Minimum Notice and Terms of Employment Act, 1973, provide that certain moneys due under those Acts be treated as preferential payments in bankruptcy and in company insolvency. Accrued holiday remuneration ranks as a preferential payment by virtue of the Companies Act, 1963 in the winding-up of a company but does not so rank apparently in bankruptcy proceedings where the undertaking is not a company.

9. As regards redundancy lump-sums, the Redundancy Payments Acts provide that where the employer is insolvent, the employee can apply to the Minister for Labour for payment and where the Minister is satisfied of the entitlement, the lump-sum must be paid to the employee from the Redundancy Fund.

10. Article 6 of the Directive would require Member States to adopt measures to protect the entitlement to social security benefits of employees where insolvent employers fail to pay social security contributions. Under existing legislation there is power to treat unpaid contributions as paid where the failure to pay the contributions is not due to any consent, connivance or negligence on the part of the employee. There is, therefore, full protection for the employee against any failure or neglect on the part of his employer.

11. Article 7 of the Directive would oblige Member States to adopt measures to protect the interests of employees under occupational pension schemes in the case of the insolvency of a business. At the present time the Department of Social Welfare has no direct responsibility in the matter. However, in the Green Paper entitled “A National Income Related Pension Scheme”, which was published in October 1976, the need to ensure protection of occupational pension rights in the event of closures was one of the matters raised for discussion. The Green Paper is still under consideration.

Views in General of Joint Committee

12. The Joint Committee agrees in principle that employees should have a guarantee that they will receive payments due to them when their employers become insolvent and it accepts that merely granting preferential status in bankruptcy and winding-up proceedings affords inadequate protection. The Committee would regard the method of financing such a guarantee, which the draft Directive leaves largely to the Member States, as posing the main problem to be solved in implementing the Directive if it is adopted. As pointed out to the Committee by the Federated Union of Employers, there is a real danger that liquidations and receiverships may be delayed and assets exhausted to a greater extent than at present if certain debts are known to be guaranteed by the State. However, this, while a factor to be taken into account, does not of itself constitute sufficient reason for failing to provide better protection for employees when their employers become insolvent.

Remuneration and Related Payments

13. It is clear that the proposed Directive contemplates unpaid remuneration and other debts arising under a contract of service being paid by state institutions before bankruptcy and winding-up proceedings are concluded. Presumably for the purpose of such proceedings, the state institutions would be subrogated to the rights of the employees. Section 285 (6) of the Companies Act, 1963 provides that advances made to a company for the payment of wages and accrued holiday payment enjoy a right of priority in the winding-up of a company if the wages and holiday remuneration so paid would have qualified for that priority. To give a similar priority to payments by the proposed state institution would, however, require legislation. In the interests of economy it may be desirable to accord such debts preferential status. The possible adoption of the Directive seems, therefore, a factor to be taken into account when considering the recommendation of the Bankruptcy Law Committee which reported on 1st October, 1973 that preferential payments of all kinds should be abolished.

14. The Joint Committee understands from the general experience in insolvencies that debts due to an employee on the insolvency of the employer are more likely (and then not in many cases) to relate to holiday pay and payments due other than wages or salary. The Committee, however, has no information on the extent of such debts and in the absence of a firm estimate of the costs involved, it does not wish to recommend how the scheme envisaged by the Directive should be financed. The Federated Union of Employers believes that employees must be required to contribute to any fund established on the grounds that liquidation is very often in practice both a risk and a responsibility shared by employees and management. On the other hand, the Irish Congress of Trade Unions argues that, since employees would receive only what they had already earned, any fund should be financed solely by employers’ contributions. The draft Directive itself merely requires that such a fund must not be financed solely by contributions from employees and the Joint Committee believes that this provision should be accepted.

Pensions and Pension Rights

15. The Directive would require Member States to “adopt the measures necessary” to protect the rights of employees under private occupational pension schemes in the event of the employers’ insolvency. According to the Green Paper, already referred to, the majority of occupational pension schemes in the private sector in this country “are, in fact, funded in advance and the employee has the assurance that funds have been set aside to secure his pension and that payment will be independent of the fortunes of the undertaking in which he is employed”. The Committee is satisfied, however, that, even in the case of schemes which are funded in advance, problems can arise on the insolvency of the employer where obligations to top up the fund have arisen but have not been discharged before insolvency or where the employer is otherwise indebted to the fund. Moreover, there is the question of the employee maintaining his pension rights on taking up new employment. The Green Paper recognises that “pension rights under occupational pension schemes in the private sector are not fully protected in the event of mergers, take-overs, changes of ownership, closures, redundancy” and it accepts that there is not “adequate provision for transferability of pension or preservation of pension rights in cases of changes of employment”. The solution to the problem is not one which the Committee believes should be sought in isolation but must be found in the context of whatever form of National Income-Related Pensions Scheme eventually emerges.

Acknowedgements

16. In considering this proposal the Joint Committee has received a great deal of assistance from the Irish Congress of Trade Unions and the Federated Union of Employers. It wishes to express its sincere thanks to both organisations.

(Signed) MARK CLINTON,

Chairman of the Joint Committee.

6 December, 1978.