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Summary of Responses: White Paper – Insolvency Payments Scheme.

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STATES OF JERSEY

SUMMARY OF RESPONSES: WHITE PAPER – INSOLVENCY PAYMENTS SCHEME

Presented to the States on 12th May 2010 by the Minister for Social Security

STATES GREFFE

2010   Price code: B  R.53

Social Security Department

Summary of Responses

W  HITE PAPER – Insolvency Payments Scheme  11th May 2010 SUMMARY OF CONSULTATION DETAILS

The Department of Social Security published a White Paper between 3rd December 2009 and 5th February 2010 seeking responses via public consultation on proposals for a statutory insolvency payments scheme.

The proposed scheme is intended to ensure that employees of insolvent businesses receive compensation based upon a reasonable proportion of the monies owed to them by their former employer, including unpaid wages, holiday pay, statutory notice pay, and statutory redundancy payments.

In summary, the White Paper proposed a scheme that would –

  1. Follow the principles of insolvency schemes operating in the UK and the Isle of Man.
  2. Be based largely on the current Temporary Insolvency Scheme.
  3. Entitle an individual to claim a number of outstanding payments (including wages and holiday pay owed, statutory notice pay and statutory redundancy payments)  from  the  statutory  insolvency  fund  if they  meet  5 specific qualifying criteria.
  4. Cap the maximum payment from the statutory insolvency scheme at the same cap applied to the Jersey Employment Tribunal (£10,000).
  5. Provide  a  mechanism  to transfer  the  employee's  rights  in insolvency proceedings to the Minister for Social Security so that he can take steps to recover as much as possible of the amount paid out.
  6. Be subject to a right of appeal to the Social Security Tribunal.
  7. Be self-funding by applying a small increase (0.032%) to Social Security contributions  paid  by  employers,  providing  an  insolvency  fund  of approximately £350,000 per year (to include administration costs at 5% of total expenditure).

OVERVIEW OF CONSULTATION RESPONSES

Copies of the White Paper were circulated to more than 80 consultees (including representatives of employers and employees, independent advisory bodies, lawyers and insolvency practitioners) as well as all States Members and those who subscribe to the States Public Consultation Register.

Responses were received from 10 individuals and organisations (listed at the attached Appendix).  Eight  of  the  respondents  specifically  stated  that  they  supported  and endorsed the proposals in general. None of the respondents were opposed to the broad proposals of the scheme. The majority of the comments received related to the funding of the scheme and administration of payments.

The Jersey Advisory and Conciliation Service (JACS) and the Viscount's Department have indicated their support for the scheme. Both were involved with the development of the  White  Paper  given  their  specialist  knowledge  on  the  subjects involved.  A number  of  detailed  points  regarding  the  operation of  the  scheme  were  addressed through discussion with JACS and the Viscount's Department during the drafting of the White Paper.

MINISTER'S RESPONSE TO CONSULTATION

Having considered the consultation responses, the Minister has decided that further consideration is required in 2 areas –

  1. The deduction of Social Security contributions from compensatory amounts paid to claimants, and
  2. The requirements of the Social Security Tribunal in preparation for hearing appeals against decisions of the Department.

In order to take forward the proposals the Minister will formally request Law Drafting time with the intention of preparing draft legislation by the end of 2010.

SUMMARY OF RESPONSES

The  table  starting  on  the  next  page  summarises  the  responses  received  during consultation and the Minister's response to each point. Each of the respondents has given permission for their comments to be quoted and attributed to them, as detailed at the attached Appendix.

 

Respondent's comment

Minister's response

Principles

The  Jersey  Rights  Association  was concerned that employees on short-term contracts will not qualify for protection in  terms  of  statutory  redundancy payments.

Redundancy legislation has already been drafted requiring a 2 year qualifying period for entitlement to a redundancy payment. This consultation does not revisit that qualifying period. The Employment Law already gives employees some protection of continuity  of  employment  where  there  are successive  fixed-term  contracts  with  the  same employer.

Jon   Scott  noted  that  Social  Security contributions are capped at an income threshold, over which contributions are not  collected,  which  means  that employer  contributions  to  the insolvency fund will not be relative to the potential claims of their employees.

The  total  sum  that  may  be  claimed  by  an individual is capped at £10,000, which is unlikely to cover the full claims of a high-earner. However, the  matter  of  Social  Security  contributions  at higher  levels  of  earnings  (currently  above  the contributions ceiling) will be considered as part of the Fiscal Strategy Review.

Two respondents noted that the scheme protects  employees  only  if  their employment  is  terminated  when  their employer  becomes  insolvent  and suggested that the scheme could have scope  for  discretion.  Jon   Scott  noted that  employees  may  have  difficulty obtaining  compensation  from  a subsequently insolvent employer if they have  been  made  redundant  prior  to formal  insolvency.  The  Employment Lawyers  Association  (Jersey  Branch) (ELA)  shared  this  concern  and suggested that former employees could be covered by the scheme where their employment  ended  within  6 months prior to insolvency.

The  Minister  had  considered  whether  discretion should  be  available  in  such  circumstances; however  decided  that  a  line  must  be  drawn somewhere.  As  recognised  by  the  ELA,  the proposed  scheme  needs  to  be  workable  and economically viable. Any widening of the scheme would have cost implications at a difficult time for businesses.  If  the  employee's  period  of  notice takes  them  beyond  the  date  of  the  employers' insolvency, they will qualify under the proposed scheme.  If  employment  is  terminated  whilst  an employer  is  solvent,  they  may  claim  amounts owed to them via the Employment Tribunal. If the employer  subsequently  becomes  insolvent,  the employee  can  claim  amounts  owed  via  the insolvency proceedings, along with other creditors.

Payments/Administration

The  Citizens'  Advice  Bureau  (CAB) noted  that,  as  proposed,  payments  to employees  would  be  made  gross, leaving  employees  to  pay  amounts owed  to  Social  Security  and  Income Tax. CAB was concerned that this could leave employees with debt and possible loss  of  benefit  entitlement.  CAB suggested  that  deductions  should  be made prior to payment.

This is acknowledged. The paper intentionally did not address the matter in detail as it is complex and impacts on other legislation; however the Minister agrees that it may be necessary to amend other legislation  and  practices  in  order  to  achieve  an appropriate outcome in regard to the deduction of Social  Security  contributions.  The  Income  Tax Department has advised that insolvency payments should  be  made  to  employees  without  the deduction of income tax. Any tax due would be collected by the Income Tax Department from the individuals themselves.

 

An  anonymous  employee  respondent within the Finance Industry commented that the new insolvency fund should aim to  achieve  less  than  the  proposed £350,000  given  that  the  existing temporary insolvency scheme had paid out  less  than  half  of  its  budget  (to December  2009)  during  a  period  of economic downturn.

The  existing  temporary  scheme  only  pays  out statutory  notice  pay.  The  proposed  scheme  will cover additional amounts owed, up to £10,000 per person. The estimated cost of the scheme is based on a normal' year rather than an exceptional year such as 2009.

The  Health,  Social  Security  and Housing  Scrutiny  Panel  proposed  that the  0.032%  increase  in  employer contributions could be raised to 0.05% to allow the Department to accumulate a financial buffer as a precaution.

The  Department  has  carefully  calculated  the requirements  of  the  proposed  scheme  and  the Minister  does  not  wish  to  increase  employer's contributions more than is likely to be necessary; particularly given that there will be other pressures on the Social Security fund in the future arising from  the  ageing  population.  The  level  of contribution  to  the  insolvency  fund  may  be reviewed as necessary in the future.

Three  respondents  (John   Scott ,  the Jersey  Rights  Association  and  an anonymous employee respondent within the  Finance  Industry)  noted  that employer  contributions  to  the insolvency fund should be reviewed if funding  is  inadequate,  or  capped  if funding is excessive in future.

It is not the Minister's intention to build up the fund  significantly  whilst  continuing  to  levy  the same  percentage  increase  on  employer contributions,  unless  continued  economic downturn is predicted in the future.

Provisions  will  be  made  to  so  that  if  the  fund builds up beyond predicted requirements, funding will be reviewed. An arbitrary cap would not be useful.

The  ELA  (Jersey  Branch)  noted  that further  appointments,  additional resources and member training may be necessary  for  the  Social  Security Tribunal  to  cope  with  the  additional activity of appeals against decisions of the  Department  regarding  insolvency payments.

The  Department  has  considered  the  requirement for  the  Social  Security  Tribunal  to  be  suitably prepared and intends to conduct further research into the potential caseload of appeals.

APPENDIX

LIST OF RESPONDENTS

  1. Health, Social Security and Housing Scrutiny Panel
  2. Citizen's Advice Bureau
  3. An anonymous employee respondent within the Finance Industry
  4. Viscount's Department
  5. Jersey Advisory and Conciliation Service
  6. Jersey Rights Association
  7. Deputy R.G. Le Hérissier of St. Saviour
  8. Adrian Walton
  9. Employment Lawyers Association (Jersey Branch)
  10. Jon Scott