The long-service leave time bomb: Gottliebsen

Over Easter I had the chance to talk with smaller manufacturers and service businesses. They are scared, really scared, over what has happened to the succession of enterprises that have collapsed in the automotive supply businesses. And the same thing has happened at appliance maker Kleenmaid, and will spread to many industries with large and small groups in danger.

In essence, when a company falls over the backlog of long service leave, retrenchment pay, holiday pay and sometimes superannuation and tax (which creates legal issues) takes everything.

Sometimes there is a building that might help a secured banker, but often the companies lease their premises. There might be personal guarantees from the owner, but the loss of what was thought to be a valuable business normally devastates family finances.

Very few corporate balance sheets total up all the employee entitlements in the event that the business stops trading. But banks now know how vulnerable companies are. And on the other side, many businesses in collapse have no hope paying what they had previously agreed to pay employees or what the law requires them to pay.

In the automotive parts business, the lower Australian car production has meant that big suppliers to General Motors, Ford and Toyota have been looking to cut back on the number of enterprises supplying them and concentrate buying on their most viable supplier operations. It seemed a sensible strategy, but it exposed the employee entitlement powder keg.

As soon as a supplier is cut out of the chain, its employee entitlements wipe out the company. There is nothing left for anyone and employees are often not paid in full. Accordingly there is a volley of suppliers to the collapsed company with big losses and in danger of collapse themselves.

These vulnerable groups are of course are required to stay alive to supply those who still have contracts. And so money in the chain tightens. Everyone gets very nervous when payments are late because they realise that in a collapse, as unsecured creditors, they will get nothing. But payments are late, partly because bankers now also realise how vulnerable they are given the business has no value.

In better times, employers and unions have restricted weekly cash payments in exchange for a whole range of delayed payments, including long service leave and severance entitlements.

These delayed payments become a total nightmare when the company actually faces trading cessation. But the whole community accepts these payments as an entitlement even though in fact they will destroy some companies. The unfortunate workers will not only fail to receive them but will be out of a job as well.

There is no easy solution to this issue and I have great sympathy for the workers who did not understand their vulnerability.

However, the US is showing a new trend. President Obama is threatening General Motors with bankruptcy if it does not rid itself of legacy union deals. In Australia, General Motors slashed hours rather than sack workers.

It received great praise in the community. But the payments to retrenched workers would have been a huge bill at a time when the parent was in danger of going under unless it rid itself of such deals. The irony was lost on Australia.

This first appeared in Business Spectator