Issues in Introducing the Retrenchment Benefits Guarantee Fund Deok Soon Hwang Korea Labor Institute)

22 Contents I. ILO Conventions II. Necessity and Basic Structure IV. Other Countries’ Cases III. Designing the RBGF Contents

3 I. ILO Conventions

4 ILO Conventions on Workers’ Claims 4 ▶ C173 Protection of Workers’ Claims (Employer’s Insolvency) Convention (1849), Article 1 1. For the purposes of this Convention, the term insolvency refers to situations in which, in accordance with national law and practice, proceedings have been opened relating to an employer's assets with a view to the collective reimbursement of its creditors. 2. For the purposes of this Convention, a Member may extend the term "insolvency" to other situations in which workers' claims cannot be paid by reason of the financial situation of the employer, for example where the amount of the employer's assets is recognised as being insufficient to justify the opening of insolvency proceedings.

5 ILO Conventions on Workers’ Claims (Continued) 5 ▶ C173, Article 9 The payment of workers' claims against their employer arising out of their employment shall be guaranteed through a guarantee institution when payment cannot be made by the employer because of insolvency. ▶ C173, Article 12 The workers' claims protected pursuant to this Part of the Convention shall include at least: (a) the workers' claims for wages relating to a prescribed period, which shall not be less than eight weeks, prior to the insolvency or prior to the termination of the employment; (b) the workers' claims for holiday pay due as a result of work performed during a prescribed period, which shall not be less than six months, prior to the insolvency or prior to the termination of the employment;

6 ILO Conventions on Workers’ Claims (Continued) 6 ▶ C173, Article 12 (Continued) (c) the workers' claims for amounts due in respect of other types of paid absence relating to a prescribed period, which shall not be less than eight weeks, prior to the insolvency or prior to the termination of employment; (d) severance pay due to workers upon termination of their employment. ▶ C173, Article Claims protected pursuant to this Part of the Convention may be limited to a prescribed amount, which shall not be below a socially acceptable level. 2. Where the claims protected are so limited, the prescribed amount shall be adjusted as necessary so as to maintain its value.

7 ILO Conventions on Wage Protection 7 ▶ C95 Protection of Wages Convention(1849) Article In the event of the bankruptcy or judicial liquidation of an undertaking, the workers employed therein shall be treated as privileged creditors either as regards wages due to them for service rendered during such a period prior to the bankruptcy or judicial liquidation as may be prescribed by national laws or regulations, or as regards wages up to a prescribed amount as may be determined by national laws or regulations. 2. Wages constituting a privileged debt shall be paid in full before ordinary creditors may establish any claim to a share of the assets. 3. The relative priority of wages constituting a privileged debt and other privileged debts shall be determined by national laws or regulations. ※ Malaysia ratified the convention in 1961

II. Necessity and Basic Structure

99 Necessity of the RBGF Trend of retrenchment benefits and the proportion of unpaid benefits ▶ The proportion of unpaid retrenchment benefits soared in Many bankrupted employers did not have the capacity to pay the benefits. ▶ Necessity of government intervention to secure livelihood of unemployed workers because private actors can not solve the problem. (million RM) %

10 Basic Structure of the RBGF 10 Firms SOCSO (RBGF) Levy Retrenched workers from bankrupt firms Insolvent employers Subrogated payments Cessation of Claims Right of indemnity Reimbursement of the subrogated payments

11 Basic Features of the RBGF 11 ▶ The SOCSO will take charge of the administration of the RBGF. - Collection of levy; management of subrogated payments; collection of reimbursement from insolvent employers - A separate account will be established in the SOCSO for the RBGF. ▶ Coverage of application: Coverage of current retrenchment benefits ▶ Option: Maximum guarantee period 65 days vs. 105 days - 65 days are retrenchment benefits for 5 years days are retrenchment benefits for 7 years ▶ Levy: amount of levy will be decided according to pay-as-you-go rule - Reimbursement from the employers can be used as the buffer for the first stage of implementation

III. Designing the RBGF

13 Coverage of Application 13 ▶ Coverage of Application: Coverage of current retrenchment benefits cf. Central/local governments and public enterprises may not be covered by this new guarantee system. ▶ ILO Convention 173, Article 4 paragraph 2 The competent authority, after consulting the most representative organisations of employers and workers, may exclude … specific categories of workers, in particular public employees, by reason of the particular nature of their employment relationship, or if there are other types of guarantee affording them protection equivalent to that provided by the Convention. ▶ Korean Case Korea’s Wage Claim Guarantee System excludes business carried out directly by the State or local governments

14 The Scope of Guarantee Amount 14 ▶ Two Options: Maximum guarantee period 65 days vs. 105 days - 65 days are retrenchment benefits for 5 years days are retrenchment benefits for 7 years ▶ New Option: Prescribing Maximum Amount or Not cf. ILO C173, Article 13 ▶ Korean Case - In Korea ceiling of subrogated payment is set in consideration of the worker’s age etc., at the time of retirement under the conditions prescribed by the Presidential Decree. - Presidential Decree prescribes that the ceiling shall be set according to the worker’s age considering wage and price growth rates and financial situation of the fund. (previously, 80% of average wage by age group)

15 Collection of Levy 15 ▶ Two Options: Estimated rates for RBGF Levy based on actuarial assessment are: (1) when the maximum coverage period is 5 years; (2) when the maximum coverage period is 7 years. ▶ Recommendation: - Rate shall be stipulated as less than 1/1,000 of the wage in the law. - Actual rate may be set flexibly according to the financial situation of the fund. ▶ Method of Collection: Mutatis Mutandis Application of social security schemes. Levy can be collected with the collection of insurance premium for social security schemes. ▶ Extinctive Prescription: The right to collect charges and other levies can be extinguished if it is not exercised for a certain period (ex. 3 years)

16 Scope of Insolvent Employer 16 ▶ Definition of Insolvency: situation in which proceedings have been opened relating to an employer’s assets with a view to the collective reimbursement of its creditors (ILO C173, Article 1, paragraph 1) ▶ Moderation of Definition: definition may extend to other financial situations in which worker’s claims cannot be paid. (ILO C173, Article 1, paragraph 2) ▶ Korean Case - bankruptcy by court decision - work-out to revive the enterprise by court decision - situation prescribed by Presidential Decree: the size of the enterprise is less than 300 workers, the business has been closed or under closing, and the employer can not pay the worker’s claim. This is because in many small and medium size enterprises bankruptcy does not have legal process

17 Process of Paying the Subrogated Payment 17 Retrenched Worker Insolvent Employer SOCSO: local office SOCSO: center Financial Institution Retrenched Worker 1.Certification of insolvency application 2. Inspection 3. Notification of Certification 4. Application of Payment 5. Request of Payment 6. Request of Payment 7. Making the payment ※ Certification of insolvency application should be made in a prescribed period, such as in 1 year.

18 Governance and Delivery 18 ▶ Tripartite governance: The new RBGF would be managed by a new commission under the Ministry of Human Resources or the SOCSO. The commission should be established as a tripartite commission. ▶ New staffs should be recruited to manage the new system. About 300 staffs would be necessary considering Korean case. ▶ Korean Case - Korea Labor Welfare Corporation (KLWC): 6 workers in KLWC center; 105 workers in local offices as of In Korea, application and inspection is made by the local public employment service center. The transfer of these tasks to KLWC would require 286 more staffs (as of 2003).

19 Remaining Issues Amendment of the Company Act to guarantee benefits claim Integrating the wage claim guarantee in the system ▶ Introduce a preferential rights for a certain period of retrenchment benefits - Establishment of an institutional shield for workers against other creditors ▶ ILO C173 recommend this measure. ▶ The preferential rights for retrenchment benefits will help to reduce the burden of employers in introducing the RBGF ▶ The suggestion of introducing the RBGF does not cover wage claim. ▶ Need to consider a comprehensive system to include unpaid wage claim in the system which can be called Wage and Retrenchment Benefits Claim Guarantee Fund. ▶ Preferential rights can also be extended to a certain amount of unpaid wage claim.

20 Supplementary Programs Loan to workers with wage claims Legal aid services for workers with wage claims ▶ Many workers with unpaid wages have financial problems in maintaining basic livelihood. ▶ The SOCSO may introduce a loan program for these workers. ▶ Direct management of loan program or credit guarantee for getting loan from other financial institutions would be possible options. ▶ Many retrenched workers and workers with unpaid wage claims do not have resources to proceed legal process to get their claims. ▶ Free legal aid services can help to alleviate the problem. ▶ In Korea, financial contributions to the Korean Legal Aid Corporation from the Wage Claim Guarantee Fund was introduced in 2005 to support free legal aid services for workers with overdue wages.

IV. Other Countries’ Cases

22 Korea’s Wage Claim Guarantee System 22 ▶ Enacted in 1998 during the Asian economic crisis in the late 1990s ▶ Administration: Korea Labor Welfare Corporation manages the Wage Claim Guarantee Fund. KLWC also manages work injury insurance. ▶ Levy: within 2/1,000 of wage (current rate: 0.4/1,000) ▶ Amount of guaranteed wage claims - Last 3 months unpaid wage - Retirement allowance for the last 3 years (90 days of average daily wage) ▶ Preferential rights for unpaid wage and retirement benefits - Korea’s Labor Standard Act gives preferential rights for 3 months wage over pledges, mortgages, taxes, and public levies. - Retirement Benefits Guarantee Act gives preferential rights for retirement benefits for 3 years. Retirement benefits covers all job separators including voluntary leavers with tenure for 1 or more years.

23 French and Australian System 23 French System Australian System ▶ Coverage: All firms with 1 or more workers ▶ Levy: 0.35% of wage (2005) ▶ Guaranteed wage claim: 6 times monthly wage to calculate unemployment insurance contribution (tenure with more than 2 and a half years); 5 times (6 months ~ less than 2 and a half years); 4 times (less than 6 months) ▶ Introduction: 2000, current system in 2001 ▶ Coverage: All firms with 1 or more workers ▶ Finance: government ▶ Guaranteed claim: total unpaid wage, paid leave, advance notice of redundancy allowance, and redundancy pay for maximum 8 weeks

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