Claims data is a wonderful indicator of issues and trends arising out of insured M&A transactions, which is why we invest time and energy in the AIG M&A Claims Intelligence Series. The Australian market has a great example of one such issue right now. 2019 was the year when employment entitlements compliance came sharply into the spotlight. The office of Fair Work Ombudsman1, has seen a flood of companies rushing to declare that they have underpaid their workers - this includes major banks, retail and leisure/hospitality groups, such as restaurants.
Of the latter, there have been some high profile instances including the Made Establishment empire fronted by celebrity chef George Calombaris. Underpayments are reportedly running to hundreds of millions of dollars including one such case believed to be the biggest on record in Australia.
Indeed, the problem appears so endemic that the Attorney-General for Australia and Minister for Industrial Relations, Christian Porter, has described big corporates as “beyond hopeless” when looking at staff remuneration.
Mr Porter has recently released a discussion paper looking at options to tackle worker underpayments ranging from the prospect of “naming and shaming” employers through adverse publicity orders to vigorous laws around wage underpayment including possible criminal sanction in the worst cases.
Indeed, the problem appears so endemic that the Attorney-General for Australia and Minister for Industrial Relations... has described big corporates as “beyond hopeless”
Shifting through the data
The issue has caused a headache for some W&I insurers who have been on the receiving end of some large claims. It appears that these cases may just be the tip of the iceberg and we fully expect to see more of this in the coming years from an insurance perspective in the M&A market.
In Australia, there is a complex and onerous compliance regime governing this area – particularly for industries that employ significant numbers of casual staff, and many businesses probably think that they are complying but in fact may be falling foul of the law.
The key area then in the context of an M&A transaction is due diligence around employment entitlements compliance – which historically has not necessarily been an area of focus, often falling out of scope of legal, financial or tax due diligence.
Unfortunately, it has simply fallen between the cracks. Employment entitlements compliance needs to be firmly on the radar for deal team advisers who are working in this area.
This means conducting detailed due diligence, employee sampling, and testing to ensure compliance against the relevant industrial instruments. Making sure that everyone is ahead of the issue is the best way to maximising coverage under a W&I policy.
Making sure that everyone is ahead of the issue is the best way to maximising coverage under a W&I policy.
And the problem may not be confined to Australia. Other parts of the world with complex frameworks for industrial relations may face similar issues.
These cases are early warning signals from which we can all learn, and all take steps to make sure that in claims terms this is an amuse-bouche, not a 10-course dinner!
Darren Savage, Asia Pacific Manager - Mergers & Acquisitions
The Guardian, 'They're madly checking their payrolls': the ugly truth of Australia's underpayment epidemic