Federal Entitlements Guarantee (FEGS)

Employee-owned cooperative directors don’t get the Federal Entitlements Guarantee (FEGS) if their cooperative goes into liquidation. Even if they have been elected as a Director for a few months, they miss out on their LSL, holiday pays and redundancy entitlements etc.
However, under the 556 Corporations Act, directors can receive their entitlements owing them before they were elected as Directors of their workers’ coop.
This is based on the definitions of Priority and Non-Priority Days, where payments can be apportioned on a pro-rata basis.
Priority Days: This is the number of days as a director of the workers’ cooperative
Non-Priority Days: Is the employment days before being elected as a Director of the workers cooperative

The NSW Court of Appeal has ruled:

Section 556(1C) requires identification of the amount of payment that can be attributed to non-priority days. It assumes by use of the words “must not include an amount attributable to non-priority days” that a payment can be in part attributed to priority days and in part to non-priority days.

This gives effect to the intention manifested by the legislature that a former employee/director of a company is not totally excluded from priority in respect of a retrenchment payment, but rather is only excluded insofar as the payment relates to a period in which he or she was a director.

This is excellent news; however, FEGs have their own regulation and don’t adhere to Section 556 of the Corporations Act. The only way the worker/directors can receive payment is from monies left over after the cooperative’s liquidation before leftover funds are forwarded onto FEGS by the Liquidator. Unfortunately, often there is no money left in the Liquidator’s bucket.

The “workaround”

The “workaround” to protect employee directors is to create a trust well before the cooperative starts struggling and put aside funds into this Trust, sufficient to cover owed entitlements to the worker directors. This would have to be reviewed on an annual basis and adjustments made.  The Trust is set up to protect itself from liquidators.

Sadly this is another barrier/cost to the creation of employee-owned cooperatives!


Follow this link for definitions of Priority and Non-Priority Day.


Leave a Reply

Your email address will not be published.