Coronavirus: Was Covid-19 wage subsidy scheme too lenient for big business?

Monday, 27 April 2020

Large and profitable companies are 'rorting the system' by picking up Covid-19 wages subsidies despite being able to sustain themselves financially, an independent researcher says.

To help businesses through the coronavirus pandemic the Government has provided employers the opportunity to apply for a wage subsidy for each staff member, so long as certain criteria are met.

As of Friday the scheme has paid out $10.4 billion to support the incomes of more than 1.6 million New Zealanders.

Many large companies have gone straight to the Government for financial support before asking their shareholders to dip into their pockets.

However, disquiet is growing over companies which have claimed the subsidy while also asking their workers to bear financial pain without seemingly going back to their shareholders for money first.

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Researcher Michael Gousmett says the wage subsidy should not have been available to large organisations with large cash reserves.

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The wage subsidy has been utilised by the likes of SkyCity, Fletcher Building, Ngai Tahu, Restaurant Brands, Auckland International Airport, Summerset Group, Kathmandu, Kmart and Harvey Norman, just to name a few, along with exclusive lodges, golf clubs and genltemens' clubs.

Michael Gousmett, an independent researcher and adjunct fellow at the University of Canterbury, says many businesses are 'rorting the system' by claiming the subsidy despite being able to sustain themselves financially.

While they may be acting legally it does raise questions around morals, he says.

'Everybody has just jumped on the bandwagon and seen it as a bit of a gold mine,' Gousmett says.

Casino operator SkyCity for example, received nearly $22 million in wage subsidies, yet made $450m off asset sales in the last financial year along with a $144.6m profit. It also paid $135m of dividends to shareholders.

Gerard Hehir says the first place companies should look for money ''is their own bank accounts''.

In response to coronavirus it's laid off 200 staff, cut the pay to 900-odd staff and asked its workforce to contribute to a hardship fund to support redundant colleagues.

SkyCity's reasoning was that it expects to be a much smaller operation when it fully re-emerges.

'Were it not for the subsidy we would be forced to make some 700 waged people redundant now in order to right-size our labour workforce for the future,' it said in a statement.

Asked whether it had explored raising capital, the company said only that it had 'sufficient liquidity' at present and would 'evaluate SkyCity's longer term funding requirements and a range of options for satisfying these'.

As a listed company, it must follow the NZX's disclosure rules with regards to statements about its finances.

Gerard Hehir, national secretary of the casino workers' union, Unite, questions whether the company really tried hard enough to avoid that happening.

'Last year they were boasting they had $450m in the bank… The first place they could look is their own bank accounts'.

He feels the company jumped the gun about its future. Many of SkyCity's patrons are locals, so he says in the long-run it may not have been that bad.

'Of course, directors of the company need to keep the company solvent, we understand that and they're obliged legally to do that, but the issue there is SkyCity turned down money from the Government for their salaried staff so they could just start making people redundant.'

Chloe Ann-King says companies should be tapping owners before asking workers for wage cuts.

Gousmett says while the horse has already bolted in this crisis, the wage subsidy 'lolly scramble' must provide lessons for the future.

'When is it fair for organisations of this size to be benefiting from the tax payers' purse?'

He says there should be more obligation on large businesses to dip into cash reserves or go to shareholders before applying for wage subsidies or asking staff take pay cuts.

The money would have been better directed at small businesses that are genuinely feeling hardship, he says.

'We need to be a little bit more careful when handing out taxpayer funds.'

Many companies have asked workers to take a short-term pay cut, usually in line with directors and managers, to help the company through the lockdown.

But Chloe Ann-King, founder of workers rights group Raise the Bar, says a wave of redundancies suggests that some companies have forgotten to go back to the owners, especially if they are taking the Government's 12-week wage subsidy.

'For some reason employers think their contractual obligations and the 2000 Employment Relations Act magically don't apply during this time. But they do.

'Employment law is very clear, employers must exhaust options such as filing for insurance, taking out bank loans. I don't care if they have to liquidate assets and sell their holiday homes to pay their workers 100 per cent of their wages.'

But insolvency expert David Webb from Deloitte says while bosses should seek employment advice, there is nothing under the Companies Act to force them to take all other alternatives.

'There isn't any obligation on directors to look at capital raises. What I am seeing is a real reluctance from the majority of the business community to reduce staff numbers.'

However, Steven Moe, a senior associate at Parry Field Lawyers, says things may have changed in the Covid-19 era.

'The [wage] subsidy, pre-27 March 2020, required employers to agree … that they would use 'best endeavours' to retain staff for the period of the subsidy.

'After 27 March, this was strengthened to employers agreeing they wouldn't make staff redundant at all.'

Kathmandu has raised $207m to stay afloat.

Council of Trade Unions economist Andrea Black said owners or shareholders should be obliged to dip into their pockets before asking their workers to, because they benefit if the company recovers.

'Underlying all this is the nature of the employment relationship, that normally employees don't get the upside, so they also don't get the downside compared to a shareholding relationship.

'We would ideally like to see that employers have gone to their banks or sought additional share capital before they started discussing reducing employees' wages.'

But Shareholders Association chairman Tony Mitchell says businesses usually never just cut staff wages alone.

'For many companies this has meant withdrawing earnings guidance, cancelling dividend payments to shareholders, raising funds through issuing debt, raising capital through issuing additional shares, reducing expenditure and putting off planned capital expenditure.

'The pain of these changes is being shared across the organisation and its investors.'

As lockdown fell, other companies have tried to keep staff on in a number of ways.

Clothing company Kathmandu moved swiftly to recapitalise. With stores here and overseas closed, it asked the Government for wage subsidies of just over $3.6m for its 601 staff. Staff and management took a 20 per cent pay cut across the board.

But the company also asked shareholders to bear some of the pain, raising $207m from them and institutional investors.

Fletcher Building made staff angry when they were asked to take a wage cut of up to 70 per cent.

Ngāi Tahu Tourism made a $9m profit last year.

Kirsten Patterson, of the Institute of Directors, says companies have a twin responsibility to staff and to the company's survival.

Ngāi Tahu received $1.58m in Covid-19 wage subsidies for seven of its tourism businesses and Ngāi Tahu Tourism Trust trustees. It's also considering laying off 300 staff.

Fletcher Building, which took a wage subsidy of $67.78m, asked workers to accept progressive wage cuts of up to 70 per cent for 12 weeks.

This raised the the ire of union E tu because the subsidy requires companies to pay 80 per cent of wages if they can.

But as work resumes next week, staff have been assured they will return to their usual pay and hours as normality returns, 'even if it is within the 12 week period'. The company would not say whether it had explored a capital raising.

One possibility why there have been so few capital raisings is that for listed companies in particular, they can be complicated.

Instead, companies usually turn to their banks as the first port of call. As one broker said: 'there's only so many investment banks in New Zealand'.

Many have also cancelled dividends to shareholders to conserve cash.

Kirsten Patterson, chief executive of the Institute of Directors, says companies have twin responsibilities to staff and to the health of the company.

'Cash flow is paramount right now and boards will be considering a range of options to lead the organisation through this crisis, including the strength of the balanced sheet, ability to seek capital and deferring dividend payments.'

And Mitchell says it would be wrong to suggest shareholders are not feeling any pain.

As well as losing money on their investments, many have seen their dividends payment cancelled and they potentially may be unable to take part in capital raisings which diluted the value of their stakes.

'The recent Kathmandu capital raise is an example where only 50 per cent of retail investors chose to participate either due to not having the funds or not wanting to invest further,' he said.

'For these retail investors they will have seen their holding in Kathmandu diluted by about 50 per cent.

'They also take considerable risk with their investment as they are last in line for payment if an organisations fails.'

But while shareholders are taking some medicine now, Unite's Hehir also notes that they may also do well once the pain is over: Air New Zealand did extremely well eventually after 2008 global financial crisis.

* A previous version of this story incorrectly stated that Ngai Tahu had $1 billion in cash reserves.