How business can prepare for the end of JobKeeper

The federal government threw business a lifeline when it announced the $70 billion JobKeeper program to support more than one million employers and 3.5 million workers during the COVID-19 crisis. But now with the possibility of the wage subsidy program being removed early – potentially before September in next month’s mini-Budget – there are predictions of a surge in insolvencies and more job losses. So what can business leaders do now to prepare for the end of JobKeeper?

The prospect of the early withdrawal of JobKeeper is causing concern in business ranks and is likely to result in a new wave of staff layoffs, predicts Carl Gunther GAICD, President of the Turnaround Management Association Australia.

“Every cash flow forecast that I've looked at contemplates JobKeeper staying in place through to September,” says Gunther. “So if the government pulls JobKeeper sooner rather than later, businesses have to know what their new plan is. And that plan should be combined with what steps they take internally within their business, to refit the cost base.”

A number of businesses have been thinking about this (early withdrawal) and have restructured their business so they can afford to run their business in a post COVID-19 environment, he says. “I think the end of JobKeeper, whenever it comes, will result in further layoffs.”

The warning comes as an Australian Bureau of Statistics survey conducted over the week from June 8 revealed that nearly 30 per cent of businesses have cash in hand to support fewer than three months of operation. Almost one in 10 said they had the cash to last only one more month.

As we look towards the federal government’s mini-budget on July 23, firms should check the announcements from Canberra about which sectors are the most impacted in order to understand the effect on their own business, plus the effects on suppliers and clients, says Gunther.

He is seeing a lot of businesses that are already prepared for the end of the wage subsidy plan. “They know exactly the headcount now, they have a plan in place and know exactly the headcount for when the JobKeeper numbers get switched off. It will be painful. But they are planning accordingly.” One transport and tourism enterprise is planning to reduce headcount by 70 per cent once JobKeeper ends.

He says the consensus view appears to suggest that unlike the global financial crisis, where the downturn took a long time to ease, the COVID-19 impact will take the form of a sharp downturn and a sharp recovery towards a new normal. Whereas the major GFC impact was felt for over three years, the consensus view is that business should plan a shorter recovery period.

“That means we may possibly be talking about a 12-month runway until fourth quarter 2021,” he says.

The impact on the economy will be very sector driven. “If you are in a sector that is massively impacted by COVID, you're going to have the largest proportion of layoffs. If you're in a sector that is less impacted, you will have a reduced proportion.”

Businesses that have not thought about this yet need to get started immediately, he says. “We have a very short runway, before they have to reset the business, to reset it for the new normal, whatever that turns out to be.”

Beyond JobKeeper, there are a number of other factors that will come together later in the year to put more pressure on businesses, he adds. These include the gradual tightening of the ATO’s stance on PAYG tax deferrals; the end of bank loan interest pauses, state payroll tax and land tax concessions, and rental relief measures; and the end of the temporary suspension of insolvency trading laws.

“It's all going to come together at one time and for some this will be in the form of a train smash. That is, the train is coming down the line and will smash. I think it’s a case of when, not if.”

Gunther recommends the following steps to prepare for the end of JobKeeper.

Steps to recovery

1. Refit the business cost base
2. Look at the supply chain and shore up supply lines
3. Decide which stakeholders are the most important and plan accordingly (customers, suppliers, staff)
4. Ensure you have enough capital in place to rebuild the business

“No matter what, you have to have capital, so you've got to preserve capital in order to do a rebuild, not just to plan for survival,” he says.

In distressed companies, boards and directors also need to seek advice around whether there is a path through a restructure or formal insolvency restructure. “It’s something that directors should be considering. Voluntary administration can be a useful tool as we have seen with Virgin Australia and LJ Hooker.”

Scenario planning for the future

Businesses should be planning different scenarios now ranging from higher case to lower case stress, in order to prepare for the end of JobKeeper, says Sal Ageri, Deloitte Australia Lead Partner, Restructuring.

“It’s always best to prepare for the worst and hope for the best,” he told the AICD in an interview.

“It's going to be a big concern because for businesses that haven't been able to get additional credit lines or liquidity or equity into the business, our expectation is there is going to be some potential for some corporate failures as a result.”

Businesses should know by now what levers they can pull to compensate for the loss of the government wage subsidy program, says Ageri. “But the bigger question is, when will you know that will happen? And that's really hard.”

For the July mini-budget, government announcements indicate there may be some industry-specific and geographic changes to JobKeeper, with continuing targeted extended support possible even beyond September for heavily-hit regional economies such as North Queensland and sectors such as aviation and tourism.

However, Ageri says Deloitte would like to see JobKeeper extended at least till the end of September as originally announced, because other sectors such as education, retail and consumer business and hospitality have also been devastated. “It’s going to be a really slow rebuild, so it will be a long time until we get back to some sort of normal playing field.”

Sector-specific assistance has already been extended in some quarters. The government unveiled on June 24 a $250 million support package for Australia’s arts and cultural sectors. The childcare sector will be the first to lose JobKeeper in July, but the federal government has offered a $708 million transitional funding package.

Safe Harbour framework

For boards and directors, a useful way to approach the end of JobKeeper would be to consult the insolvency ‘safe harbour’ duties of directors framework. (Download the AICD’s insolvency safe harbour tool.)

“The safe harbour protections lay out a really cool governance framework to continually test boards to ensure that the path they're continuing on is the right path. It also challenges the thinking in terms of scenarios. And whether plans laid out to either restructure or reshape the cost price of business are on track.

“It’s a good framework and it makes a lot of sense to get some precise stress tests,” says Ageri. It is an overarching framework to allow boards to focus on the important things and to challenge the status quo.

The federal government has announced a six-month temporary relief period from personal liability for trading while insolvent, which ends in September. This is designed to give directors confidence to trade through the current crisis without pressure and to enter their organisation into administration if there is a chance it might be insolvent.

Heavy reliance on JobKeeper

In a recent AICD survey on the governance impact of COVID-19, more than 40 per cent of respondents reported they are relying on the JobKeeper payments and that the scheme has, of all the COVID-19 policy measures, provided organisations with by far the greatest relief during the pandemic – particularly in the SME and NFP sectors.

Overall, 44 per cent indicated that the JobKeeper Subsidy Scheme had provided the most relief – with the number jumping to 47 per cent amongst small to medium businesses and 51% amongst NFPs.

Forty-four per cent of respondents also expect to have reduced workforces over the next six months compared to pre-COVID-19 levels. A total of 2,371 AICD members responded to the survey, in which a large majority of members (81 per cent) support a cautious and conservative approach to phasing out government economic support measures, such as JobKeeper.

The survey also found that 12 per cent of respondents (16 per cent small to medium businesses) reported that temporary relief from personal liability for trading while insolvent laws had influenced board decision making on whether to trade through.

“This depth of reliance on safe harbour (particularly for small to medium businesses), suggests that come late September, when the relief is due to expire, there will be many organisations facing difficult financial decisions, especially when combined with the expected phasing out of other support measures such as JobKeeper at a similar time,” the AICD member survey says.