Clear indications of abuse of the State wage guarantee scheme

If a company goes bankrupt, or is undergoing company reorganisation, employees may be entitled to receive their pay through the State wage guarantee scheme. In 2020, the wage guarantee expenditure was SEK 3 billion.

It has been reported on several occasions that the wage guarantee scheme is subject to fraud. The Swedish NAO has therefore examined the extent of the abuse and how the wage guarantee is protected against incorrect payments.

The Swedish NAO has cross-linked the Swedish Tax Agency’s register of wages with the county administrative boards’ wage guarantee payments. This is the first time such a run has been made. It shows, among other things, that:

• 7 per cent of the wage guarantee recipients in bankruptcies do not have reported wages from the employer the bankruptcy relates to
• 9 per cent receive more in wage guarantee than they received in pay for at least one year before the bankruptcy
• 3 per cent get substantial wage increases just before the bankruptcy.

“These are clear indications that the wage guarantee scheme is being abused, although individual cases may have legitimate explanations. Our overall assessment is that 6-9 per cent of the expenditure on bankruptcies is incorrect. This corresponds to SEK 100-150 million a year, which also includes employers’ social security contributions," says Yvonne Thorsén, project leader for the audit.

Trustees in bankruptcy decide on the employees’ right to the wage guarantee. A person whose company goes bankrupt may propose the trustee in bankruptcy and in most cases the proposal is approved. Agencies have warned that those intending to abuse the wage guarantee scheme choose trustees who conduct less thorough investigations. The Swedish NAO’s audit shows that some trustees in bankruptcy are used more frequently than others in wage guarantee cases which show signs of abuse.

The audit also shows that the responsible agencies lack important conditions to effectively protect the wage guarantee system against abuse. Among other things, this includes

• the county administrative boards, which make wage guarantee payments, have little opportunity to check whether the decisions are correct and to stop suspected incorrect payments
• confidentiality rules restrict the ability of trustees in bankruptcy and the Enforcement Authority (which is responsible for the supervision of the wage guarantee scheme) to make register checks of employees’ right to wage guarantee
• the system for amending incorrect decisions is cumbersome and compensation paid incorrectly is difficult to recover.

The shortcomings are mainly due to the Government’s failure to design and manage the wage guarantee scheme appropriately. Despite recurring warnings of abuse, the main features of the scheme have not changed since 1992.

“Clear indications of abuse and the lack of overall responsibility, analysis and follow-up call for fundamental reform of the scheme. A good first step is to gather the responsibility under one agency with access to the registers needed for effective control of the wage guarantee scheme,” says Auditor General Helena Lindberg.