Liquidation: What Happens To Employees?

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liquidation what happens to employees

By Liyan Tay 

The after effect of a company going insolvent is a tough and distressing situation for those involved, in particular employees who may also lose their source of employment, home and other assets.

If you are paid wages, a salary or commission and engaged by a company under an award, Certified Agreement, Australian Workplace Agreement or a contract of employment then you are considered an employee.

Contractors are not employees and are considered ordinary unsecured creditors of the company.

Employees have the right, if there are funds left over after payment of the fees and expenses of the Liquidator, to be paid their outstanding entitlements in priority to other unsecured creditors in the following order:

  • Outstanding wages and superannuation; then
  • Outstanding leave of absence including annual leave and sick leave, where applicable, and long service leave; and then
  • Retrenchment pay including redundancy payments.

The priority claims of directors and their spouses or relatives are limited to a maximum claim of $2,000 (outstanding wages and superannuation) and $1,500 (outstanding leave entitlements). Company directors and relatives are also not entitled to any priority retrenchment pay.

Employees who have lost their jobs as a result of their employer entering liquidation or bankruptcy may be able to seek financial assistance through Fair Entitlements Guarantee (FEG).  FEG is a government safety net scheme of last resort that is administered by the Department of Employment.

An employee is not eligible for FEG assistance if the company in voluntary administration, subject to a deed of company arrangement or if the company is in receivership (unless a Liquidator is also appointed.

FEG assistance can be paid for the following entitlements:

  • Unpaid wages – up to 13 weeks (capped at the FEG maximum weekly wage which is presently $2,451.00);
  • Unpaid annual leave and long service leave;
  • Payment in lieu of notice – maximum of 5 weeks; and
  • Redundancy pay – up to 4 weeks per full year of service.

Unpaid employer compulsory superannuation contributions are not covered by the FEG Scheme.

FEG assistance is also not available to contractors, directors or a relative of the company director company within 12 months before liquidation or employees who do not meet all of the eligibility conditions.

The quickest way to access FEG assistance is to make a claim online for assistance at FEG Online Services.  Subsequent to receiving a claim, the Department would then liaise with the insolvency practitioner in order to have the claims verified.  This process takes around 16 weeks from the day a claim is made.  It is possible claims may take longer to process if there are difficulties in calculating entitlements, if company records are not maintained properly or if a there is complex claim.  It is therefore crucial that employees provide all supporting documentation with their claim form in order to assist FEG in assessing their claims.

In 2015-2016 FEG paid around $260 million in employee entitlements.  The FEG Scheme and its predecessors were introduced to assist and ensure that vulnerable employees were not victims of corporate collapse.

Want to know more?

If you would like to know more about the issues raised in this article, please contact Liyan Tay our Insolvency & Reconstruction Senior Manager for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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