What Happens to Employees When a Company Goes into Liquidation?
When businesses become unprofitable and are unable to service their debt, the business could be ordered to go into liquidation or administration, or be voluntarily liquidated. As the company is wound up, employees are one of the first parties to be affected and, in addition to losing their job, they’ll be most concerned about getting paid for work they’ve already done.
In Australia, a regime administered by the federal government known as the Fair Entitlements Guarantee (FEG) provides a last-resort safety net for employees. Through the FEG, eligible employees might be able to claim for unpaid wages, unpaid annual leave, and other entitlements. Employees also have the right to be paid proceeds from the liquidation if funds are available.
Claiming under the FEG
What can employees claim under the FEG?
Eligible employees might be able to claim the following items under the FEG.
- Unpaid wages for up to 13 weeks
- Annual leave and long-service leave
- Payment in lieu of notice for up to five weeks
- Redundancy pay for up to a maximum of four weeks per year of service or on a pro-rata basis for less than one year of service if the employee’s contract (or governing instrument) provides for it.
Note that the FEG does not allow employees to claim for superannuation, reimbursement payments, or one-off or irregular payments. Similarly, no bonus payments or non-ongoing or irregular commissions are provided for.
Who is eligible for the FEG?
- Eligible employees
The FEG law came into effect in 2012, so the employer in liquidation should have entered liquidation or bankruptcy on or after 5 December 2012. The employee’s end of employment must have been due to the company’s insolvency, or must have happened less than six months before the appointment of an insolvency practitioner, or must have happened on or after the appointment of the practitioner.
The employee obviously must be owed the employment entitlements they’re claiming, and they should lodge the claim within 12 months of losing their job or the date of the liquidation or insolvency event. The employee needs to have taken reasonable steps to prove these debts during winding up.
Other eligibility criteria relate to citizenship and visa status. The claimant needs to be an Australian citizen or permanent resident, or hold a special category visa that allowed them to stay in Australia at the time they lost their job.
- Ineligible workers
Generally contractors aren’t eligible to claim, but some textile, clothing, and footwear contract outworkers might be able to. Others who are ineligible to claim include directors of the company and their relatives (if they or their relative was a director within 12 months of the liquidation).
Generally, an employee will be ineligible to claim if they have been employed for six months or less and before that employment period they were a contractor with that employer. Further eligibility exclusions may apply.
How do employees make a claim through the FEG?
As noted above, a valid claim needs to be within 12 months of the employment ending or the liquidation. Claimants can claim by lodging an application with FEG Online Services, where they will be asked to submit evidence on their citizenship status. All supporting documents can then be lodged through the online service. Claimants can also apply by completing the claim form and emailing, posting, or faxing it to the Department of Employment.
In addition to citizenship evidence, supporting documents that claimants may need to provide include letters of appointment or employment contract, pay slips, PAYG summaries, bank statements, evidence of wage salary rates, and letters of termination.
Getting paid from the liquidation
What can employees be paid from the liquidation?
Separate to the FEG regime, employees have a right to be paid outstanding entitlements in the event of liquidation if there are funds remaining after the costs of the liquidation are paid. The following, in order of priority, are the entitlements that could be paid to employees.
- Unpaid wages and superannuation
- Unpaid leave of absence, including annual leave, sick leave, and long-service leave
- Redundancy pay
Once unpaid and superannuation are paid in full, the unpaid leave of absence amounts can be paid, and so on. If funds are insufficient, each payment category or category is paid on a pro-rata basis and the remaining categories will not be paid.
What about directors?
Company directors, their spouses and relatives are limited to a maximum of $2,000 for wages and superannuation, and $1,500 for leave entitlements, for the period that they were a director or a spouse or relative of a director. No retrenchment pay is payable.
What do employees have to do to be paid from the liquidation?
Employees need to provide the liquidator with what’s known as ‘proof of debt’, which is information that helps prove they are entitled to the unpaid wage, superannuation, or other entitlement. Liquidators will notify employees if funds are likely to be sufficient for entitlements to be paid and they will contact employees for proof for debt.
How might getting paid from liquidation affect my FEG claim?
Your FEG advance or payment could be reduced if the insolvency practitioner thinks that there will be enough money to pay your entitlements within 112 days of you making an FEG claim or 112 days from the date of the insolvency event (whichever is the later date).
Australian Debt Solvers are business liquidation experts in Australia, and can assist with managing a business through the liquidation process. Contact us today if your business is in financial difficulties, and receive tailored advice suited to your business situation.
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