What Happens to Employees When a Company Goes into Liquidation?

When businesses become unprofitable and are unable to service their debt, they encounter what is known as insolvency. Some companies decide to enter into voluntary administration while other may be ordered to go into liquidation or receivership.

Employees are one of the main parties impacted by the liquidation process. In addition to losing their job, there is also a major concern with respect to getting paid for work that they have already done. It is important for employees to be aware of where they stand during the process and any subsequent rights or claims they may be entitled to.

Employee Entitlements

The liquidation of a company generally terminates the employment of employees. As per legislation, employees are entitled to unpaid wages, superannuation, leave, and retrenchment.

The major issue for employees is that money from the collection and sale of assets must first be used to pay for liquidation costs and fees. This is followed by priority creditors which in many circumstances, leaves little or no remaining funds for employee entitlements.

Unfortunately, in the vast number of circumstances, this leaves many employees with unpaid entitlements. To address this issue, the Australian government introduced what is knows as the Fair Entitlements Guarantee.

Claiming under the Fair Entitlements Guarantee (FEG)

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.

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.

Despite some being listed as employee entitlements in the event of bankruptcy or liquidation, the FEG does not allow employees to claim for the following:

• superannuation
• reimbursement payments, or one-off or irregular payments
• bonus payments or non-ongoing or irregular commissions are provided for.

Who is eligible for the FEG?

The short answer to this is eligible employees. Some of the noteworthy eligibility criteria for assistance under the FEG Act are:

• employment has ended
• the end of your employment:
  • came as a result of the insolvency of your employer, or
  • occurred less than 6 months before a liquidator was appointed, or
  • occurred on or after the appointment of a liquidator
• you are owed employment entitlements
• you were owed employment entitlements before the insolvency event occurred
• took reasonable steps to have them paid
• were an Australian citizen at time when employment ended

Which parties are classified as ineligible workers?

There are several parties you may think they are eligible employees but are in fact ineligible. These include contractors, directors and relatives of directors.

Contractors: as is often the case, contractors have limited rights in relation to employee benefits. They are not eligible with some minor exclusions relating to textile, clothing, and footwear contracts.

Directors: Anyone who was a director of the company within the 12 month period prior to liquidation cannot claim FEG entitlements.

Relatives: Others who are ineligible to claim are the relatives of directors (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.

Those who are unsure about their eligibility and claim process should read thoroughly through the 'before you begin' section.

Getting paid from the liquidation

In an ideal world there will be enough money left over as a result of the liquidation process for employee entitlements to be paid out in full.

What can employees be paid from the liquidation?

Separate to the FEG regime, employees rights are specifically outlined by ASIC. Employees are entitle to:

• Unpaid wages and superannuation
• Unpaid leave of absence, including annual leave, and long-service leave
• Redundancy pay

One issue faced by employees is that each payment category must be paid in full before the other is paid. That means that all wages and superannuation must be paid in full before employees receive any unpaid leave and so on. If funds are insufficient, each 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. This is for the period that they were a director or a spouse or relative of a director. These parties are classified as ineligible employees and subsequently ineligible for any retrenchment pay.

What do employees have to do to be paid from the liquidation?

In order to be paid from the liquidation, employees are required to provide the liquidator with what is known as a ‘proof of debt’. It sets out the details of an employees claim against the company, including how the debt arose and the amount. Any documentation relating to unpaid wages, superannuation, or other entitlement should be attached. 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. We can assist with managing a business through the liquidation process and advise if there suitable alternative options such as restructure and turnaround. If your business is under financial distress, Contact Us and receive a free consultation with tailored advice to suit your needs.