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Insolvency

Navigating Employee Rights in Times of Company Insolvency

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A company’s financial distress and insolvency can be an overwhelming experience for employees. It raises concerns about job security and the payment of hard-earned entitlements.

The regulations implemented and employees’ experience may depend on which insolvency process the company undergoes.

First and foremost, you are classified as an employee if you are:

  • engaged by a company under an award, enterprise agreement, agreement-based transitional instrument or contract of employment,
  • paid a salary, wages or commission.

Contractors, directors and relatives of directors experience different entitlements.

In this blog, we’ll explore the impacts of insolvency on Australian employees, shedding light on their rights and entitlements during the insolvency process.

Understanding Employee Entitlements During Insolvency

When a company goes into liquidation, the termination of employment is just one facet of the challenges employees face. The critical issue lies in allocating funds from the sale of assets.

The legislation mandates that these funds are first directed towards liquidation costs and fees, followed by priority creditors. Unfortunately, this often leaves little to no funds for employee entitlements.

Fair Entitlements Guarantee (FEG)

To address this concern, the Australian government has instituted the Fair Entitlements Guarantee (FEG) as a last-resort safety net for eligible employees.

Under FEG, employees may claim unpaid wages, annual leave, and other entitlements. However, it’s important to note that FEG does not cover superannuation and certain payments.

Eligibility Criteria for FEG Assistance

To be eligible for FEG assistance, employees must meet specific criteria, including having their employment terminated due to insolvency, being owed employment entitlements, and taking reasonable steps to receive them.

Contractors, directors, and their relatives are generally ineligible.

Generally, an employee will be ineligible to claim if they have been employed for six months or less and if they were a contractor with that employer before that employment period.

Claims and Documentation

Eligible employees seeking entitlements must provide the liquidator with a ‘proof of debt’ outlining the details and amount of their claim. Documentation related to unpaid wages and other entitlements should be attached to the claim. Liquidators will notify employees if funds are likely to cover entitlements, prompting the need for proof of debt.

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 place 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 if the employee’s contract (or governing instrument) provides it.

Unfortunately, employees cannot claim superannuation, reimbursement payments, or irregular bonuses.

Abandoned Companies and ASIC Intervention

In cases where an employer leaves a company without placing it into liquidation, employees may struggle to recover their wages and entitlements. Seeking help from the Australian Securities and Investments Commission (ASIC) to wind up the abandoned company becomes crucial.

If there are other employees, encourage them to lodge requests as well. The ASIC is more likely to wind up an abandoned company with an outstanding $15,000 or more employee entitlements.

ASIC’s intervention doesn’t guarantee FEG payments, but it aids in thoroughly investigating the reasons for the company’s failure.

Voluntary Administration and Employee Entitlements

During voluntary administration, ongoing employees must be paid for services provided after the administrator’s appointment. However, entitlements that arose before voluntary administration are usually not paid during this period.

The fate of employee entitlements post-administration depends on decisions made at creditors’ meetings, such as returning the company to directors, implementing a Deed of Company Arrangement (DOCA), or proceeding to liquidation.

A voluntary administrator must prepare a separation certificate for employment termination during the voluntary administration or DOCA.

Liquidation and Employee Priority Payments

In most liquidation cases, employee entitlements are categorised and paid in a specific order:

  • outstanding wages and superannuation,
  • outstanding leave of absence,
  • and retrenchment pay.

Each category must be paid in full before the next one, and if funds are insufficient, payments are made pro rata.

Directors and their spouses or relatives are not entitled to any priority retrenchment pay for the period they are a director, spouse or relative of a director.

If a liquidator pays employee entitlements, they must provide a PAYG payment summary recording the entitlements paid and any income tax deducted.

Receivership and Employee Rights

In receivership, the receiver’s primary duty is to the secured creditor.

The receiver has no obligation to report to unsecured creditors, including employees. Ongoing employees must be paid if the receiver continues trading the business, treating these payments as an expense of the receivership.

If the business is sold, the fate of employee jobs and entitlements depends on the terms of the sale.

Understand the Impact of Insolvency on Employees

In times of company insolvency, Australian employees facing financial distress can navigate the complexities by understanding their rights and entitlements.

The Fair Entitlements Guarantee serves as a crucial safety net, but employees must diligently meet eligibility criteria and provide necessary documentation.

Seeking guidance from regulatory bodies and understanding the implications of voluntary administration, liquidation, and receivership ensures that employees can navigate these challenging situations confidently.

Clout Advisory are leading Insolvency Accountants and SME Restructuring specialists. Our Insolvency Accountants are equipped with the expertise to navigate these complexities with empathy and care. We take command of the situation and quickly address issues, utilising an array of appropriate options to maximise the overall benefit to everyone involved.

If you have any questions or need further assistance, contact us.

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