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01 Apr 2007

Employee Entitlements: Priority or Not?


4 min

Both the Bankruptcy Act and the Corporations Act have provisions dealing with employee entitlements, and both grant them some level of priority. But there are significant differences between the two Acts and this article explores these differences.

The Corporations Act grants a priority to almost all employee entitlements. Non-related employee creditors (non-excluded employees) receive priority over other unsecured creditors for all wages, leave and retrenchment payments. Employer superannuation has the same priority as wages thanks to the provisions of the Superannuation Guarantee (Administration) Act.

Under section 560 of the Corporations Act, that priority extends to pre-liquidation advances of monies made by a person (1) so that the company could make payments of entitlements to employees, and (2) where the entitlements would have had priority had they not been paid. That person will receive the same priority as the employees would have received. That is, the new creditor is not simply a non-priority creditor.

Section 561 extends the employee entitlement priority to realizations from assets that are subject to a floating charge. Other factors need to be considered, but the general proposition is that employees (and persons that advanced money under section 560) will be paid before the secured creditor from 'floating assets'. All of these provisions place a non-excluded employee in a better position that almost every other unsecured creditor. The position is significantly different for excluded employees.

Excluded employees are those that are or were directors, spouses of directors, or a relative of a director. The definition of relative is set out in the Act, but this article does not need a detailed explanation of that definition. Suffice to say that this class of employee is treated very differently to other employees. Their priority is limited to $2,000 for wages and $1,500 for outstanding leave. This exclusion extends to persons who advanced money for the payment of excluded employees wages etc (they do not get a priority for payments that would not have received a priority under section 556), or under section 561 as a priority against floating assets. Employer superannuation owed to excluded employees is not limited, as it is governed by the Superannuation Guarantee (Administration) Act, not the Corporations Act.

The Bankruptcy Act treats employee claims differently from the Corporations Act. Under the Bankruptcy Act all employees, regardless of their association to the bankrupt, have a limited priority (currently $3,650) for wages. The reasons for granting full priority to employees of companies must not apply to employees of partnerships etc. We fail to see why.

Interestingly however, there is no limit on leave entitlements. There is something strange in a system that provides priority for money owed for holidays, but not for money owed from working for a living?

There are no sections in the Bankruptcy Act that correspond to the Corporations Act section 560 (persons paying money to fund employee entitlements) or section 561 (priority over floating assets). More indication that employees of bankrupts are apparently less deserving than employees of companies?

Outstanding employer superannuation is also treated very differently. The priority for superannuation is joined with the limited priority for wages under the Bankruptcy Act. This means that the limited priority ($3,650) is shared between outstanding wages and outstanding superannuation. Whereas employees of companies get full priority for all wages and superannuation, employees of bankrupts get a maximum of $3,650 shared between the two.

Now having said all of that, the GEERS system will generally pay employee entitlements (both priority and non-priority in a bankruptcy) and that department of the Federal Government will stand in the shoes of the employees. It seems that the government is most affected by these inequities.

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