FAQ: Employee entitlements in liquidation

What happens to my pay and super when my workplace goes into liquidation?

Employees are often the most affected stakeholders when a company is placed into liquidation and they lose their job. They’re faced with the possibility of not receiving payment for the employee entitlements owed to them, or they have to wait an extended period of time to receive their entitlements

Below you’ll find a list of frequently asked questions we receive at Worrells to assist employees in circumstances where their employer has been placed into liquidation.

My employer has gone into liquidation, what happens to my employee entitlements?

When a company is placed into liquidation, the liquidator will take control of the company and will usually write to you notifying you of the termination of your employment. They will provide details of your unpaid entitlements according to the company’s books and records.

You will become a creditor of the company and will need to lodge a claim for any unpaid entitlements.

What entitlements can I claim?

You should lodge a claim for all amounts owed to you by the company, including unpaid wages and superannuation, unpaid annual leave, unpaid long service leave (LSL), pay in lieu of notice (PILN) and redundancy pay, where applicable.

What if the company’s records do not show the correct amount owed to me?

You should lodge a Proof of Debt in the liquidation for the amount you believe is owed to you.  Provide supporting documentation to show how you calculated this amount.  You should include your employment contract, payslips, leave records and any other relevant documentation.

Are my entitlements paid before other creditors?

Yes, pursuant to section 556 of the Corporations Act 2001, employees are entitled to be paid in full before ordinary unsecured creditors, but after the costs of the liquidation. In some cases this comes after secured creditors.  Section 556 separates the employee entitlements into different classes, as follows;

1. Wages and superannuation, including Superannuation Guarantee Charge (SGC).

2. Leave entitlements, including LSL

3. Retrenchment payments, including PILN

Each separate class of entitlements has a separate priority which are to be paid in the above order. In other words, wages and superannuation need to be paid in full before leave entitlements are paid and so on. All employee entitlements must be paid in full before ordinary unsecured creditors receive a dividend.

However, there may be insufficient assets in the liquidation to pay employee entitlements in full.

What if there are not enough funds in the liquidation to pay my entitlements?

In cases where there are insufficient assets available to pay your employee entitlements in full, or if your employee entitlements cannot be paid in the liquidation in a timely manner, you should seek assistance from the Fair Entitlements Guarantee (FEG).

What is FEG?

FEG is a discretionary government scheme to assist employees whose employment has ended due to their employer being placed into liquidation (or bankruptcy). FEG provides financial assistance to cover certain employment entitlements that are owed where there is no other source of funds available.

Will FEG pay all my outstanding entitlements?

FEG only covers certain entitlements, as follows:

• wages - up to 13 weeks of unpaid or underpaid wages

• annual leave

• long service leave

• payment in lieu of notice – up to a maximum of 5 weeks

• redundancy pay - up to a maximum of 4 weeks per full year of service.

FEG also has a maximum weekly wage limit that they will pay. This is currently $2,850 gross per week.

FEG does not cover outstanding superannuation.

Are all employees eligible for FEG?

To be eligible for FEG, you must meet the following criteria –

• Your employer has entered liquidation and you are owed entitlements;

• Your employment ended due the insolvency of your employer and ended within the 6 months prior to the appointment of the liquidator, or on or after the date of their appointment.

• You are an Australian citizen or hold a permanent visa or special Category visa under the Migration Act 1958.

• Lodge an effective claim, including all mandatory information and documentation, within 12 months of your employment ending or the date of the appointment of the liquidator (whichever is later).

There are also a number of individuals who are specifically excluded from receiving FEG assistance, including;

• Contractors and sub-contractors

• Any individual who was a director of the company within the 12 months prior to the date of liquidation

• A spouse or relative of a director of the company

How do I apply for FEG?

The best way to submit a claim is online through FEG Online Services (Register - Fair Entitlements Guarantee (dewr.gov.au). You can also submit a claim form which can be downloaded from the FEG website and submit the paper claim form by post or email.

It is important to provide any relevant information or documentation such as employment contracts, payslips as soon as possible to expedite the claim process.

How long is the FEG claim process?

Whilst FEG aims to process claims within 16 weeks of receiving a completed claim with the relevant supporting documentation, the processing time varies and can be longer in times of increased demand, which is currently the case.

Who assesses my FEG claim?

The FEG process requires an employee to submit their claim with FEG, as well as the insolvency practitioner to calculate and verify the entitlements owed to the employee. FEG will then undertake their own process of verification of the entitlements and will work with the insolvency practitioner to address any discrepancies. Once FEG and the liquidator agree, FEG will make payment of the entitlements owed direct to the employee.

Is tax deducted from payments received from FEG?

Payments from FEG are considered taxable income and FEG must withhold PAYG tax from payments made to employees. Whilst you are not required to provide your Tax File Number to FEG, if you do not provide it FEG will withhold tax from your payment at the top marginal rate. You may wish to obtain your own tax advice to help understand your tax implications.

The liquidator has asked me to continue working for the company after the date of liquidation. What happens to my entitlements if I am re-employed by the liquidator?

Under certain circumstances a liquidator may elect to continue trading the business for a short period of time and may reemploy some staff to assist with the continued trading. The liquidator will pay your wages and superannuation and any accrued leave during the period you are employed by them.  Any entitlements owed to you as at the date of liquidation will remain outstanding and will still need to be claimed in the liquidation or via FEG.

What if FEG doesn’t pay all of my entitlements?

If some of your entitlements are not paid by FEG, for example where your entitlements exceed the FEG limits, you will remain a creditor in the liquidation for the unpaid amounts. You may receive further payments directly from the liquidator if sufficient funds are realised in the liquidation to enable a dividend to be paid.

I am a director of the company, can I claim my entitlements?

Whilst directors are not eligible for FEG, they can lodge a claim in the liquidation for any unpaid entitlements, however they are defined by the Corporations Act 2001 as excluded employees. 

As excluded employees, the portion of their claim that is treated as a priority claim when dividends are paid, as set out in section 556 of the Corporations Act 2001, is subject to statutory limits. The current limits are $2,000 for wages and superannuation and $1,500 for leave entitlements. These same limits apply to relatives of directors.

The balance of their claim for unpaid entitlements which is above this limit is treated as an ordinary unsecured creditor claim.

What about my superannuation?

Unpaid superannuation contributions are not covered by FEG. The Australian Taxation Office (ATO) will lodge a claim in the liquidation on behalf of employees for the Superannuation Guarantee Charge owed, which includes unpaid superannuation plus an administration fee and interest.

If there are funds available in the liquidation to enable a dividend to be paid for unpaid superannuation, the liquidator will pay the dividend to the ATO and then distributed by the ATO to the individual employees superannuation funds.

Further information can be found on the ATO website - Superannuation and insolvency | Australian Taxation Office (ato.gov.au).

It is recommended you contact the ATO directly to discuss recovery of the superannuation owed to you.

If you’re considering liquidation, it’s important to get all the facts. Reach out to your locals Worrells Principal for a confidential and no-obligation chat about your options.