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Do Insolvent Businesses Still Need to Pay Employee Entitlements?

Do Insolvent Businesses Still Need to Pay Employee Entitlements?

Individuals may be able to receive employee entitlements under certain conditions when their employers go insolvent. Find out more here.

9th August 2019

A state of insolvency will often disincentivise directors from accruing additional financial debt which they cannot repay in the future. In most cases, insolvency means that your business can no longer afford to hire employees or even pay outstanding employee entitlements. For employees, this abrupt financial instability can be highly distressing because they are suffering the consequences of inadequate management.

Are you an ‘eligible’ employee?

According to ASIC, it is likely that you will be considered an employee if you are:

  • Employed by a company under an award, enterprise agreement, agreement-based transitional instruments
  • paid a salary, wages or commission

Contractors are classified as ordinary unsecured creditors of the company. Therefore, it is unlikely that you be classified as an employee if you are a contractor. However, this may not necessarily apply if you are an employee who is involved in textiles, clothing or footwear.

Employee entitlements

Employees are a special class of unsecured creditors. The difference between a secured and an unsecured creditor is that the former is in possession of a security interest such as a mortgage. This security interest encourages the company to repay the debt owed to the secured creditor.

According to Section 556 of the Corporations Act 2001 (Cth) and Section 109 of the Bankruptcy Act 1966 (Cth), employees are considered with priority. Nevertheless, you will only receive your entitlements once the company has paid the secured creditors and covered administrative expenses. The implication is that in the majority of situations, companies will have insufficient to meet their debt obligations to employees.

Recovering employee entitlements under the FEG Scheme

The Fair Entitlements Guarantee (FEG) provides financial assistance to employees that are affected by their employer’s insolvency. It is important to note that this scheme is a plan of last resort. Therefore, you cannot recover payments if you are not a ‘certain’ type of employee.

Under Section 10 of the Fair Entitlements Guarantee Act 2012 (Cth), an individual is eligible for entitlement if:

  • the employment with the relevant employer has ended
  • the person’s former employer entered liquidation or bankruptcy on or after 5 December 2012
  • the end of the person’s employment was due to the insolvency of the employer, occurred less than 6 months before the appointment of an insolvency practitioner for the employer; occurred on or after the appointment of an insolvency practitioner of the employe

The scope of employee entitlements

Under the FEG scheme, employees are eligible to receive

  • up to 13 weeks of unpaid wages
  • unpaid annual leave, long service leave
  • unpaid redundancy pay up to a maximum of 4 weeks

Furthermore, you cannot receive an amount which exceeds the capped award. Thus, the maximum amount you can receive is $2451 per week.

Final Thoughts…

In conclusion, insolvency will always place a strain on the employee-employer relationship because it leaves the employee in a continuing dependency from which the employer can no longer relieve. In addition, s596AB of the Corporations Act 2001 (Cth) makes it an offence for anyone to enter into an agreement or transaction with the intention of avoiding employee entitlements of a company. Therefore, it is paramount that business owners are fully aware of potential criminal or civil sanctions that may arise from improper conduct. As such, it is worth consulting a debt management lawyer if you have any further questions relating to employee entitlements during insolvency.

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Author
Eric Zhang

Eric currently works in the content team as a legal intern for Lawpath. He is in his final year of a Bachelor of Commerce with a Degree in Bachelor of Laws (Majoring in Finance).