Key Takeaways
- Employees are entitled to recover benefits such as wages, leave, superannuation, and redundancy pay during insolvency.
- Employee entitlements are treated as priority unsecured debts under the Corporations Act 2001.
- The Fair Entitlements Guarantee (FEG) assists employees when their employer cannot pay owed entitlements due to liquidation or bankruptcy.
- Company directors have a duty to avoid insolvent trading and must seek advice to protect employee interests.
- Timely legal action is crucial for employees and directors to navigate insolvency and recover entitlements.
When a business becomes insolvent in Australia, employees are often left wondering what will happen to their pay, leave, superannuation, and redundancy entitlements. Whether you are a staff member seeking clarity or a business owner wanting to meet your legal obligations, understanding how employee entitlements are treated during insolvency is crucial.
This guide outlines the protections available under Australian law, including the Fair Entitlements Guarantee (FEG) scheme, the priority of employee payments, and the responsibilities of company directors in times of financial distress.
What to Do if You Suspect Your Employer Is in Financial Trouble
If you believe your employer may be facing financial difficulty, prompt action can improve your chances of recovering your entitlements. Steps you can take include:
- Raise your concerns directly with your employer or HR team
- Seek legal advice to understand your rights and options
- Lodge a complaint with the ATO if superannuation has not been paid
- Contact your union representative (if applicable)
- Reporting suspected misconduct or insolvent trading ASIC
Taking action early may reduce risk and position you better should insolvency proceedings commence.
How Directors Can Protect Employees Without Breaching Duties
Company directors have a duty to avoid insolvent trading, but they can still act responsibly and ethically in the interest of employees:
- Seek legal and financial advice early to explore restructuring or administration options
- Consider voluntary administration before liabilities become unmanageable
- Maintain accurate payroll, leave, and superannuation records to support any entitlements review
For more detail on director responsibilities, visit ASIC’s Insolvency Information for Directors.
Understanding Employee Entitlements in Insolvency
When a business enters insolvency—whether through liquidation, administration, or receivership—employees are entitled to recover benefits they have accrued under Australian law and their employment agreements, including:
- Wages and salaries
- Annual leave
- Long service leave
- Redundancy pay
- Payment in lieu of notice
- Superannuation contributions
These obligations remain enforceable even if the business can no longer meet them through its own assets.
For more information, see ASIC’s resource on employee entitlements.
How Are Employees Paid When a Company Collapses?
When a liquidator or administrator is appointed, they assess company assets and liabilities, including outstanding employee entitlements.
Priority of Employee Entitlements
Under the Corporations Act 2001 (Cth), employee entitlements are treated as priority unsecured debts. This means they are paid in the following order:
- Secured creditors (e.g., banks with registered charges)
- Employee entitlements (wages, super, leave, redundancy)
- Unsecured creditors (e.g., trade creditors)
If the company lacks sufficient assets to pay employees, they may be eligible to claim through the Fair Entitlements Guarantee.
Special Cases: Business Sale or Restructure
In some cases, the business may be sold before or during insolvency. When this occurs:
- Redundancy pay may not be payable if the new employer offers a comparable role
- Leave balances and entitlements may reset, depending on how the transfer is structured
- Employees may still need to lodge a claim for unpaid amounts from the former employer
Further guidance is available in the Fair Work Ombudsman’s resource on employee entitlements during a business transfer.
The Fair Entitlements Guarantee (FEG) Scheme
The Fair Entitlements Guarantee (FEG) is a federal government program that assists eligible employees when their employer enters liquidation or bankruptcy and cannot pay what is owed.
What FEG Covers:
- Up to 13 weeks of unpaid wages
- Annual and long service leave
- Payment in lieu of notice (up to 5 weeks)
- Redundancy pay (up to 4 weeks per year of service)
FEG does not cover unpaid superannuation, but the ATO may take enforcement action on behalf of employees.
Eligibility Requirements
To qualify for FEG, an employee must:
- Have lost their job due to liquidation or bankruptcy
- Lodge a claim within 12 months of termination or insolvency
- Not be a contractor, company director, or a relative of a director
For full eligibility details and application instructions, visit the FEG eligibility and application guide.
The Importance of Your Next Legal Move
Insolvency can be destabilising, but timely legal action can make a significant difference. Whether you are a worker seeking entitlements or a director aiming to fulfil your duties responsibly, the next step you take matters.
At Pentana Stanton Lawyers, we guide both employees and business owners through insolvency-related legal challenges with clarity and professionalism.
We assist with:
- Employment law and insolvency disputes
- Director advice and risk management
- Claiming unpaid entitlements via liquidation or the FEG scheme
Contact us for strategic legal support tailored to your circumstances.