Employee Entitlement in Insolvency: Your Legal Rights in Australia

In Australia, when a company becomes insolvent, one of the primary concerns revolves around its employees’ rights and entitlements. The Insolvency legal framework provides specific protections to ensure that employees are not left in the lurch, and this article outlines the legal rights of Employee Entitlements in Insolvency in the event of company insolvency and the obligations of Company Directors.

Priority Payment for Employees

Under the Corporations Act, when a company is wound up, employees are prioritised over unsecured creditors for unpaid wages and superannuation. However, this priority doesn’t surpass secured creditors’ claims over particular assets. At the Insolvency Advisory Centre, we can guide company directors through the legal requirements and ensure they have all the information required.

The Fair Entitlements Guarantee (FEG)

The FEG acts as a safety net if a company is insolvent and can’t pay its employees. Eligible employees can claim unpaid wages up to a limit, unpaid annual and long service leave, payment in lieu of notice, and redundancy payments.

Superannuation Guarantee

Employers are legally bound to contribute to their employees’ superannuation. Employees can lodge a claim with the Australian Taxation Office (ATO) to recover these unpaid contributions if they fail due to insolvency.

Redundancy Payments

In insolvency leading to redundancies, employees have a legal right to redundancy payments, which vary based on their service length. The FEG can assist if the company cannot meet these obligations.

Continuation of Employment Contracts

Insolvency doesn’t automatically terminate employment contracts. Unless specifically terminated by the insolvency practitioner or due to business cessation, these contracts remain effective.

Unfair Dismissal

If an employee believes they’ve been unfairly dismissed due to company insolvency, they can lodge an unfair dismissal claim with the Fair Work Commission. The claim must be submitted within 21 days of the dismissal.

Transfer of Business

In cases where the business or parts of it are sold during insolvency, the new employer must recognise the employees’ service length and maintain their accrued entitlements.

Access to Financial Counselling

Employees impacted by company insolvency have access to free financial counselling services. These services can guide employees in managing finances and understanding their rights.

Right to Information

Employees have a right to be informed about the insolvency process, potential outcomes, and entitlements. Liquidators and administrators are obligated to keep employees updated on significant developments.

Proof of Debt

In an insolvency scenario, employees become creditors for their unpaid entitlements. They have a right to submit a proof of debt to the liquidator to stake their claim.

Employee Entitlement in Insolvency

“Australia’s legal framework around insolvency robustly protects employee entitlement in Insolvency, ensuring their rights and entitlements aren’t lost amidst corporate financial turmoil. Employees, however, should remain proactive and engaged in the process. At the Insolvency Advisory Centre, we can help company directors and stakeholders understand their rights and legal obligations. We give independent advice where necessary, and our team ensures transparency and integrity in all our dealings with company directors, stakeholders and employees.”