Introduction: Facing the Uncertainty
If your employer has entered liquidation, it’s natural to feel uncertain about your job, your income, and what happens next. One of the most common questions is: what happens to employees in liquidation?
In most cases, employment ends immediately. This can be confronting – but there are clear legal protections in place. Understanding your employee rights in insolvency can make a significant difference to how you navigate the process and recover what you’re owed.
This guide explains what happens, what entitlements you can claim, and the practical steps to take.
What Happens to Employees in Liquidation?
Liquidation is the formal process of winding up a company that cannot pay its debts. A liquidator is appointed to take control of the business, sell assets, investigate the company’s affairs and distribute funds to creditors.
So, what happens to employees in liquidation?
- Employment usually terminates immediately or shortly after appointment
- Outstanding entitlements become claims against the company
- Employees become creditors – but with priority status
- Access to government support (such as FEG) may become critical
In some cases, a small number of staff may be retained temporarily to assist with closing down operations or facilitating a sale. However, ongoing employment is the exception rather than the rule.
Employee Rights in Insolvency: Priority Matters
A key aspect of employee rights in insolvency is that employees are treated as priority creditors under Australian law.
This means that, if funds are available, employee entitlements are paid ahead of most other unsecured creditors.
What employee entitlements are covered in liquidation?
When considering employee entitlements in liquidation, the following are typically included:
- Unpaid wages liquidation claims (including recent unpaid salary)
- Accrued annual leave
- Long service leave
- Redundancy pay
- Payment in lieu of notice
- Superannuation (recovered separately via the ATO)
This priority status provides meaningful protection – but it is still dependent on whether the company has sufficient assets to fund payments.
The Role of the Liquidator
Understanding the liquidator’s role is critical when assessing what happens to employees in liquidation.
Verifying claims
The liquidator reviews payroll records and calculates each employee’s entitlements. You may be asked to confirm or dispute these figures.
Communication
Employees should receive updates regarding:
- Entitlement calculations
- Likely recovery outcomes
- Timing of payments
- Access to FEG
Distribution of funds
If assets are realised, the liquidator distributes funds according to the statutory priority regime, with employee entitlements ranking highly.
Supporting FEG claims
Where funds are insufficient, the liquidator provides the documentation required for a Fair Entitlements Guarantee (FEG) claim.
Fair Entitlements Guarantee (FEG): The Safety Net
For many employees, the most important protection is the Fair Entitlements Guarantee (FEG).
FEG is a government scheme designed to assist employees who lose their jobs due to liquidation and cannot recover their entitlements from the company.
Who is eligible for FEG?
To access FEG, you generally must:
- Have lost your job due to liquidation or bankruptcy
- Not be related to the directors
- Be an Australian citizen or hold an eligible visa
- Lodge your claim within the required timeframe
What does FEG cover?
FEG typically covers key employee entitlements in liquidation, including:
- Up to 13 weeks of unpaid wages
- Annual leave and long service leave
- Redundancy pay (up to 4 weeks per year of service)
What doesn’t FEG cover?
- Superannuation
- Amounts above statutory caps
- Certain contractor arrangements
- Amounts owed to related parties
FEG is a critical safety net, but it is not unlimited, and timing and eligibility requirements must be met.
Superannuation and the ATO
Superannuation is not covered under FEG, which often raises concern for employees.
If Super hasn’t been paid:
- The liquidator reports the issue to the ATO
- The ATO will lodge a claim in the winding up for recovery of the Superannuation Guarantee Charge (SGC). Recovered amounts are distributed to employee superannuation funds
- Directors may, in some cases, be personally liable if the ATO issues a Director Penalty Notice in respect of the unpaid superannuation
Recovery of superannuation can take time and is not always guaranteed in full.
How to Claim Employee Entitlements in Liquidation
If you’re affected, acting promptly can improve your outcome.
Step 1: Review your entitlement calculation
Check the figures provided by the liquidator carefully.
Step 2: Gather supporting documents
Keep copies of:
- Payslips
- Employment contract
- Leave balances
- Super statements
Step 3: Lodge your claim
Submit any required forms to the liquidator (such as a proof of debt) if requested by the liquidator.
Step 4: Apply for FEG (where eligible)
If there are likely to be insufficient funds in the liquidator’s hands to pay entitlements:
- Submit a FEG claim
- Provide supporting documentation
- Expect processing to take several months
Step 5: Stay engaged
Monitor updates and respond promptly to requests from the liquidator or FEG.
Frequently Asked Questions
Will I get paid immediately?
No. One of the realities of what happens to employees in liquidation is that payments take time. If the company has no funds, you may need to rely on FEG, which can take a number of weeks (or months) – though FEG generally endeavours to distribute funds to eligible employees as quickly as possible.
Can I keep working for the company?
In limited cases, perhaps – but usually only temporarily. Most employees will have their employment terminated shortly after liquidation begins.
What about unpaid wages in liquidation?
Unpaid wages in liquidation are a priority claim and are often one of the first entitlements addressed, either through available funds or FEG (subject to limits).
Will I receive redundancy pay?
Yes, if you are eligible. Redundancy pay is a recognised entitlement and is also covered under FEG, subject to statutory caps.
What if I’m a contractor?
Contractors are generally not covered by employee rights in insolvency in the same way as employees:
- They are treated as unsecured creditors
- They do not have priority status
- They are not eligible for FEG
If there is uncertainty about your status, it may be worth seeking advice.
When to Seek Advice
If you’re unsure about your position, early advice can make a real difference.
You should consider seeking professional advice if:
- Your entitlements seem incorrect or incomplete
- You are unsure whether you are an employee or contractor
- Significant superannuation is unpaid
- You are a senior employee or HR manager dealing with multiple staff
- There are concerns about director conduct or asset movements
At IRT Advisory, we regularly assist employees and management teams in understanding what happens to employees in liquidation and navigating employee rights in insolvency with clarity and confidence.
A short conversation can help you understand your position, avoid delays, and ensure you take the right next steps.
Final Thoughts
While losing your job due to liquidation is stressful, the framework around employee rights in insolvency is designed to protect you.
Understanding what happens to employees in liquidation, knowing your employee entitlements in liquidation, and acting early can significantly improve your outcome.
If in doubt – ask questions, stay informed, and don’t hesitate to seek advice.
