What happens to employee entitlements if a company becomes bankrupt?

Australia is home to a huge number, and vast variety, of businesses and companies. From electrical engineering firms to whiteware retailers, there are a variety of employment opportunities for Australians to engage with. 

Many of the old jobs that Australians were once known for have begun to slowly decrease and disappear. This stems from the country’s economy realigning in the wake of the mining boom. Figures show this occurring slowly, with increasing levels of commercial contacts paving the way for new business ventures and startups. 

The Reserve Bank of Australia believes that GDP picked up over 2015 and indicators show it will continue to grow throughout 2016. While the figures look good, companies committed to sectors like mining are facing a tough time. One of the consequences of this is corporate insolvency. 

Talk to a employment contract lawyer if discussions with your employer does not develop into a viable solution.

Liquidation and employment contracts

When insolvency is discussed, the focus is typically on the corporation and its ability to fulfil their commercial contracts, however, employees are usually the first casualty of an insolvent company. As such, it is important that employees are aware of their rights and what they can expect from their company’s insolvency.

In the worst case scenario, a company that is insolvent may be forced to enter liquidation. What this means is that the enterprise will wind up its commercial agreements, selling off its assets and redistributing proceeds back to its creditors and any surplus to shareholders. 

In most cases, when liquidation occurs it automatically terminates the employment of employees. Yet, if it can be proved, employees have the right to be paid their owed entitlements in priority over other unsecured creditors. Priority employee entitlements are categorised into three groups and paid in this order:

  • Wages and superannuation benefits;
  • Leave of absence; and
  • Retrenchment pay.

Each group is paid out in full before funds are distributed to the next class. If there is not enough money for a category to be paid in full, payments take on a pro rata basis and the next classes are excluded. 

In addition, employees may also be entitled to make a claim though the Fair Entitlements Guarantee or the General Employee Entitlements and Redundancy Scheme. The target of the claim will depend on when the employer insolvency happened.

It's important to talk to your employer if you have not been paid.
It’s important to talk to your employer if you have not been paid.

Know your working relationship is the first step

If you believe your organisation may be insolvent, it is important to know the actions you can take. One of the most important aspects to understand is your employment relationship with the enterprise.

If you are an employee, you will be engaged with it through an award, enterprise agreement, contract of employment or agreement-based transitional instruments. Additionally, if you receive a salary, wage, or commission, you will typically be classified as an employee. 

It is important to remember that contractors are not employees and have different fields of action in the event a company goes out of business. Typically, contractors are also considered unsecured creditors (legal entities that are owed money but do not hold security through property) but without the priority status.

If you are an employee that is owed money for unpaid wages, superannuation or other benefits, you are a creditor of the company and you might be entitled to some, if not all, of what you are owed. 

Whether you are an employee or a contractor, if you believe your company is in financial trouble, it is important you raise these with your employer first. However, if this comes to nothing, it is important to seek the advice of a legal expert. 

At McCarthy Durie Lawyers, we understand the pressures forced layoffs can cause. With a long history working with Queensland workers, we can help you find a solution. Contact a representative today to find out more.