How do I protect my employees without money?

Most employee entitlements are guaranteed by a scheme known as FEG. Staff are protected by the government for unpaid wages, holiday leave and long service leave and some redundancy, but not superannuation.

It is important to know that employee entitlements are paid in priority to other creditors in a liquidation. So trade creditors get whatever is left over after paying employee wages, salaries, holiday pay and superannuation. However, sometimes the bank (or any financier who has security over the assets of the company) gets all the money from those assets. This means the employees may miss out entirely. This is where the FEG scheme comes in.

FEG stands for Fair Entitlements Guarantee. More details about FEG are set out below.

In a restructure it is also possible that some or all of the entitlements of some or all employees are assumed (in other words taken on) by another entity who acquires the business or assets of the financially distressed company. The FEG scheme would then pick up the entitlements not paid.

In general the experience of an employer striking financial trouble or being liquidated is extremely unsettling for employees. It is important to manage their ‘need-to-know’ carefully as their work rate will be affected unless they have a clear view of where things are heading and that they will be protected.

In some cases admissions of financial trouble can lead aggrieved staff to behave improperly towards the company. Instances of sabotage and theft can occur unless staff are appropriately managed.

Rebuild Now can assess what the best course for you and deal with employee concerns including providing explanations about how the company got here, where the business (as opposed to the company) is heading, their entitlements in liquidation and the intentions of the directors. As importantly Rebuild Now can advise you on the best strategy, if required, to preserve the best employees and contractors.

More details about FEG

It is administered by the Department of Employment. It is designed to provide a safety net for the protection of employees whose employment has been terminated as a result of their employer’s insolvency.

An eligible claimant is a person who is lawfully employed in Australia terminated by their employer or insolvency practitioner on or since 12 September 2001 because their employer has become insolvent, and who is owed the following employee entitlements (FEG does not include superannuation):

• Unpaid and underpaid wages in the three month period prior to the appointment of the insolvency practitioner,
• Unpaid annual leave,
• Unpaid long service leave,
• Unpaid payment in lieu of notice* (capped at 5 weeks),
• Unpaid capped redundancy pay* (capped at 16 weeks).

An employee who resigned in the six (6) months prior to the insolvency of their former employer may also be an eligible claimant pursuant to FEG.

The maximum wage rate is capped at around $114,00 for terminations in liquidations. The rate of pay used to calculate entitlements is the employee’s ordinary rate of pay as at the date of notice. Employees should note that the minimum rate of pay is in accordance with the relative award or industrial instrument.

Employees wishing to lodge a claim in accordance with FEG should note that claims must be lodged within 12 months from the date of their termination or appointment of an insolvency practitioner (whichever is the later). Any claim for assistance lodged more than 12 months after the relevant date may not be accepted by the Department.

Employees will be asked to acknowledge Section 560 of the Corporations Act 2001 when completing the claim form which allows FEG to take over their position as a creditor of their former employer, once they have been paid. Any benefits paid under FEG will then be recoverable from the distribution of assets or other proceedings that provide opportunity to recover those funds.

A payment may be made directly to an employee under FEG however, the employee will be required to sign a Deed of Assignment assigning their right to claim and receive payment from the administration.

For further information please refer to the FEG website.

* Note: Employees offered employment on substantively similar terms or conditions (or overall no less favorable terms and conditions) with a new entity operating the same business may not be eligible to claim for unpaid PILN or Redundancy under FEG. Employees should note that should the new entity be subsequently placed into liquidation or their employment be terminated by the new employer, the Department will recognise the employee’s service with the original employer.