What happens to employees when a business fails?

When Jirsch Sutherland is appointed to manage a corporate insolvency, one of our first priorities is addressing what it means for employees. Staff are often at the heart of a business, and when a company collapses, their wages, superannuation and leave entitlements are among the most pressing concerns.

So, what happens to employees when a business fails? This article provides a straightforward guide for employees – and the accountants, lawyers and others who advise them – on how entitlements are treated during the insolvency process.

Why do businesses fail?

The most common reason is cashflow: the business has run out of money and can’t pay its debts when they fall due. Those debts often include:

• Unpaid wages and superannuation
• Annual leave and long service leave
• In some cases, sick leave
• Redundancy or retrenchment pay

When this happens, the business may enter a formal insolvency process. Two of the main insolvency options include:

Voluntary Administration (VA)

• Gives the company breathing space to explore whether the business can be saved.
• Employees are not automatically terminated.
• If the business continues to trade, wages and entitlements are paid as normal.
• Pre-appointment entitlements (owed before the administrator is appointed) are usually put on hold until creditors decide the company’s future.
• Possible outcomes:
  • Sale of the business: employees may transfer to the new owner, often keeping their terms and some entitlements.
  • Deed of Company Arrangement (DOCA): creditors may agree on a repayment plan that explains how outstanding employee entitlements will be managed.
  • Liquidation: if saving the business isn’t viable.

Read more about Voluntary Administration on our website.

Liquidation

• The company is wound up, its assets sold, and the proceeds used to pay creditors.
• Employees are terminated.
• Employee entitlements may be paid in full if funds are available, and employees have priority over many other creditors under the Corporations Act.
• Once complete, the company is deregistered.

Read more about liquidation on our website.

Employee entitlements: priority matters

Employees rank ahead of many other creditors. The usual priority is:

1. Wages and superannuation
2. Leave entitlements (annual leave, long service leave, some personal leave)
3. Payment in lieu of notice and redundancy pay

However, if there aren’t enough assets to cover these entitlements, employees may still have options. Enter the Fair Entitlements Guarantee (FEG) scheme.

 The FEG scheme provides a safety net for employees of businesses in liquidation. Through FEG, employees can claim:

• Unpaid wages (up to 13 weeks)
• Annual leave and long service leave
• Payment in lieu of notice (up to 5 weeks)
• Redundancy pay (up to 4 weeks for each full year of service)

 FEG does not cover:

• Superannuation (this must be claimed through the ATO)
• Reimbursements, bonuses, or irregular payments or commissions

Eligibility highlights:

To qualify for the FEG, an employee must meet the following criteria:

• Employment must have ended due to the employer’s insolvency.
• The employee must have been an Australian citizen, permanent resident, or holder of a special category visa at the time employment ended.
• A claim must be lodged within 12 months of job termination or the employer’s liquidation (whichever is later).
• The individual must have been working as an employee (not as a contractor).
• Certain employees, such as company directors and their close relatives, are not eligible for FEG assistance.
• If an employee begins a new job with a successor entity of the same employer, they may lose eligibility.

Read more about FEG here.

Action plan for employees

If you’re an employee and your employer has entered insolvency:

1. Confirm the situation: is it VA or liquidation?
2. Gather your records: payslips, contracts, super statements.
3. Check your super: contact your superannuation fund to see if contributions were made.
4. Lodge a FEG claim: within 12 months if the business is in liquidation.
5. Seek help: if unsure, speak to an insolvency practitioner.

A note for business owners and directors

Employee entitlements rank high on the priority list. Failing to pay superannuation can also create personal liability for directors. Acting early – whether through restructuring, a sale, or seeking advice – can reduce risks for both employees and directors.

 Final thoughts

For employees, losing a job is tough – and uncertainty about entitlements can make it worse. The good news is that Australian law offers strong protections, and government schemes like FEG exist to help employees recover what they’re owed.

The key message? Act quickly. Get your records together, confirm the company’s status, and lodge your claim. Waiting could mean missing out on what’s rightfully yours.

Roer Jimenez
Manager
Jirsch Sutherland