What happens to employees in liquidation? Rights, pay and next steps

What happens to employees in liquidation is likely top of mind if you're considering wrapping up your business.

The weight of what job loss means for your people - and their families - can bring real guilt, a sense you've failed them, and worry about how they'll cope without that income. It can make the decision to wrap things up incredibly tough.
To put your mind at ease, this guide explains what happens, what entitlements your employees are owed, and the good news: there is support available through the government's Fair Entitlements Guarantee (FEG) scheme.

For a deeper overview of the winding-up process, read our full guide:
Administration vs liquidation

What happens to employees when liquidation kicks off

If you make the difficult decision to liquidate, it's best to inform employees first. 

However, once you've started the process, control passes to the registered liquidator, who handles the formal process and employee communications.

What happens to employees in liquidation is final: they’re made redundant, effective immediately. It's the natural consequence. But as the liquidator is now in control, they take on the responsibility of official notification.

In some cases, the liquidator may keep certain key people on to temporarily support the wind-up – for example, to help realise assets or complete outstanding work. But this is at their discretion.

Once made redundant, eligible employees become unsecured creditors for any unpaid employee entitlements. Those entitlements are usually paid from company assets realised by the liquidator.

Employee entitlements in a liquidation 

So, what are the employee entitlements claimable in a liquidation? 

• Unpaid wages 

• Accrued annual leave/holiday pay 

• Unpaid superannuation contributions

• Long service leave 

• Redundancy pay 

• Payment in lieu of notice 

For your employees, these aren’t just line items. These outstanding entitlements, such as unpaid wages and redundancy pay, are what will keep the lights on after liquidation, while they find their next role. Job searches take time, and without this financial buffer, the pressure can be significant. 

Your employees sit ahead of other unsecured creditors as priority unsecured creditors, but behind secured creditors and liquidator fees.

In practice, by the time secured creditors are paid, there may unfortunately not be enough funds left to pay entitlements. This is where the FEG scheme steps in. It bridges the gap where company assets are insufficient.

The Fair Entitlements Guarantee (FEG) scheme

The Fair Entitlements Guarantee (FEG) scheme in Australia is a government-backed scheme that gives financial support to employees who lose their jobs due to the insolvency of their employer.

FEG is administered by the Department of Employment and Workplace Relations. 

It covers all types of company liquidation, including creditors' voluntary liquidation (CVL) – where directors take the decision to wrap things up.

Importantly, FEG is a safety net. It only kicks in when an employee can’t recover their entitlements through the liquidation itself.

FEG has caps on the amount of the employee entitlements it will cover in liquidation. Employees should check the official FEG information online for current caps.

While your employees must make FEG claims themselves, your liquidator plays an active role in guiding them. As well as making them aware of the scheme, they also provide the employment records needed to support the claims.

Your employees need to apply directly through the FEG Online Services portal or by paper form if needed. They must submit their claims within 12 months of their job ending or the liquidator being appointed – so timing matters.

Director obligations to employees during liquidation

Even though the liquidator takes control once your company goes into liquidation, as director, you still have certain obligations to fulfil – namely, cooperating fully with the process. 

In practice, this means: 

• Advising the liquidator of the location of your company property and delivering it to them 

• Promptly handing over all books and records, including payroll records, employment contracts, leave balances and any outstanding wage or entitlement information 

• Providing a Report on Company Activities and Property (ROCAP) within five business days of appointment 

• Meeting with the liquidator and helping with their inquiries as reasonably needed

A friendly warning: If you delay and continue to trade, you risk insolvent trading claims, Director Penalty Notices (DPNs), and exposure on any personal guarantees – as well as increasing the entitlements owed to employees, making outcomes worse for everyone.

The earlier you act and enter liquidation, the more time the liquidator has to properly notify employees and guide them through FEG claims in a tidy way. Acting early also helps you avoid creditors forcing you into a court-ordered liquidation.

Liquidation can help employees – and you 

Don’t let the impact a liquidation will have on your employees lie heavy on your decision to do what’s best for your position. Early action is best. 

While redundancy is never ideal, employees don’t walk away high and dry. They usually have employee claims for certain unpaid entitlements, and the backing of the FEG scheme if the liquidation can’t pay them. 

As director, you also have the backing of the liquidator through the process, so you don’t have to navigate things alone.