Worried about employee entitlements when your business goes into voluntary administration? You’ve come to the right place. For directors, HR teams, and employees alike, financial uncertainty can be daunting. Understanding how employee entitlements are handled during voluntary administration can help manage expectations and reduce stress for everyone involved.
At SALEA Advisory, we work with businesses to navigate complex financial challenges. This blog will explain how voluntary administration impacts employees, including what to expect and how to look out for your team.
What is Voluntary Administration?
Voluntary administration is a formal process that allows an insolvent company (ie, one which is unable to pay its debts when they fall due) to pause trading, assess its financial situation, and develop a plan to restructure or wind up the company.
During the process, an external administrator takes control of the company, aiming to provide the best possible outcome for creditors and employees while exploring recovery options to keep the business operational.
What Does Voluntary Administration Mean for Employee Entitlements?
When a company is insolvent, voluntary administration can offer breathing space to restructure. However, the way employee entitlements are handled during this process can vary, and it’s essential to understand your obligations as a director or HR professional.
It’s important to know that employee entitlements may be impacted during voluntary administration. If the business continues trading, ongoing employees are paid for services provided during the process, as these wages become an expense of the voluntary administration. However, any unpaid wages or entitlements accrued before the administration period may not be immediately covered.
In such cases, the Fair Entitlements Guarantee can help eligible employees claim certain unpaid entitlements if company is ultimately placed into Liquidation.
How Does the Fair Entitlements Guarantee Work?
The Fair Entitlements Guarantee (FEG) is a scheme by the Australian Government to provide a safety net for employees as a result of Liquidations. It ensures that eligible employees can claim some unpaid entitlements if their employer goes into liquidation. The FEG covers:
- 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 per full year of service)
However, it’s important to note that the FEG does not cover unpaid superannuation. Employees can pursue unpaid superannuation through the Australian Taxation Office (ATO).
Case Study: Mosaic Brands Voluntary Administration
A recent high-profile case is the voluntary administration of Mosaic Brands, which entered the process in late 2023 with approximately $250 million in debt. Employees were left uncertain about their future, with more than 300 staff owed unpaid wages. In response, the Federal Government fast-tracked FEG access for affected workers to mitigate the significant financial hardship many were experiencing.
Challenges with Employee Entitlements During Voluntary Administration
While the FEG offers a level of protection, there are limitations that directors and HR teams should consider:
- Superannuation Shortfall: Unpaid superannuation is not covered under FEG and must be claimed separately through the ATO.
- Delayed Access: Employees may not receive their entitlements until liquidation occurs, creating financial strain in the interim.
- Retention Challenges: Key staff may choose to leave if they feel uncertain about the business’s future, making retention strategies crucial.
Maintaining clear communication with your team about what they can expect and how entitlements will be managed is essential to maintaining morale and sustaining professional relationships.
Supporting Your Team Through Voluntary Administration
Navigating voluntary administration is challenging, but ensuring employees are informed and supported can make a significant difference. While the FEG provides a safety net, being proactive in managing entitlements and keeping staff updated is crucial for business continuity.
How SALEA Advisory Can Help You Manage Employee Entitlements
If your business is facing financial difficulties, engaging with an insolvency professional early can help protect your interests and those of your employees. At SALEA Advisory, we guide business owners through restructuring options, ensuring that employee entitlements are managed fairly and transparently.
Understanding how employee entitlements are handled during voluntary administration helps businesses maintain transparency and retain valuable staff. By being proactive and seeking expert advice, you can navigate this process with confidence and fairness.
If your company is facing insolvency or considering voluntary administration, contact SALEA Advisory for tailored guidance. Our team of experts can help you understand your obligations and plan the best path forward. Download our free Guide to Voluntary Administration today and take the first step towards securing your business’s future.
