Employee entitlement ‘priority’ refers to the order in which certain employee claims are paid during insolvency. Wages, some super-related amounts, leave entitlements, injury compensation and redundancy pay may receive priority. Generally, administration and liquidation costs are paid first, employees rank ahead of unsecured creditors, and shareholders are paid last.
On This Page
- Introduction
- What Are Employee Entitlements and What Is “Priority”?
- Where Do Employees Sit Compared with Other Creditors?
- Are Employee Entitlements Paid Immediately During Voluntary Administration?
- Order of Priority for Employee Entitlements
- Common Misconceptions
- Checklist for Employees
- What Directors Should Do
- FAQs
Introduction
When an insolvent company enters voluntary administration, employees are often left wondering when they will receive their entitlements. Directors may also be trying to understand what happens to unpaid wages, leave, superannuation, unpaid entitlements, and redundancy obligations during the insolvency process.
In many cases, employee entitlements may be prioritised over ordinary unsecured creditor claims. However, “priority” does not automatically mean employees are paid immediately or in full.
This guide explains what employee entitlement priority means, which employee entitlements may receive priority, the general order of priority, how DOCA and liquidation affect employee claims, and how the Fair Entitlements Guarantee (FEG) fits into the picture.
What Are Employee Entitlements and What Is “Priority”?
Definition
Employee entitlements are amounts owed to employees by a company. These may include:
- Outstanding wages or normal wages owed before appointment
- Superannuation,
- Annual leave,
- Long service leave,
- Redundancy or retrenchment pay, and
- Payment in lieu of notice
Not every employee-related amount is treated the same way during insolvency. Some entitlements (referred to as ‘priority employee entitlements’) receive statutory priority, while others may be treated differently depending on the circumstances and the outcome of the administration process.
For a comprehensive overview of employee entitlements during voluntary administration, read our blog: Voluntary Administration Employee Entitlements.
What Does “Priority” Mean?
In an insolvency context, “priority” refers to the order certain debts are paid if money becomes available for distribution.
In Australia, employee entitlements are classified as priority unsecured debts under the Corporations Act 2001. This means some claims may be paid before others. Employee entitlement claims are often ranked ahead of ordinary unsecured creditor claims, such as unpaid supplier invoices. However, priority does not guarantee full payment.
If there is only enough money to pay some creditors, priority rules determine which claims are paid first.
Note that employee priority does not override every other claim. Costs associated with the voluntary administration, liquidation, and certain secured creditor rights may still rank ahead of employee entitlements in some situations.
Where Do Employees Sit Compared with Other Creditors?
The Corporations Act mandates that all employee entitlements must be paid in full before any other creditors receive payment, ensuring employees are prioritized in the event of liquidation.
However, they are not necessarily the first claims paid in every situation.
The general position is often as follows:
| Broad category | General position |
| Administration or liquidation costs | Paid first |
| Employee entitlement claims | Paid ahead of ordinary unsecured creditors |
| Ordinary unsecured creditors | Paid after employee claims |
| Shareholders | Generally paid last |
| Secured creditors | May have separate rights over company assets |
This is a simplified overview only. The actual outcome can depend on factors such as:
- Whether the company enters liquidation or a DOCA,
- The company’s available assets,
- The rights of secured creditors, and
- The costs of the external administration process.
In practice, employee priority mainly becomes more important if the company later enters liquidation and funds become available for distribution.
Are Employee Entitlements Paid Immediately During Voluntary Administration?
Generally, no.
Employee entitlements that arose before the voluntary administrator was appointed are not paid immediately during the administration period. Instead, those entitlements are generally dealt with through the outcome of the administration.
The treatment of employee entitlements will often depend on whether the company:
- enters a DOCA,
- goes into liquidation, or
- is returned to the directors.
There is also an important distinction between pre-appointment and post-appointment entitlements.
| Type of entitlement | General treatment |
| Pre-appointment entitlements | Dealt with through the outcome of the VA |
| Wages for work after appointment | Paid as an administration expense if trading continues |
| Entitlements under a DOCA | Paid according to the DOCA terms |
| Entitlements in liquidation | Paid according to liquidation priority rules if funds are available |
For example, if the administrator continues trading the business, wages for work performed after the appointment are generally treated as an expense of the administration and are more likely to be paid in the ordinary course.
Order of Priority for Employee Entitlements
If a company later enters liquidation, employee entitlements are generally paid according to a statutory order of priority.
The general order is as follows:
| Priority Order | Entitlement Category | What It Means |
| 1 | Wages and superannuation-related amounts | Amounts owed for work already performed |
| 2 | Injury compensation | Certain compensation liabilities arising before liquidation |
| 3 | Leave entitlements | Annual leave and long service leave |
| 4 | Retrenchment or redundancy pay | Amounts arising from termination due to redundancy |
Each employee entitlement category is generally paid in order. If there is not enough money to fully pay one category, the available funds may be distributed proportionally between employees within that category before the next class of claims is addressed.
This means lower-ranking employee entitlement categories may receive reduced payment or no payment at all if company assets are insufficient.
Importantly, these priority rules become more relevant if the company moves from voluntary administration into liquidation, where company assets are formally realised and distributed.
Common Misconceptions
There are several misconceptions about how employee entitlement priority works during voluntary administration and liquidation.
| Misconception | Reality |
| Employees are paid immediately once voluntary administration begins | Pre-appointment entitlements are not paid during the voluntary administration itself |
| Priority guarantees full payment | Priority only determines the order of payment if funds are available |
| Employees always rank ahead of everyone else | Administration costs, liquidation costs and secured creditor rights may rank ahead in some situations |
| FEG applies during voluntary administration | FEG generally becomes relevant only if the company later enters liquidation |
| FEG covers unpaid superannuation | Under the FEG, eligible employees can claim up to 13 weeks of unpaid wages, accrued annual leave, long service leave, and redundancy payments, but it does not cover unpaid superannuation. |
| A DOCA can ignore employee entitlements | A DOCA must still deal with employee entitlement priority requirements |
Checklist for Employees
If you are owed employee entitlements during voluntary administration, it is important to understand the company’s current status and keep accurate records of what you are owed.
Employees should:
- Confirm whether the company is in voluntary administration, under a DOCA, or in liquidation,
- Keep copies of payslips, employment contracts, leave records and termination letters,
- Understand whether the claim relates to work performed before or after the administrator’s appointment,
- Ask the administrator for information about how employee claims will be treated, and
- Avoid assuming that FEG automatically applies.
Employees should also keep records of the employer’s business name, payslips, leave balances, and correspondence in case they later need to make a claim.
What Directors Should Do
For directors, employee entitlement priority can affect staff communication, restructuring options, creditor negotiations and the overall outcome of the voluntary administration process.
Directors should understand that:
- Employee entitlements can materially affect whether a DOCA is viable,
- Payroll, leave and employment records should be accurate and up to date,
- Unpaid superannuation and employee entitlements should be addressed early,
- Priority does not necessarily mean employees will be paid immediately, and
- Directors should avoid making payment promises without proper advice.
It is also important to understand that poor or incomplete employment records can delay employee claims and create additional complications during the administration or liquidation process. Directors may still face personal liability for unpaid superannuation guarantee charges under the Director Penalty Notice regime of the Australian Taxation Office.
If you’re unsure about your company’s current situation and your position, seek advice from an insolvency practitioner or external administrator at the earliest.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation, consultation to help you understand where you stand, what risks exist, and what options are realistically available before deadlines reduce control. Get in touch today.
FAQs
Do employees have priority over creditors in voluntary administration?
Yes. Employees may have priority for certain entitlements, particularly if the company later enters liquidation or proposes a DOCA.
However, priority does not necessarily mean employees will be paid immediately or in full.
Are employee entitlements paid immediately during voluntary administration?
No. Pre-appointment employee entitlements are generally dealt with through the outcome of the voluntary administration process.
This may include:
- A DOCA,
- Liquidation, or
- The company being returned to the directors.
What employee entitlements are paid first?
The general order of employee entitlement priority is:
- Wages and certain superannuation-related amounts,
- Injury compensation,
- Leave entitlements, and
- Retrenchment or redundancy pay.
If there is not enough money to fully pay one category, available funds may be distributed proportionally within that category.
Does priority guarantee employees will be paid in full?
No. Priority only determines the order certain claims are paid if funds are available.
If company assets are insufficient, employees may still receive only part of their entitlements or no payment at all.
Do employees rank ahead of unsecured creditors in terms of entitlement payment?
In many cases, yes. Employee entitlement claims are often prioritised ahead of ordinary unsecured creditor claims.
However, administration costs, liquidation costs and secured creditor rights may still affect the outcome.
Does voluntary administration automatically terminate employees?
No. Voluntary administration does not automatically terminate employees. Some ongoing employees may continue working during the administration period depending on whether the business continues trading.
Do employees get paid before secured creditors?
Not always.
Employees often rank ahead of ordinary unsecured creditors, but secured creditors may have rights over specific company assets. This can affect how much money is available for employee entitlements.
Can a DOCA change employee priority?
A DOCA must generally preserve employee entitlement priority rights unless the proper approval process applies.
Employees should understand how a proposed DOCA compares with liquidation before agreeing to any variation affecting their entitlements.
More on this: What Is a Deed of Company Arrangement (DOCA)?
How does priority work under a DOCA?
A DOCA may set out how employee entitlements will be paid and when payments will occur.
Employees generally retain priority rights at least equal to what they would receive in liquidation unless the required approval process applies.
Can employee priority be changed?
Sometimes. However, proper approval processes apply before employee priority rights can be varied.
Employees should understand how any proposed change compares with liquidation before agreeing to it.
Can employees claim FEG during voluntary administration?
No. FEG is generally not relevant when the company is in voluntary administration.
However, employees may later make a claim through the Australian Government’s FEG scheme if the company enters liquidation.
Who is eligible for FEG?
Employees are generally ineligible for the FEG if they have been employed for less than 6 months or if they were contractors prior to their employment period.
Does FEG change the employee priority order?
No. FEG is a government safety net and does not change the underlying insolvency priority structure.
What Happens to Employee Entitlements if the Company Enters Liquidation?
In liquidation, employee entitlements are classified as priority unsecured creditors, meaning they are paid before other unsecured creditors if funds are available after the liquidator’s fees and expenses are covered.
Employee entitlements in liquidation must be paid in a specific order: all wages must be paid in full before any superannuation or leave entitlements are addressed.
Does FEG cover unpaid superannuation?
No. FEG does not generally cover unpaid superannuation guarantee amounts.
The Fair Entitlements Guarantee Act 2012 specifies that superannuation entitlements cannot be claimed under the FEG; these must be pursued through the Australian Taxation Office.
