Employee's Rights During Insolvency

Recent financial stress has seen many businesses close, leaving employees uncertain over future employment, and also concerned as to whether any wages, holiday pay or redundancy owing will be paid.

Some creditors (including employees) are given preferential rights’ and therefore are more likely to receive what is owed to them.

Priority order

The general priority order is:

  1. Secured creditors (often the bank)
  2. Liquidator’s costs
  3. Employees
  4. IRD claims to PAYE and GST
  5. Unsecured creditors

The Bank (or other secured creditors) are generally first in line for repayment as they have a registered security interest in the assets of the company. This interest may be in relation to certain identifiable assets such as stock or machinery or alternatively the interest may be over ALL the company’s assets. However, some assets, such proceeds of book debts and inventory on hand at the time of business failure are given to the preferential creditors ahead of the bank.

Employees third in line

As third in line, employees will only receive what is left after the secured creditors and liquidator’s costs have been covered. Depending on how dire the situation is, you may receive all wages, some wages, or in the worst case scenario, none of the wages owed to you. You can take out insurance to protect against the loss of employment generally, or to protect payments on your mortgage or other debt.

It can take some time to work out what employees are owed. In this case you may need to apply to WINZ for some support.

What exactly are employees entitled to?

Employees are entitled to receive payment for wages or salary, redundancy (if provided for in the employment agreement), holiday pay and any employer contributions to schemes such as Student Loans, Child Support and Kiwisaver. Unfortunately, there are a few restrictions:

  1. You can only claim wages up to the maximum cap of $22,160;
  2. You can only claim wages accrued during the 4 months prior to liquidation;
  3. There is no preferential entitlement for payment in lieu of notice (if provided for in the employment agreement);
  4. There is no preferential entitlement to expenses incurred in the nature of your job;
  5. ‘Employee’ for the purposes of these categories, does not cover shareholders or directors, who are further down the pecking order.

The above are unsecured interests, and can be claimed 5th in the line with the other unsecured creditors. Note however that it is unusual for there to be anything remaining for the unsecured creditors in a liquidation situation.
If you owe your employer any money eg for tools etc then you may be able to set this off against the money owed to you, and so not have to pay it back.

If your employer has been placed into liquidation, you ought to contact the liquidator to ensure your claim for wages is registered.