Will the employee get paid when the company goes into liquidation?

It is sad whenever I visit a business with the liquidator and inform the employees about the liquidation. It is even worse to see the helpless employees are left unpaid for the work they performed.

Usually, when we say a company has been put into liquidation, that means the company is no longer able to pay its debts, that means the company owes more than it has available.

So, as an employee, what they are concerned about the most is whether they still can get paid?

When a company goes into liquidation, all of the company’s employment agreements may be terminated on the day of liquidation except for some circumstances that the liquidator needs them to continue to perform some work to generate more funds to pay off as many creditors as possible. At that time, the employee will be entering into a new employment contract with the liquidator.

According to the Companies Act, there is an order who should get paid first, and the good news is the employees are put towards the front of the line. However, it does not apply to everything you are owed, and it is currently capped at $23,960 before tax.

The Companies Act 1993 provides that employees have preferential claims for any (all rank equally amongst themselves):

• Unpaid salary or wages and any commissions earned in the four months before the company’s liquidation; plus
• Untransferred payroll deductions and donations made for an employee in the four months before the company’s liquidation; plus
• Unpaid holiday pay payable to the employee as at the date that the company is put into liquidation, regardless of when the holiday pay accrued; plus
• Untransferred KiwiSaver contributions, child support payments, and/or student loan payments deducted from the employee’s salary or wages; plus
• Redundancy compensation, if provided for in the employment agreement.

Note that the above does not include:

• Wages or salary that you might have earned earlier than the four months before the liquidation, or for any work you did after the company went into liquidation;
• Bonus or Incentive payments; or
• Awards of compensation made in your favour by the Employment Relations Authority or the Employment Court.
• Any claims by employees for compensation under section 123(1)(c)(i) of the Employment Relationships Act 2000

For those not under preferential claims and any preferential amounts that exceed the cap of $23,960 are both unsecured, which means you stand in line along with any other creditors who might not have preferential treatment.

It is unfair when your employer fails the business and owes you money, that you need for food and living. Therefore, the law requires employee entitlement to be paid ahead of most other creditors, even if it is capped.