When a small business enters financial distress, one of the biggest concerns is what happens to employees. As a business owner, you likely might feel a strong sense of responsibility toward your staff. For employees, uncertainty around wages, entitlements and job security can feel overwhelming.
Australia’s Small Business Restructuring framework gives eligible companies a structured way to deal with debt while continuing to trade. If handled correctly, restructuring can preserve jobs and provide a pathway forward. This article explains what small business restructuring means for employees, what protections apply, and how entitlements are treated under the law.
What Is Small Business Restructuring?
Small Business Restructuring is a formal insolvency process available to companies with total liabilities under $1 million. It allows business owners as directors to:
- Remain in control of the business
- Work with a registered Small Business Restructuring Practitioner
- Propose a plan to creditors to compromise debts
- Continue trading while the plan is considered
Unlike liquidation, the goal of restructuring is to stabilise the business and preserve value, including employment where possible.
Does restructuring automatically mean job loss?
No. Entering a restructuring process does not automatically result in redundancies or terminations. In many cases, restructuring is specifically designed to protect a business, so if they can reduce debt pressure and restore cash flow stability, jobs may be preserved.
However, each situation is different. Some restructures may involve operational changes, including:
- Reducing overheads
- Streamlining roles
- Removing unprofitable divisions
If workforce reductions are required, employment law protections continue to apply.
What Protections Do Employees Have During Restructuring?
Even if a company is restructuring, employees retain their rights under Australian employment law.
This includes:
- National Employment Standards
- Modern awards
- Enterprise agreements
- Fair Work Act protections
Restructuring does not remove consultation obligations or allow employers to bypass redundancy rules. If major workplace changes are proposed, employers must inform affected employees and give them an opportunity to respond. Employers also have to genuinely consider the feedback before making any final decisions. Failure to follow consultation requirements can expose the company to unfair dismissal claims.
Are employee wages protected during small business restructuring?
The short answer is yes. A key feature of the Small Business Restructuring Process is that certain employee entitlements must be paid before a restructuring plan can be put to creditors. Before proposing a plan, the company must ensure that:
- All employee entitlements that are due and payable are paid
- All tax lodgements are up to date
This requirement protects employees from being used to fund the restructure. If entitlements are outstanding and unpaid, the company cannot proceed with a restructuring plan.
What employee entitlements must be paid?
Employee entitlements generally include:
- Outstanding wages
- Accrued annual leave
- Long service leave (where applicable)
- Superannuation obligations
If a restructure is successful and the company continues trading, employees remain employed under their existing arrangements unless otherwise agreed. If restructuring fails and the company later enters liquidation, employee entitlements receive priority.
What Happens to Employees If the Business Is Saved?
If creditors approve the restructuring plan and the company meets its obligations under that plan, the company continues trading, and employees remain employed.
While internal changes may occur to improve viability, the process is designed to provide a pathway forward rather than shut the business down.
What Happens If the Restructuring Fails?
Not all restructuring plans are approved by creditors. If a plan is rejected or the company cannot meet its obligations, it may proceed into liquidation.
In liquidation:
- Employees become priority unsecured creditors
- Outstanding wages and superannuation are paid first from available assets
- Leave entitlements are paid next
- Redundancy pay follows
If insufficient assets are available, eligible employees may access the Fair Entitlements Guarantee (FEG), which provides government assistance for certain unpaid entitlements. While the Small Business Restructuring framework aims to reduce the likelihood of liquidation, it cannot eliminate risk entirely.
What are the consultation obligations for employees?
If restructuring leads to potential redundancies, consultation obligations are triggered once a definite decision is made to introduce major changes. Meaningful consultation involves:
- Sharing details of the proposed changes
- Explaining the reasons
- Discussing potential impacts
- Considering employee feedback
It is not enough to inform employees after decisions are finalised. Employers must also consider redeployment options within the business or associated entities before making a role redundant.
How does redeployment work?
Before terminating employment due to redundancy, employers must assess whether it would be reasonable to redeploy the employee. This involves asking:
- Are there other suitable roles available?
- Could training make the employee suitable?
- Are there associated entities with vacancies?
Redeployment does not require the employer to create an entirely new business line, but it does require genuine consideration.
What is a genuine redundancy?
If roles are removed as part of restructuring, the redundancy must be genuine. Under the Fair Work Act, a redundancy is genuine if:
- The employer no longer requires the job to be performed by anyone due to operational changes
- Consultation obligations have been complied with
- Redeployment within the business or associated entities is not reasonable
- Redundancy is about the position becoming unnecessary, not performance.
Employers must actively consider whether suitable alternative roles exist before termination.
Get Advice Now to Protect Your Business
Financial distress affects more than balance sheets. Directors often feel significant personal pressure during this time. Many small business owners have close working relationships with staff, and seeing them anxious about job security or concerned about unpaid entitlements can be distressing.
If you are a business owner concerned about how financial pressure may affect your employees, seeking advice early can help clarify your obligations and reduce risk. The earlier you seek advice, the more options are typically available. Waiting until cash flow collapses entirely reduces flexibility and increases the risk of liquidation.
At Business Savers, we focus on finding practical solutions for businesses facing financial distress. Whether restructuring is viable or another pathway is more appropriate, understanding your responsibilities to employees is essential to moving forward with confidence.
Don’t wait until your problem gets worse – book a free consultation today.
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