But one council told The Age that it would have no choice but to send its recycling to landfill if SKM stopped operating.
Environment Minister Lily DAmbrosio said councils should try to strike deals with other recyclers when their contracts with SKM expired.
Theyre a rogue operator, Ms DAmbrosio said.
They have been unreliable in managing kerbside waste and the EPA did the right thing ... to step in and put a notice on them.
Their non-compliance, their breaking of the rules, will not be tolerated.
Ms DAmbrosio said that Februarys shutdown, when more than 22,000 tonnes of recyclables went to landfill, had prompted the state government to work with councils on alternative arrangements.
Were working toward diversifying the sector with new plant and equipment, getting new facilities in place, the minister said.
When we first had these matters that came up earlier this year, a lot of work was put in place, identified with local councils, to put contingency measures in place.
Those contingency measures are available right now, if things dont go according to what the contracts require SKM to do.
The minister would not provide details on the contingency measures and what they might mean for households.'
Liberal environment spokesman David Morris said the latest recycling scare showed the Andrews Labor government had been asleep at the wheel on the issue of waste, since it took office in 2014.
In the past four-and-half years, weve had a complete policy vacuum and were really starting to see the impact now, Mr Morris said.
Unless we get some immediate action, were going to be in real trouble."
Mr Morris said the government was letting down the majority of Victorians who took their recycling seriously and were doing their bit.
Most people take it pretty seriously, they see it as a responsibility, the Liberal frontbencher said.
But if theyre doing their bit, then whats separated and collected is simply dumped in landfill, then the government is not meeting its obligations to the people.
Mr Morris said the government had no plan to cope with another collapse in SKMs service and urged Ms DAmbrosio and her colleagues to get contingencies in place.
Theres no plan B at this stage and if they do nothing else this week, for goodness sake get a plan B in place, Mr Morris said.