Insolvency - how it effects employees

If my employer becomes insolvent how will this affect me as an employee?

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We are living in very uncertain times. Probably the biggest current threat to companies is the increase in energy charges. Even with newly announced government support, it is difficult to see how many businesses will survive if their energy bill increases significantly and insufficient further government support is given. As an employee how will this impact you?

Duty for an employer to communicate with its employees if considering redundancies

The Trade Union and Labour Relation (Consolidation) Act 1992 (TULRCA) says that an employer considering the redundancy of 20 employees or more is obliged to embark on a collective consultation period of at least 30 days, with a view to reducing and mitigating any dismissals. This obligation still applies if the business has entered an insolvency process, and failure to comply may entitle employees to make a claim for a protective award against the remaining assets of the company.

If my employer enters into an insolvency process what will happen?

If your employer enters an insolvency process this does not necessarily mean your employment will be terminated. The possible outcomes will depend on the type of insolvency process.

You may be:

  • kept on in employment,
  • be made redundant,
  • or it is possible that your employment may transfer to a new employer under TUPE if a buyer is found for some or all of the insolvent business and TUPE applies to the purchase.

What are the main insolvency processes?

  • Administration

An Administrator is an insolvency practitioner who is appointed to manage an insolvent company’s affairs, business and property. An administrator aims to rescue the company and potentially sell it while it continues to trade. They have 14 days before they have to formally adopt your employment contract. The administrators who run the insolvent company may try to find a buyer for the company. If a buyer is found, employees might transfer to the buyer under The  Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This in effect means that you will be transferred on the same terms of employment (including pay) as you had with your original employer and without a break in your period of employment. If a sale cannot be completed redundancies may be inevitable.

  • Liquidation

A company that goes into liquidation will likely stop trading immediately on or after the liquidator’s appointment, if not before. The liquidator aims to get the best outcome for the company’s creditors which might not always be to maintain employees in their current roles. It is likely that you will be made redundant without being given the notice laid out in your employment contract.

What claims can I make if I am made redundant?

These include:

  • Redundancy pay
  • Holiday pay
  • Statutory notice pay
  • Pension contributions
  • Unpaid wages

What if there are insufficient funds for my employer to pay my claims?

You can make a claim from the National Insurance Fund (NIF). For each element of the above claims there are different criteria for what the NIF will pay out.

  • Redundancy pay

You have to have at least 2 years of continuous service to make a claim. The amount you are entitled to will depend on your age and the number of years’ service you have, capped at £571 per week.

  • Holiday pay

You may be able to claim holiday days owed to you that you did not take or holiday days that you took but for which you were not paid. You can only claim for holidays that you took in the 12 months before your employer became insolvent. Employees can claim up to 6 weeks’ holiday pay, currently capped at £571 per week.  

  • Statutory notice pay

You are entitled to claim for your ‘statutory minimum notice entitlement. Under law, you are entitled to one week’s notice after one month’s employment, rising to two weeks after 2 years employment and increasing by a further week each year up to a maximum of 12 weeks.  Again this is capped at £571 per week. This claim will only be paid out at the end of your notice period.

It is important to understand that this is a compensatory payment. If you start a new job before the end of your notice period your claim will be reduced. Also, you must do all you can to mitigate this claim, for example by claiming any entitlement to unemployment benefit. If you do not claim this then it will be deducted from your claim anyway.

  • Pension contributions

A claim can be made from the NIF for employee and employer pension contributions not paid over to your pension scheme. It is always good practice to check that your contributions are getting paid over, especially if your employer is in financial distress.

  • Unpaid wages

You can claim up to 8 weeks’ wages, currently capped at £571 per week.

How will I know how to make the correct claims?

The Insolvency Practitioners dealing with the insolvency of your employer will give you guidance. They will provide you with the appropriate claim forms to complete and the appropriate reference numbers. It can take 6 weeks or longer to receive the payment. The information you provide is checked against your employer’s records and you will only receive a payment if those records reflect that you are owed money.

Conclusion

This is clearly a complex area of law. Probably the best advice if you think that your employer is on the brink of insolvency and owes you money is not to panic and hand in your notice. Even if your employer does enter into an insolvency process there is still the opportunity to make claims to the NIF you will make payments you. They then stand in your shoes as a creditor of insolvent business.


For help and advice concerning the viability of your business please get in touch with our restructuring and insolvency team on 0808 144 5575.

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