Employees working for a company that is in trouble may well have noticed how, over a short period, orders have started to fall, wages have been paid late, key employees have left to take up posts elsewhere, and rumours have been circulating. In these circumstances, should the company become insolvent, it is unlikely to be a shock to employees. Alternatively, employees may have no idea that the company is heading for insolvency until they arrive for work one morning and are locked out of the premises, or instructed to go home. Whatever the circumstances leading up to redundancy, employees need to know their rights.
The ways in which an insolvent company can end
There are a number of ways in which a company can be brought to an end:
- Administration – when a company, faced with problems and heading towards insolvency asks an Administrator to implement steps that might save the company;
- Liquidation – a company has ceased trading, its assets have been sold and any money raised
is used to pay creditors;
- Receivership – where one large creditor calls-in secured lending which means, as a consequence, the company has to close.
What employees are entitled to
This is set out in the Employments Rights Act 1996. Once a company is insolvent, in addition to redundancy pay, employees may be
able to claim, from the insolvency service, the following:
- Up to 8 weeks wages;
- Up to 6 weeks holiday pay;
- Statutory Notice pay;
- Payment of pension contributions to their scheme not paid by employer; and
- A basic/protective award for unfair dismissal.
Payment of all of these is subject to other considerations, such as length of service, circumstances surrounding the termination of employment, and caps on the amount paid.
Statutory Redundancy Pay
Redundancy pay is payable when a business ceases to trade and closes completely, closes a branch or arm of the business in the location where the employee works, or has no further requirement or a much reduced one for the experience and skills of the employee. The following factors dictate the extent of an employee’s entitlement to redundancy pay:
- How long the employee has worked continuously for the company; with a maximum of 20 years taken into account;
- The weekly pay of the employee at the date of redundancy; and
- Age of the employee.
Financial entitlement based on years of employment
Redundancy pay is calculated as follows:
- Less than 2 years consecutive employment, no entitlement (the employee must have had a contract of employment for at least 16 hours a week);
- ½ a week’s pay for each year the employee worked prior to reaching 22 years of age;
- 1 week’s pay for each year the employee worked from the ages of 22 and
- 1½ week’s pay for each year worked from the age of 41.
So long as the employees' circumstances meet the specified criteria, their claim should be submitted online at the Insolvency Services section of the Government's website. Claims should be submitted to the Insolvency Service as soon as possible. If a claim is rejected by the Insolvency Service, a claim may be made to an Employment Tribunal. The time limit for such claims is generally 3 months.
The employer or the Insolvency Practitioner responsible for the Company should provide appropriate guidance in submitting the online claim to the Insolvency Service. This guidance is, also, available on the Insolvency Service website. The claim will be assessed by the Redundancy Payments Service, a department within the Insolvency Service, and payment made from the National Insurance fund.
Generally, for the Insolvency Service to consider claims the following should apply: -
- The employer is insolvent;
- Employment has terminated; and the employee has made every effort to obtain payment from the employer.
Payments from the RPO will be limited by a weekly cap (currently £479 as at
6th April 2016). The maximum amount of redundancy pay that can be
paid by the RPO is £14730 . This is not subject to tax.
Administration or Liquidation
During Administration an employee does not have an immediate legal claim on the employer. The involvement of an Administrator, in effect, imposes a moratorium which provides time for the Administrator to try and steer the business out of trouble. Administrators, in order to reduce operating costs, have 14 days to dismiss employees. Under the provisions of the Insolvency Act, employees dismissed in this way are classed as ordinary creditors for the purpose of insolvency. Employees retained by the administrator beyond 14 days are classed as preferential creditors. Preferential creditors stand a better chance than ordinary creditors of recovering monies owed, such as outstanding salary, accrued holiday pay and redundancy pay.
If between 20 and 99 employees are going to be made redundant
in a 90 day period, the employer must, by law, allow a consultation
period of 30 days during which the employers must set out in writing how
the redundancy exercise will be organised and executed. Consultation
with Trade Unions should also take place. Failure to implement these
provisions can result in claims for a Protective Award.
If, when dismissed, an employee is not given full notice or is not paid in lieu of notice, a claim for statutory notice can be made from the RPS. Any conditional contractual notice will be an unsecured claim in the insolvency.
The key points in the assessment of statutory notice entitlement by the RPO are:
- Once 2 weeks have been worked, there is an entitlement to one week's notice. After two years, it is 2 weeks' notice. Thereafter, for each complete year there is another week's notice entitlement up to a maximum of 12 weeks.
- Payment for notice worked but not paid is subject to the statutory weekly limit of £479 and deduction of tax and national insurance (prior to 6 April 2016 the limit was £475).
- Payment for notice not worked is viewed by the RPO as a compensation payment for breach of contract. It is important that all steps possible are taken to keep the "loss" during the notice period to a minimum. This includes ensuring that a claim is made for all available benefits, including Jobseekers' Allowance at the JobcentrePlus.
Pre-Pack Administrations and TUPE
Where an insolvent business is bought out and is able to continue trading as a new company, existing employees may be offered the opportunity to transfer to the new business. Whilst this should not affect their entitlement to redundancy pay, their conditions of employment may change. Any transfer of staff should be conducted in accordance with Transfer of Undertaking (Protection for employment) Regulations (TUPE).
A final word
No employee wants to lose their employment, particularly when they have worked for a company for a long time and their expectations were that in the event of future redundancy they would get the full amount of monies owed to them. It is important therefore that employees understand their rights and if in any doubt about them or how to go about claiming their legal dues, they should take advice, either from their Union or another independent source. The Redundancy Payment Office also has a telephone helpline on 0330 331 0020, Monday to Friday 9.00am until 5.00pm.