When a business becomes insolvent, it is the duty of the directors to act with skill, care and diligence in safeguarding the interests of their employees. This means that as a director you must be aware of your employees’ rights and entitlements. In this article, we outline the key information and process that directors need to follow in regard to their employees in the event of an insolvency.
As an employer you have a duty to consult with the employees in a likely redundancy scenario. There are specific rules when making 20 or more employees redundant at a single establishment within a 90-day period and this is known as collective consultation.
While there are no specific rules when making less than 20 employees redundant it is still good practice to consult as an Employment Tribunal could rule that employees have been unfairly dismissed if you do not.
For an insolvency event that will result in redundancies, it is best to take independent legal advice regarding your duties. It is also important that directors take such advice where there is the possibility of transferring staff to another business.
Employees have different rights depending on whether the employer and/or the Insolvency Practitioner:
- makes employees redundant (dismissal)
- asks employees to keep working
- transfers employees to a new employer (if the business has been sold)
If an employee is made redundant, they can apply to the Redundancy Payment Service (RPS) for:
- a redundancy payment
- holiday pay
- outstanding payments like unpaid wages, overtime and commission
- money an employee would have earned working their notice period
They may be eligible for unemployment benefits if they lose their job and therefore, they should sign-on as soon as possible. Failure to do so, may have a detrimental impact on the compensation for loss of notice pay awarded by the RPS.
Compensation for unfair dismissal
Employees can also apply to the court for compensation if they think they were unfairly dismissed or not properly consulted.
They can make a claim to an employment tribunal if:
- they were dismissed unfairly (‘basic award’)
- there was no proper consultation about their redundancy (‘protective award’) explaining why redundancy is necessary and any alternatives to redundancy.
Related article: Insolvency guidance for directors if your company is in distress
If employees continue working after the insolvency
Employees might be asked to continue working for their employer after the company becomes insolvent.
They will still be eligible to claim for redundancy pay and other money owed if made redundant at a later date. Employees cannot claim holiday pay, wages, bonuses or commission owed between the day of the insolvency and the day of dismissal, as this will be the responsibility of the insolvency practitioner.
If the employee is transferred to a new employer
Employees may not be able to claim any money from the government if transferred from the former employer to another business. In such circumstances the new business may be deemed to have adopted their employment contracts.
What are the employee’s entitlements?
The money that an employee is entitled to depends on:
- how long they were employed by the insolvent company
- what was stated in their employment contract?
- their age
All payments for wages, holiday and other money owed are currently capped at £571 per week and subject to tax and National Insurance.
Wages and other money owed
Employees can apply for unpaid wages and other money they are owed by the employer, e.g., bonuses, overtime and commission, in accordance with their employment contract.
They can claim up to a maximum of 8 weeks money owed, regardless if they work only 2 days per week or 5 days per week.
Employees can get paid for:
- holiday days owed that they did not take (‘holiday pay accrued’)
- holiday days they took but were not paid for (‘holiday pay taken’)
They are only paid for holidays taken or accrued in the 12 months before the employer became insolvent. Holiday pay claims can be submitted for a period up to 6 weeks.
Statutory notice pay
Employees are entitled to a paid notice period when they are made redundant, even if a notice period is not detailed in their contract of employment.
They can claim for statutory notice pay if they:
- did not work a notice period
- worked some of their notice period
- worked an unpaid notice period
The statutory notice pay is worked out as one week’s notice for every year employed, up to a maximum of 12 weeks.
Employees are normally entitled to redundancy pay if:
- they have been made redundant
- they were an employee
- they were continuously employed by the now insolvent business for 2 years or more
There is a payment limitation of a maximum of 20 years’ service with the insolvent company.
As with other payments, redundancy pay is currently capped at £571 a week with effect from 6th April 2022 and the maximum statutory redundancy pay you can get is £17,130.
Redundancy pay qualifies for special tax treatment, as up to £30,000 is tax free. But other elements of the package – holiday pay and statutory notice pay – will be taxed in the same way as any normal pay.
Employees will need to contact the IP in regards to any missing contributions to their pension. In certain circumstances, the RPS will make payment to the pension provider for unpaid contributions relating to their period of employment 12 months prior to the date of insolvency.
Applying for the money due
Employees are eligible to apply if:
- they were an employee (see definition above)
- they are a UK or EEA national (or a foreign national with permission to work in the UK)
Directors will need to provide the IP with the employee details for the RSP applications. When an employee submits their on-line claim to the RPS for redundancy, unpaid wages and holiday pay, it must be within 6 months of their dismissal, otherwise their claim will be rejected.
After employees have applied
It usually takes around 14 days to get a payment. It can sometimes take longer but most claims are generally processed within 6 weeks. The information supplied will be checked against the employer’s records, for example how much holiday had been accrued. The employee will only get a payment if the insolvent company’s records verify that they are owed money.
For rejected applications, employees can make a claim to an employment tribunal if they disagree with the decision.
How we can help
Employment law is complex and constantly changing area of legislation. It is, therefore, important to work with an insolvency practitioner who understands your business’s situation in detail.
We have extensive experience of these scenarios. One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at firstname.lastname@example.org or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.
This guidance article was written by our Insolvency Practitioner, George Dale Partner at Opus.