What Are My Employees' Rights During Insolvency?March 20, 2017
If your business enters insolvency or is at risk of insolvency, your employees are afforded certain rights and protection.
In this blog, I’ll touch on some key points and explain what rights your employees have.
Before I get started, if your business is struggling, I strongly recommend getting professional advice as early as possible.
At 180 Advisory Solutions, we offer initial advice for free and it’s completely confidential. The more time we have to work with your business, the higher the likelihood of a successful recovery for all or part of your business so please get in touch today.
What happens in the first 14 days of an insolvency?
Once in an insolvency, an insolvency practitioner has 14 days to decide whether to make redundancies.
If the business continues to trade under the control of an insolvency practitioner, all retained employees will continue to be paid as normal. However, it's highly likely that even if the business continues trading during the insolvency the workforce will be reduced in size to try and reduce overheads and increase the chance of saving at least the business or part of it, if not the Company.
Employees made redundant (whether the business is in insolvency or not) are entitled to claim for:
- Unpaid salary, wages and commission
- Accrued holiday pay
- Unpaid pension contributions
- Payment in lieu of notice for up to 12 weeks
- Redundancy pay depending on their age and length of service
- For larger businesses (those with 20 or more employees) there may be the possibility of an award for unfair dismissal due to the lack of any statutory redundancy consultation
The above entitlements, in essence, remain in an insolvency. What changes is who ends up footing the bill for these claims.
There is a Government safety net for redundant employees offered via the Redundancy Payments Service. Any sum due to employees that an insolvent employer cannot pay is paid by the Redundancy Payments Service with a few restrictions/issues.
- Only employees are protected
- Self-employed contractors are treated like any other creditor
- The employer must be in formal insolvency procedure (in a liquidation that means a court has granted a winding up order, not just appointed a provisional liquidator)
- Statutory limit for arrears of wages, notice period, redundancy, etc is £479 per week and the maximum statutory redundancy pay is £14,370
- If an employee earns more than this weekly limit, the difference is a creditor claim in the insolvency
- The claims process usually takes several months from the start of formal insolvency proceedings (the insolvency practitioner has no influence of this Government department to speed things up)
The insolvency practitioner and their team will make it their priority to assist redundant employees compile and submit their claims.
TUPE considerations for buyers
The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) were introduced by the EU a number years ago. Even if the UK leaves the EU, these regulations will undoubtedly continue to apply (unless Nigel Farage is our post-Brexit Prime Minister).
Business owners considering buying back the business or assets from an insolvent business or third parties considering buying business or assets from a liquidator need to be very careful of TUPE regulations.
I strongly recommend seeking legal advice from an employment law specialist as there is a risk that all previous and existing employees (along with their rights to arrears of pay, redundancy, etc) transfer to the new employer, even if the purchaser only wanted to buy some of the business and assets.
Are you struggling with director’s guilt?
Business owners who work with long-serving and loyal staff often experience stress and guilt at the prospect of downsizing or closing unviable parts of their business, thus preventing or delaying them from taking action to save the viable parts of their business till it's too late.
However, it’s important to realise that unemployment in the UK is exceptionally low at the moment and all good workers who are made redundant through an insolvency typically find alternative employment at comparable salary levels very quickly. Often there is very little, if any, space between the two jobs.
On top of this, employees receive a redundancy package. So, while it may worrying for them in the short term, employees who are made redundant are often financially better off in the long-term.
In all the insolvencies we have been involved with, every single good employee who was made redundant fairly quickly found a new job.
To summarise, don’t delay making decisions about your business because of concerns about the impact it will have on some of your staff. It’s far better to experience short-term upheaval for some employees than risk the closure/failure of the entire business.
Seek professional advice
Struggling businesses often have an excessive workforce left over from when business was strong and profitable. The business owners are aware that their employee numbers are far too large and that redundancies are required to align the size of the workforce to current turnover levels.
However, struggling businesses can often find themselves unable to fund the redundancy packages for these excess staff and therefore lurch from one month to the next with an excessively large payroll only making matters worse and worse.
This vicious circle often eventually ends up with the business completely running out of funds, the whole venture failing and all staff losing their jobs.
If you find yourself in this position it is imperative you seek advice and help from an insolvency practitioner who may be able to assist ending this vicious circle while there is still some or all of the business to be saved.
And remember, the earlier you seek advice, the greater the chance you have that we can save your business.