What are the consequences of company insolvency on the employee?

What are your employee rights when your company is insolvent?

What are your employee rights when your company is insolvent?Learning that an employer is insolvent is bound to cause significant worry amongst affected employees, who will undoubtedly have questions about unpaid wages.

However, there are special arrangements in place to safeguard employees’ rights and entitlements. Peninsula sets out the basics for employees of insolvent companies.

When the company you work for runs out of money and enters into insolvency, you face several challenges as an employee, from ensuring your job is stable to making sure you’re paid for your work.

As an employee, you have certain rights under the law, even when the company you work for is insolvent. You also have rights protecting your contract in the event that the company is sold to a new owner, such as the TUPE regulations.

Working for an insolvent company can be a scary experience, but there may be more options available than you realise. Our quick guide may help you to learn more about how you’re affected by an employer becoming insolvent and what rights you have to project your job.

How will insolvency affect my employees?

Insolvency will effect employees once a business goes insolvent. As soon as a liquidator is appointed with the task of winding up a company, employees are dismissed immediately. This can put a company’s workforce into an unfortunate scenario where the company may not be able to afford their payouts. After all secured creditors have been paid, employees will be next and entitled to arrears of wages and holiday pay. If there isn’t remaining cash after paying secured creditors and the liquidator, employees are still covered by the Redundancy Payment Service.

Different types of insolvency processes

Insolvency occurs when the employer is unable to pay its debts when they fall due or their liabilities exceed their assets. The most common forms of insolvency processes are:

  • Administration: this is traditionally a process to rescue the company as a ‘going’ concern
  • Liquidation: this is terminal – the company is closed and its assets are sold to pay its creditors
  • Administrative receivership: instigated by single creditor (often a bank) and the company’s assets are sold to pay this creditor
  • Bankruptcy: this only applies to an individual, not to partnerships or limited companies

What are the consequences of company insolvency on the employee?

The rights of the employees will usually depend on the specific form of the insolvency regime and the consequences of company insolvency can vary. Here are just some of the most common consequences:

  • The employer makes the employee redundant

This usually occurs when the company enters liquidation. An employee can apply to the National Insurance Fund for unpaid wages and other payments via the gov.uk website. Employees can also make a claim to the employment tribunal if they were dismissed unfairly (‘basic award’) or if there was not a consultation about their redundancy (‘protective award’).

  • The employer asks the employee to continue working after entering an insolvency process

Should an employee continue working after a company enters an insolvency process, they will still be eligible to claim for redundancy pay if they’re made redundant at a later date (subject to meeting the two years’ service qualification) via thegov.uk website. However, they will not be able to claim holiday pay, wages, bonuses or commission that they’re owed between the day the company enters insolvency process and the day they were dismissed.

  • The employee is transferred to a new employer – TUPE

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect employees if the company they work for changes hands. TUPE will apply to insolvent companies that are taken over by another employer, including where the company is sold as a ‘going concern’ by administrators. The new employer (transferee) will take on all the liabilities, including employment protection under TUPE, of the insolvent employer (transferor). 

TUPE regulations introduced in 2006 are used to govern employee rights during insolvency and protect employees from being made redundant or losing money owed to them during company takeovers and business transfers. If you’re considering a company voluntary arrangement (CVA) or a voluntary administration it is imperative to consider the rights of employees before committing to move forward. Payroll expenses and employee contract terms will determine how feasible a recovery may be. In some cases you may be able to use administration to eliminate employee contracts without taking on large employee liabilities.

The new employer or insolvency practitioner can reduce employees’ pay or change their terms and conditions if this will prevent job losses. There are consultation obligations and all such changes must be agreed with employee or trade union representatives. Post-transfer dismissals may be unfair.

TUPE’s principle of automatic transfer does not apply in liquidation.

What is an employee entitled to?

If the employer is in an insolvency process, the Government steps in to pay through the National Insurance Fund. When a company becomes insolvent and enters into liquidation, creditors sell the company’s assets in order to generate cash to pay creditors. As an employee, you’re a preferred creditor and have certain special rights. One of these rights is that you can claim your outstanding salary for the four months prior to the company becoming insolvent. This includes any commission that you’re owed by your employer, such as for product or service sales.

All payments are capped at £525 per week. An employee (but not the self-employed or agency workers) will be able to claim:

  • Wage arrears: up to 8 weeks’ wages
  • Holiday pay: up to 6 weeks’ holiday pay
  • Notice pay: an employee must be given the notice period stated in their contract or the statutory minimum notice period, whichever is longer
  • Redundancy payments: these are calculated by the length of the employees’ service, their salary (subject to the cap) and their age up to a maximum of 20 years’ employment These are capped at £508 per week, and are calculated by the length of the employees service, their salary and their age.The entitlement considers a maximum of 20 years employment and offers:
    • Half a weeks pay for each year until an employee is 22
    • One week’s pay for each year between 22 and 41
    • One and half weeks pay for each year from the age of 41
    • Claims are reduced by 1/12 once the employee reaches 64, and ceases entirely from 65 onwards

In addition, the Government advises employees to contact the insolvency practitioner about unpaid pension contributions.

Who will pay my employee’s wages?

During a liquidation, all the assets of the Company are collected and distributed amongst the Company’s creditors. The type of creditor a person or Company is will determine where they stand in the liquidation ‘pecking order’ of whose claims the liquidators will consider first.

Under the Insolvency Act 1986, employees are entitled to be treated as preferential creditors in respect of unpaid wages owed in the four months before the date of the insolvency. Any unpaid wages claim over and above the government set limit would be treated as unsecured.

More often than not during a liquidation, there will not be enough money to satisfy all of the creditors’ claims. If you are the Director of a limited Company, you will be relieved to hear that any shortfall in wages will not come out of your personal pocket. If your employees’ outstanding wages cannot be paid out of the proceeds of the liquidation, your employees will be able to make a claim to the National Insurance Fund.

Redundancy pay if you have been on furlough

If you’ve been on ‘furlough’ (temporary leave) during the coronavirus (COVID-19) pandemic, you must use your full normal pay when working out redundancy pay. For example, if your weekly pay is usually £300 but you received 80% pay while on furlough, your redundancy pay must be your full normal pay of £300 a week.

If your pay is different each week, your weekly pay must be worked out by using the 12 weeks leading up to the day you got your furlough redundancy notice. Your pay must be topped up to 100% for any hours you were furloughed. Add up the total amount of pay during the 12 weeks and divide it by 12 to get your weekly pay. 

Need help

If you are considering liquidating your insolvent company, you should make it a priority to obtain advice from a professional. We have an expert team of licensed insolvency practitioners can help you understand the options available to you and your company, as well as the impact each process may have on your employees.

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