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 and entered a liquidation process is bound to cause significant worry amongst affected employees, who will undoubtedly have questions about unpaid wages.

There are special arrangements in place to safeguard employees’ rights and entitlements. 

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.

What happens to employees when a company is liquidated?

When a company goes insolvent and a liquidator steps in, the employees are immediately let go. These former employees then turn into creditors. If the company owes them wages or other dues, the money from the asset sale will be used to settle these debts.

If the funds from the liquidation aren’t sufficient to cover the dues owed to employees, they can rely on the Redundancy Payment Service, though there are specific limits in place.

Put simply, employees have a priority as creditors. This means they have a right to:

  • Up to four months of unpaid salary, but not exceeding £800 in total;
  • Compensation for up to six weeks of holiday pay;
  • Certain pension payments related to their job.

Do employees get paid when company goes into liquidation

Yes, employees will get paid when a company goes into liquidation, these types of claims are considered priority debts, which means they must be paid before other debts, such as suppliers, loans or credit card balances.

However, in many cases, there may not be enough money left over after the company’s debts have been paid to fully compensate employees for their outstanding claims.

If this is the case, employees will need to complete an RP1 form by the company liquidator.  This form allows employees to make a claim for any outstanding wages, holiday pay and redundancy entitlement. 

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 the gov.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.

Read more: Does TUPE apply in administration

What is an employee entitled to?

What are the company liquidation employee rights 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.

Read more: Can’t afford to pay tribunal claim

Who will pay my employee’s wages?

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.

Frequently asked questions

Do employees get redundancy if a company goes into liquidation?

Yes, employees do get redundancy if a company goes into liquidation if you: have been made redundant. were an employee. were continuously employed by the insolvent business for 2 years or more.

What do employees get if company goes into liquidation?

Employees are entitled to redundancy, outstanding holiday pay, and outstanding wages if the company goes into liquidation. However, in order to make a redundancy claim you must in turn provide a case reference number. This will be provided to all staff by the company liquidator. In more complicated cases, it's still possible to claim redundancy.


In conclusion, when a company becomes insolvent, the rights of its employees may be affected. In general, employees are entitled to their unpaid wages and any outstanding holiday pay, and they may be entitled to redundancy pay if their employment is terminated due to the company’s insolvency. Employees may also be entitled to compensation if their employer has not followed proper procedures in relation to their dismissal.

It is important for employees to be aware of their rights in these situations and to seek advice if they have any concerns. In some cases, employees may be able to claim these entitlements through government schemes or through the courts. If you are en employer and worried about your staff in the event of liquidation, complete the online enquiry and we will talk you though your options.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.