Insolvency refers to a situation where an organization is unable to meet its financial obligations, TUPE regulations provide essential protections for employees in the event of a transfer to a new employer, even in cases where the previous employer is insolvent.
TUPE, short for Transfer of Undertakings (Protection of Employment), ensures that employees’ rights are upheld during transfers.
During a TUPE transfer, the specific type of insolvency and the timing of the insolvency will impact certain factors, including:
- The party responsible for paying any outstanding employee debts.
- The extent of employee protections provided under TUPE.
In instances where the organization or a part of it is being rescued or transferred to a new owner (referred to as ‘non-terminal insolvency’), employees retain their protections under TUPE.
However, if the organization is undergoing complete closure (known as ‘terminal insolvency’), there is no transfer, and employees will not be protected under TUPE.
In cases of insolvency, it is necessary for the employer to appoint an insolvency practitioner (IP) to manage the insolvency process. Additional information on this topic can be found through The Insolvency Service on GOV.UK
When the organisation is taken over (‘non-terminal insolvency’)
In the event that an insolvent organization (the old employer) is sold and continues its operations, employees will undergo an automatic transfer to the new employer while maintaining their existing terms and conditions, encompassing;
- their original start date
- holiday pay
- pension contributions.
Under normal circumstances during a TUPE transfer of undertakings, any changes to employment contracts after the transfer necessitate economic, technical, or organiSational (ETO) reasons that require workforce changes. These changes must be directly linked to the transfer and require mutual agreement between the new employer and the employees or their representatives.
However, in cases where the old employer is insolvent, the new employer or the insolvency practitioner has the potential to modify employees’ employment terms and conditions if it aids in preserving jobs and sustaining business operations. This process entails consultation with employee representatives and obtaining their agreement, reflecting a collaborative approach to safeguarding employment opportunities while ensuring the business remains viable.
Money owed to staff who transfer after an insolvency
In the event of staff transferring to a new employer following their old employer’s insolvency, it is important to note that the new employer would not bear liability for certain outstanding payments owed by the old employer to the staff.
Transferred employees facing such situations may be eligible to make claims for the owed funds through the Redundancy Payment Service. To initiate the claim process, they would need to obtain a case reference number from the insolvency practitioner appointed by their former employer.
By following this procedure, employees can seek resolution and potential compensation for the unpaid amounts through the appropriate channels provided by the Redundancy Payment Service.
When the organisation is closed down (‘terminal insolvency’)
In instances where the old employer undergoes a ‘liquidation’ resulting in:
- the closure of the business or becomes bankrupt,
- employees will not transfer to a new employer as part of the process.
In such cases, the old employer should follow the necessary procedures to make their staff redundant, adhering to the appropriate legal requirements and providing the relevant entitlements to the affected employees.
Money owed to staff
In the unfortunate event that the old employer becomes insolvent and ceases its operations, the former employees may have the opportunity to claim a portion of the outstanding money owed to them through the Redundancy Payment Service. To initiate the claim process, employees would be required to obtain a case reference number from the insolvency practitioner assigned by their former employer.
This step ensures a streamlined and organized approach to seeking compensation for the owed amounts through the designated channels provided by the Redundancy Payment Service.
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.