What are Employee Rights When a Company is Insolvent?
If an employer enters into insolvency then it is understandably an extremely anxious and worrying time for the employees.
Thankfully, there are special arrangements for employees who are dismissed as a result of the insolvency of their employer. The National Insurance Fund can guarantee a basic minimum of payments to cover redundancy and other contractual payments, within limits, and aims to pay 80 percent of all claims within three weeks of a claim being made.
These payments are subject to legal limits. The maximum weekly amount an employee can receive is £464.00 per week, and this is limited to a predefined period.
Unfortunately, this same scheme does not offer any protection to agency workers or self-employed contractors. Agency workers should always contact their agencies to see where they stand, while the first port of call for employees should be the administrator of their former employer.
The Different Types of Insolvency
If you work for a company that has become insolvent, this can mean one of the following 5 things. Each of these will have slightly different implications for employees.
- Administration – this occurs when an employer asks an administrator to come into the company to try and keep it going.
- Company Voluntary Arrangement – This is another restructuring mechanism, where the company arranges a payment plan agreed upon by creditors.
- Company liquidation – the company is closed and its assets are sold to pay its creditors.
- Receivership – similar to liquidation but it’s usually instigated by a single creditor that has lent money to the company securely, such as a bank. The assets are then sold to repay that creditor alone.
- Creditor voluntary liquidation – a process designed to allow an insolvent company to close voluntarily. The decision to liquidate is made by a board resolution but instigated by the directors.
What are the Rights and Entitlements of Employees?
If you’re owed money by the insolvent company, you should claim it through the insolvency practitioner, who is the independent professional who administers the insolvency. In some instances i.e. if a company rescue is being attempted or the business is being sold, you might be asked to continue working.
This will not affect your rights to redundancy pay if the business closes at a later date. If the business is sold to a third party, your employment rights will be protected. This includes any pay you might be owed.
How can Employees Claim the Money They are Owed by an Insolvent Company?
The insolvency practitioner should send you the claim forms you need. If they don’t, contact them in writing to request them.
If you’re not sure who to write to, contact Companies House using the details listed towards the bottom of this page or you can search for Insolvency Notices on the official journal of public record, The Gazette, here. Search for the company name and you will see the name of the appointed insolvency practitioner by the notice.
How much can Employees Expect to Receive if a Company Closes Down?
The National Insurance Fund does not guarantee you’ll receive every penny you’re owed by your employer, but you will be able to claim for the following:
Up to 8 weeks’ wages, including a payment if the employer failed to follow ‘collective consultation’ rules
Up to 6 weeks holiday pay
Statutory Notice Pay
Statutory notice pay, which starts at 1 week for a month of service, and rises to 1 week for every year of service (up to a maximum of 12 weeks)
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
It should be said that redundancy payments are a complex subject so we would recommend you refer to the governments page on the matter here for the latest information.
Unpaid Pension Contributions
Unpaid contributions by employees are paid for the 12 months before the insolvency. In terms of contributions by employers, the The Department for the Economy’s Redundancy Payments Service (RPS) will pay the least of:
- Contribution arrears for the 12 months before the insolvency
- A sum equal to 10% of the employee’s total wages for the 12 months before the insolvency.
- The amount necessary for the scheme to meet its liability on dissolution for payment of benefits as certified by an actuary
Read our full article here on maternity rights in insolvency.
How Much Notice Should Employees be Given in Insolvency?
You must also be given at least the notice period stated in your contract or the statutory minimum notice period, whichever is longer. You can claim statutory notice pay if:
- You worked your statutory notice period without being paid by your employer
- You were dismissed without receiving your full notice period
- You did not work your full notice period
The statutory notice period is the minimum legal notice period your employer has to give you. This is:
- 1 week’s notice if you’ve been at the company for between a month and 2 years
- If you’ve been employed for at least 2 years, you receive 2 weeks’ notice plus an extra week for every year you’ve worked (up to a maximum of 12 weeks)