In the event of a company’s liquidation, severance (also called redundancy) pay can be provided to employees, providing they meet eligibility criteria.

In this article, we’ll cover this issue in detail, explaining the process and criteria.

What Happens to Employees When a Company Goes into Liquidation?

On liquidation, employees are immediately made redundant and will be dismissed from the business. However, some may be eligible for payments to replace unpaid wages and other entitlements. The payments are made by the government and are subject to statutory limits.

The process will be overseen by the liquidator, or in the case of a compulsory winding-up, The Official Receiver. In terms of being eligible to receive payment, employees should have worked for the company for two years or more.

Payments come from the National Insurance Fund, which holds funds for statutory payments and the state pension. Claims can be made only when the business is insolvent.

Employee claims are administered by the Redundancy Payments Service (RPS), which is a division of the Insolvency Service. The liquidator and their staff should provide the former employees with guidance on how to claim for salary and other entitlements. Company directors will need to show that they cannot make the payments themselves, such as through showing accounts and bank statements and that they have been unable to raise money by other reasonable means. They should also ensure they have detailed records of who was on the payroll, including NI numbers, length of service and dates of birth.

How to Apply for Severance Pay During Liquidation

The liquidator will provide former employees with a case reference number and this needs to be entered onto the online application form, called an RPI, which is on the Insolvency Service website.

How Much is Severance Pay?

Severance pay is capped at £544 per week, for a maximum of 20 years that the employee worked at the business. It is tax free up to £30,000. Payments are worked out as follows: 

  • half a week’s pay for each full year they were employed and under 22 years old
  • one week’s pay for each full year they were employed and between 22 and 40 years old
  • one and half week’s pay for each full year they were employed and 41 or older.

Claiming for Other Entitlements in Liquidation 

In addition to their main salary, employees can also claim for the following:

Holiday pay – This can be for days not yet taken or those which have already been spent, but not yet paid for by the employer. It is possible to claim for up to six weeks.Tax and NI deductions will be made and the limit is capped at £544 per week.

Arrears of pay – The claimant is entitled to up to eight weeks arrears of pay, based on their weekly salary entitlement. Tax and NI deductions will be made and the amount is also subject to the £544 cap.

Pay in lieu of notice – When working for a solvent business, an employee will be given notice of redundancy, with a settlement reached. In liquidation, matters tend to move very quickly and the employee may be given hardly any notice of redundancy.  

After one month’s employment, the claimant is entitled to one week’s notice, two weeks’ notice after two years, reaching a maximum of 12 weeks after 12 years’ employment. Tax and NI will be deducted  and the amount is subject to the £544 cap..If an employee is entitled to state benefits, the amounts for this will be deducted from payments.

Bonuses, overtime and commission – For bonuses, overtime and commission that are owing, these can be covered for a period of up to eight weeks, again making the tax and NI deductions.

Pension Contributions – If the employer stopped making payments into an occupational pension scheme, then the Redundancy Payments Service can repay the money deducted from wages for this purpose, but not actually paid into the scheme. This is limited to the 12 months prior to liquidation. 

They will also pay whichever is the lower of the employer’s unpaid contribution or 10% of the wage, both of which are limited to the 12 months before liquidation.

What if Another Job is Found After Making a Severance Pay Claim? 

If another role is found during the period that severance pay is being claimed, then the wages from the new role will be deducted from payments. 

Can Directors Claim for Severance Pay in Liquidation?

Just as with any other employee, directors are entitled to claim for a redundancy payout. If they have been an employee of the company, working there for at least two years, completing a minimum of 16 hours per week and taking home a monthly wage, then they should apply along with other employees.

Register for State Benefits as Soon as Possible After Liquidation

Once they hear they have lost their job, it is vital that former employees of a liquidated business register for benefits such as Jobseekers Allowance as soon as possible. This can ensure there are no unnecessary deductions from any statutory redundancy payments and they receive all the entitlements they are eligible for, at what can often be a difficult time.