The Redundancy Payments Service (RPS) provides help to employers who wish to make employees redundant but cannot afford to make statutory redundancy payments. This could be because the company is insolvent.

The service allows applications to be submitted and if accepted, the RPS will make the statutory redundancy payments on behalf of the employer. Most employees who have worked continuously for a business for 2 or more years will be entitled to statutory redundancy pay.

Can a company director claim redundancy payment?

It’s not unheard of for a company director to submit a claim for redundancy payments if they have a contract of employment and have been paying themselves a wage. Whether that claim is accepted is a different question altogether.

If you’re a company director placing your company into liquidation but planning to submit a redundancy payment claim you need to be aware of what factors the RPS consider when looking at director claims.

Why a director’s redundancy claim might be rejected

We’ll cut to the chase. If a director hasn’t been paying themselves an adequate salary, presumably to reduce the amount of tax they pay, then they most likely won’t qualify as a formal employee of the company. What does adequately refer to? We’ll explain with an example:

• Director A pays themselves an annual salary of around £9,000. The rest of their income comes from dividends.
• Based on a 37.5 hour week, a remuneration of £9,000 per year is the equivalent of £750 per month or £173 per week.
• This in turn means that they are being paid around £4.61 per hour, which is well below the National Minimum Wage (NMW).
• Would a normal employee come to work for £4.61 per hour? Highly unlikely (and of course illegal to do so.)
• On this basis, RPS are likely to conclude that Director A is not a formal employee of the company. 

For a director is to be considered a formal employee of the company they must pay themselves the National Minimum Wage. A director can be exempt from paying themselves the NMW but they are then classed as an office holder, not an employee.

Redundancy claims under the spotlight

Although there are not formal statistics published on the number of redundancy payment claims made, we believe that claim numbers are increasing, with the number of company insolvencies now surpassing pre-pandemic levels.

What we are also observing is a higher rejection of director redundancy payment claims.  If you are a director with a company facing insolvency then we recommend speaking with our team about your options before submitting a redundancy payment claim.

Contact us today on 0808 196 8676.