Employee Rights: How You’re Affected By An Employer’s Insolvency


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August 11, 2021     |     Posted by:     |     Category: Blog, Company Administration, Company Liquidation

If you’re an employee of a company which is insolvent, you’ll understandably have lots of questions. Will I get paid? When will I get paid? Is there any possibility of the company being saved? It’s an uncertain time for all involved.

As an employee, you’ve certain rights under the law, even when the company you work for is insolvent. You also have rights protecting your contract should the business be sold or transferred to a new employer.

Working for an insolvent company can be a scary experience, but there may be more options available than you realise. Read on to learn more about how you’re affected by an employer becoming insolvent and what rights you have to project your job.

Your employer is insolvent. What should you do?

Companies can become insolvent for a number of reasons, but what matters the most to you as an employee is what’s going to happen in the immediate future for your employer.

There are several types of insolvency procedure. Companies can become insolvent and enter into liquidation – a process that involves the sale of the company’s assets to pay its creditors and settle its debts.

Companies can also enter into administration or a voluntary arrangement (a CVA) when they’re insolvent. Administration may allow the company to continue trading under the control of the Administrator whilst seeking to find a buyer. A CVA allows control of the company to remain with the directors.

The first type of insolvency – liquidation – means that the company will cease trading and you will be made redundant. This doesn’t mean you won’t be paid for your work – you have certain rights under the Insolvency Act 1986 to claim any sums due to you, such as your wages.

Claiming outstanding salary from a company in liquidation

When a company goes into liquidation, it’s the liquidator’s role to realise assets in order to try to enable a distribution to creditors. As an employee, you’re identified as a preferential creditor. You’re also eligible to claim from the National Insurance Fund via the Redundancy Payments Service (RPS) for any outstanding salary, accrued holiday, redundancy and statutory notice pay.

This claim has three steps. Firstly, the Liquidator submits your details to the RPS (personal details, rates of pay, start dates etc.) Secondly, you submit an online claim to the RPS. The third step is when the RPS check your claim against what the liquidator has submitted, aiming to make payment to you within 6 weeks of receiving the claim.

All claims to the RPS are subject to being capped at £544 per week. A general guide of what you are entitled to is below:

Understandably, if your wages exceed the cap of £544 per week you’ll want to know your options for claiming the balance of your full entitlement. If there are funds available from the liquidation, you can submit a claim to the liquidator for this balance. Employees rank preferentially for arrears of wages (capped at £800). All accrued holiday ranks preferentially as does any unpaid contributions to occupational pension schemes. All other balancing claims rank as unsecured claims in the liquidation.

The RPS have a claim in the liquidation for payments that they have made to employees and also rank preferentially in respect of the arrears of wages and accrued holiday as above.

What happens if the company you worked for sells or transfers its business to another company?

Sometimes, an insolvent company’s business is bought by another company and your employment is automatically transferred. The TUPE regulations are designed to protect employees in the event of a business being purchased by another company. TUPE stands for Transfer of Undertaking (Protection of Employment) Regulations 2006.

Whether or not the TUPE regulations apply depends on the type of insolvency process. The ordinary TUPE regulations can be relaxed or disapplied if the insolvency is a “terminal” process (liquidation). Administration and CVAs are non-terminal insolvency processes and the TUPE regulations apply. 

If your job isn’t transferred to the new company and you’re made redundant, you’ll be able to claim outstanding pay. However, you usually won’t receive redundancy pay unless you were employed by the previous company for two or more years.

Under TUPE, your employment is usually protected. Any payments that were owed to you by your previous employer are still owed to you but will be paid by the new company instead of the old one.

It’s important to note that the conditions of your employment may not be the same as before. In certain cases, the administrator or company purchasing your previous business may need to modify your terms of employment quite significantly.

Are you concerned that your employer could become insolvent?

Working for a company when it becomes insolvent is rarely pleasant, especially if it enters into liquidation and leaves you as one of many creditors seeking payment for salary arrears and holiday pay.

While you will likely receive some of what you are owed, it’s far from uncommon for an insolvent company to only pay a fraction of what it really owes to its employees, contractors and other creditors.

Unfortunately, as an employee, your level of control over the company’s direction is extremely limited. If you’re seriously concerned about your employer’s solvency, it’s often best to begin exploring other employment opportunities.

While this is far from ideal, it can provide a greater level of employment continuity than waiting for a company to become insolvent. It can also provide some level of financial certainty and stability throughout what is otherwise a difficult period.

Are you a concerned company director, worried about insolvency?

We’ve written a specific guide to help answer the key questions you may have and to help you get support as soon as possible.

Download your free copy here.

 

 


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