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Insolvency, Employees and what HR needs to know

Keely Rushmore and Nathanael Young
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In recent months, a number of high profile insolvencies have hit the headlines, and there seems no sign of these abating.  In each case, news coverage has often focused on the job losses that are likely to follow the insolvency. However, the actual effect of insolvency on jobs is complex. Contributor Keely Rushmore, Senior Associate in the Employment Department & Nathanael Young, Senior Associate in the Commercial Litigation & Dispute Resolution Team – SA Law.

There are actually different forms of insolvency. If a company goes into liquidation, employees have little legal protection as its business will shut down and the employees will lose their jobs.  If a buyer is subsequently found for the business (or part of it) The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will not apply to transfer their employment, and so the purchaser has flexibility over which employees (if any) it takes on and the terms and conditions it offers.

If, however, a company goes into administration, the position is more complicated.  This is because administration is much more flexible.  Although the statutory purpose includes rescuing the company as a going concern, this often proves impossible.  In that case, administration will involve an attempt to sell the business or parts of the business, although if that fails, it will also result in the business being shut down. There can also be pre-pack administrations, which involve the business being sold to a pre-arranged buyer.

In an administration scenario, it is therefore not necessarily the case that all employees will lose their jobs.  The administrators may wish to keep staff on while they restructure or arrange a sale, and buyers of part or all of the business may take on the old employees themselves.

If the administrators sell all or part of the business TUPE may apply (and will apply in the case of a pre-pack administration).  The effect of this is that the employment of the employees assigned to the business (or part of a business) will transfer to the new owner on their existing terms and conditions.   Both buyer and seller have obligations to inform and consult with employee representatives with regard to the transfer, including in relation to any proposed “measures” (for example, a restructure and/or redundancies).  Failing to comply with these obligations can lead to a protective award of 13 weeks’ pay per employee.

There are, however, some key differences between TUPE in an administration scenario and TUPE in a “normal” business sale scenario, with a view to assisting buyers and, hopefully, saving jobs.  In particular, liability for any outstanding sums due to the employees does not transfer to the new buyer as would usually be the case in a TUPE scenario.  Instead, employees can claim these sums from the National Insurance Fund (“NIF”), subject to current weekly limits.  This includes up to 8 weeks’ wages, 6 weeks of holiday pay, statutory notice (if an employee has worked out their notice period but has not been paid) and outstanding contributions to a workplace pension.  The buyer will, however, inherit responsibility for any payments due to the employees in excess of what can be claimed.

In addition, a buyer’s ability to vary contracts of employment is relaxed in comparison with a standard TUPE scenario, enabling “permitted variations” to be agreed with appropriate employee representatives provided that the buyer can evidence that the variations are designed to safeguard employment opportunities by ensuring the survival of the transferring business.

Dismissals are still possible in a TUPE scenario, but the buyer must show that there is an economical, technical or organisational reason entailing changes in the workforce (“an ETO reason”).  A restructure will often provide the buyer with an ETO reason, but to avoid a successful unfair dismissal claim it must still follow a fair process prior to dismissal, including appropriate consultation.

Where employees are kept on by administrators, they will often continue to be paid. However, employees who lose their jobs will usually have either unpaid wages or claims for payment in lieu of notice. Sometimes they will also be entitled to claim redundancy payments. However, given insolvent businesses do not have enough money to pay their creditors, having a claim is not the same as being paid out in relation to that claim.

In most cases, the best option for the employee is to claim from the NIF, subject to the limits referred to above. However, to the extent there are claims that exceed the amounts paid by the NIF, the employee’s position is more precarious.

For these sums, employees will need to submit a claim to the liquidator or administrator. Most employees will rank alongside unsecured trade creditors, which means they will usually receive only a fraction of their claim, if anything at all, normally after a long delay.  However, there are some situations in which employees are treated as preferential creditors (normally where they are retained past the first 14 days of the administrators being appointed), and have a better chance of being paid a substantial proportion of their claim, if not all of it.

Any form of insolvency proceedings is a difficult prospect for employees, but depending upon the type of proceedings they still have a certain amount of protection in respect of monies owed to them and their future employment.   Employers can play an important part in helping employees to understand their position and what they are entitled to do and to receive.


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