Learning that an employer is insolvent is bound to cause significant worry amongst affected employees, who will undoubtedly have questions about unpaid wages. However, there are special arrangements in place to safeguard employees’ rights and entitlements. Kate Palmer, associate director at Peninsula sets out the basics for employees of insolvent companies.

Different types of insolvency processes

Insolvency occurs when the employer is unable to pay its debts when they fall due or their liabilities exceed their assets. The most common forms of insolvency processes are:

• Administration: this is traditionally a process to rescue the company as a ‘going’ concern
• Liquidation: this is terminal - the company is closed and its assets are sold to pay its creditors
• Administrative receivership: instigated by single creditor (often a bank) and the company’s assets are sold to pay this creditor
• Bankruptcy: this only applies to an individual, not to partnerships or limited companies

What are the consequences of company insolvency on the employee?

The rights of the employees will usually depend on the specific form of the insolvency regime and the consequences of company insolvency can vary. Here are just some of the most common consequences:

• The employer makes the employee redundant

This usually occurs when the company enters liquidation. An employee can apply to the National Insurance Fund for unpaid wages and other payments via the gov.uk website. Employees can also make a claim to the employment tribunal if they were dismissed unfairly (‘basic award’) or if there was not a consultation about their redundancy (‘protective award’).

• The employer asks the employee to continue working after entering an insolvency process

Should an employee continue working after a company enters an insolvency process, they will still be eligible to claim for redundancy pay if they’re made redundant at a later date (subject to meeting the two years’ service qualification) via the gov.uk website. However, they will not be able to claim holiday pay, wages, bonuses or commission that they’re owed between the day the company enters insolvency process and the day they were dismissed.

• The employee is transferred to a new employer

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect employees if the company they work for changes hands. TUPE will apply to insolvent companies that are taken over by another employer, including where the company is sold as a ‘going concern’ by administrators. The new employer (transferee) will take on all the liabilities, including employment protection under TUPE, of the insolvent employer (transferor).

The new employer or insolvency practitioner can reduce employees’ pay or change their terms and conditions if this will prevent job losses. There are consultation obligations and all such changes must be agreed with employee or trade union representatives. Post-transfer dismissals may be unfair.

TUPE’s principle of automatic transfer does not apply in liquidation.

What is an employee entitled to?

If the employer is in an insolvency process, the Government steps in to pay through the National Insurance Fund. All payments are capped at £525 per week. An employee (but not the self-employed or agency workers) will be able to claim:

• Wage arrears: up to 8 weeks’ wages
• Holiday pay: up to 6 weeks’ holiday pay
• Notice pay: an employee must be given the notice period stated in their contract or the statutory minimum notice period, whichever is longer
• Redundancy payments: these are calculated by the length of the employees’ service, their salary (subject to the cap) and their age up to a maximum of 20 years’ employment

In addition, the Government advises employees to contact the insolvency practitioner about unpaid pension contributions.

About the author

Kate Palmer is associate director at Peninsula, a team of HR, employment law, and health and safety experts.

See also

Company insolvency statistics – Q2 2019

Greater protection for staff and small suppliers in insolvent businesses

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Your rights if your employer is insolvent (Gov)

BEIS/The Insolvency Service – new powers to protect staff and small suppliers (Gov)

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