If your employer becomes insolvent, you have several legal rights, depending on whether:
- You are made redundant
- You keep your job
- The business you work for has been sold
The UK Government may be able to pay you:
- Redundancy payment
- Holiday pay
- Outstanding payments like unpaid wages, overtime, and commission
- The money you would have earned working your notice period (‘statutory notice pay’)
In this article, we deep dive into your rights in all the above situations. We understand you will be worried and upset. Being armed with knowledge of your legal rights will help ensure you get all the payments you are entitled to if your employer becomes insolvent.
What is Employer Insolvency?
Insolvency occurs when a person or business cannot pay its debts when they are due. When an employer’s business falls into financial difficulty, they become an insolvent employer
There are several different types of employer/company insolvency:
Administration
Administration is where a company voluntarily or by a Court Order appoints an Insolvency Practitioner to take control of the organisation's assets. Whilst a company is in administration, creditors cannot take any action to enforce their claims. The goal of administration is to:
- restructure the business so it can trade its way back to solvency, and
- satisfy the company’s debts as far as possible.
Liquidation
Liquidation (also known as winding up) is where a company's assets are sold and the proceeds distributed to its creditors in accordance with the order of priority set out in the Insolvency Act (IA) 1986. A business can choose to go into liquidation voluntarily, or the Court can order it to enter compulsory liquidation.
Receivership
Receivership is where a secured creditor, usually a bank or other lending institution, appoints a Receiver to liquidate a company's assets to pay the money owed to the secured creditor.
Company Voluntary Arrangement (CVA)
A CVA is a compromise or arrangement, governed by an Insolvency Practitioner, made between a company or LLP and its creditors, allowing the company to pay off all or part of its debts over an agreed period.
Will I Lose My Job If My Employer Becomes Insolvent?
If you have an employment contract, the question of whether your employer’s insolvency ends your employment depends on the type of insolvency. In the case of compulsory liquidation or receivership, employment contracts are automatically terminated from the date the Winding Up Order was published.
Where an employer has gone into voluntary liquidation, employees will not immediately lose their jobs. However, once the winding-up petition is commenced, the liquidator is likely to end all employment contracts.
Administration is another type of insolvency where employment contracts do not immediately terminate. This is because an Administrator’s job is to rescue the company as a going concern. As such, they are an agent of the company, and their appointment does not result in a change of employer.
Where an Administrative Receiver is appointed, employees will not automatically lose their jobs unless one of the following exceptions identified in Griffiths v Secretary of State for Social Services (1974) applies:
- The appointment results in the immediate sale of the business (except where the sale to a purchaser constitutes a relevant transfer under TUPE and the employee's employment transfers to the purchaser).
- Where, simultaneously or soon after the appointment, the Administrative Receiver and employees enter into a new employment contract which conflicts with the old agreement.
- Where the continuation of the employment of a particular employee would be inconsistent with the role and functions of the Administrative Receiver.
In most cases, employees will retain their jobs if a CVA is entered into, as the object of a CVA is to allow the company to continue to trade, so creditors can be paid the amount agreed.
What If I am Made Redundant Because My Employer Has Become Insolvent?
Even if you do not lose your job automatically (see above), an insolvent employer will likely restructure or sell part or all of the business to reduce overheads and/or acquire capital to pay creditors. This may lead to you being made redundant. If this happens, you will be entitled to statutory redundancy pay if you have worked for your employer for two or more years.
Your statutory redundancy payments will amount to the following:
- Half a week’s pay for each full year you were employed and under 22 years old.
- One week’s pay for each full year you were employed and between 22 and 40 years old.
- One and a half weeks’ pay for each full year you were employed and 41 or older
Redundancy payments are capped at £719 a week, and you can get a payment for a maximum of 20 years that you were employed at the business.
If My Employer is Insolvent, What Happens to My Pay?
The National Insurance Fund (NIF) is a government-backed fund designed to reimburse certain payments if the insolvent employer cannot fund them.
The NIF can pay out:
- Any unpaid salary or benefits.
- Holiday pay.
- Outstanding payments like unpaid wages, overtime, and commission.
- Money you would have earned working your notice period (‘statutory notice pay’).
- Statutory redundancy pay (see above).
- Unpaid statutory sick pay.
To get a payment from the NIF, your employment must be terminated or the business you work for must have been sold, and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply. You will need to fill out the online form RP1.
What Happens If the Insolvent Business is Sold as a Growing Concern?
TUPE protects the rights of employees and workers when a business is transferred to a new employer. Under TUPE, the employment contracts of workers automatically transfer to the transferee with the same terms and conditions.
Where a business is transferred due to insolvency, in case where the insolvency proceedings are not with a view to liquidation of the assets of the employer’s business, for example administration, under regulation 8(6), TUPE will apply, however, the new employer (the transferee) will have greater flexibility when it comes to changing the terms and conditions under your existing employment contract than they would have done if your employer was not insolvent when they transferred their business.
Under regulation 8(7), if your employer has been made bankrupt or the assets of the company are being liquidated, TUPE provisions will not apply to the transfer of the business, and if you are dismissed because of the transfer, your dismissal will not be automatically unfair.
How We Can Help
If your employer is facing insolvency or has become insolvent, we can offer you clear, practical legal advice on your legal rights. Contact us on 0330 173 6983 or send us an email for more information.
