Charlotte Bloomfield explains what rights employees have when a company enters administration.
In the wake of ISG’s collapse, the rights of employees in circumstances where a company is insolvent are top of mind for many. When the firm went into administration in September, more than 2,000 people were made redundant with immediate effect.
So, what rights do employees have in such situations, and what can be done to mitigate the impact on them?
What is happening at the company?
When a contractor like ISG finds itself in financial difficulties, the perception is often that the employees are forgotten. In reality, the company’s directors have a lot of competing concerns: from whether they (or an insolvency practitioner) will be able to rescue the company or any parts of it – and if they will need to sell off parts to a buyer that can keep it going – to what type of insolvency event will happen (administration or liquidation), and whether they might be personally liable for breaching their director’s duties.
All this while continuing to run the company and keeping the situation confidential, because as soon as the news that it is struggling becomes public knowledge, confidence in the business will collapse, the workforce could leave en masse and customer confidence will plummet, making it significantly less likely that any part of the company can be rescued.
Suffice to say, there is a lot going on in the background when a company is facing insolvency. Everything moves very quickly, with cashflow forecasts prepared daily to determine what the company can or cannot pay.
What happens to the employees?
If a company is placed into administration, employees will not automatically be dismissed – there are a few different things that can happen. This will broadly depend on what happens to the company itself:
- some employees might be asked to keep working, particularly if part of the business can be kept going for any amount of time;
- if the business (or part of it) is sold, employees might be transferred to a new employer. This is called a TUPE transfer (under the Transfer of Undertakings (Protection of Employment) Regulations) and means that employees keep their jobs and are employed by the purchaser;
- if the company is shut down, employees will be made redundant.
The insolvency practitioner will tell employees how their jobs are going to be affected and what to do next. They will usually have people on hand to help employees fill out the relevant forms and to offer information about their rights and what money they can claim.
What rights do employees have if they are made redundant?
If employees are made redundant because a company is insolvent, they might not have been paid in the run-up to the insolvency.
If the company is wound up, once other debts have been paid, there is unlikely to be much – if any – money left to pay employees and it is likely to take some time before the process is completed.
However, if the employees are made redundant with outstanding pay they can apply to the government for money they are owed. The National Insurance Fund will pay:
- statutory redundancy pay for employees employed by the company for two years or more;
- up to eight weeks of wages or other money owed (for example, contractual bonuses, overtime and commission), capped at £700 per week;
- holiday that has accrued but not been taken, or taken but not been paid for; and
- statutory notice pay (again, capped at £700 per week).
What about staff on maternity or sick leave?
Unfortunately, due to the speed with which such situations develop, on occasion some people may be inadvertently forgotten. More often than not, these are the people who might need the most support, such as those on maternity leave or other family leave, people on long-term sick leave, and people who are out of the business for another reason (sometimes even those who are simply on holiday).
Those on maternity, paternity or adoption leave when their employer becomes insolvent can contact HMRC, which will pay a statutory amount. Anyone expecting to receive an enhanced package will only receive statutory pay.
People on skilled worker visas
Another complex situation concerns individuals employed on skilled worker visas. Their visa, and thus their right to reside in the UK, is linked to their sponsor – i.e. their employer. As their authorisation to work in the UK terminates on the final day of employment, they potentially face the cancellation of their visa. If they are made redundant, they not only lose their job and income, but may also need to leave the country, along with any dependants.
Ultimately, nobody wants to find themselves in an insolvency situation. The best-case scenario involves clear and upfront communication with employees about what is happening, why, what rights they have and how they access support and payment of any sums due.
Good legal advice and experienced insolvency practitioners help ensure everyone is considered, even if they are not present. However, the most vulnerable often suffer the most in situations like ISG’s.
Charlotte Bloomfield is a partner at Womble Bond Dickinson‘s employment practice.
