Employee Rights Under Insolvency – What Can you Claim?

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For many company directors, one of the biggest concerns when facing an insolvency event and/or business closure, such as voluntary liquidation, is what impact the process is likely to have on their employees. In this article, we’re going to look at employee rights and discuss statutory redundancy entitlement and other entitlements, in a creditors voluntary liquidation (CVL) scenario.

These entitlements equally apply to other insolvency events, such as a company administration and a compulsory winding up. Although employees may also be made redundant in contemplation of a members voluntary liquidation (MVL), otherwise referred to as a solvent winding up, it is common that the company (with the assistance of the Insolvency Practitioner) will settle all employee statutory entitlements directly without the need to involve government departments as set out later in this article.

If a business ceases to trade in contemplation of a creditors voluntary liquidation all contracts of employment will be terminated. Despite employment legislation requiring the employer to give employees advanced notification of redundancy, this is often not possible when the company is insolvent. In this instance, employees are likely to be made redundant without notice and advised by the Insolvency Practitioner on how to process claims for various statutory entitlements.

The Insolvency Practitioner will assist all employees in lodging claims with the Redundancy Payments Service, a government department who will pay employees in respect of their statutory entitlements.

What Can Be Claimed From The Redundancy Payments Service?

Arrears of Wages
Any unpaid wages up to and including the date of redundancy can be claimed. The claim will be at the full contractual rate of pay and can include unpaid bonuses, overtime and commissions.

The Redundancy Payments Services will cap any payments at £538 per week (correct as at 06/04/2020) and claims can only be processed for an 8 week period. Any additional arrears claim will have to be claimed as a creditor in the CVL process.

Holiday Entitlement
Employees can claim for holiday days owed that they did not take, as well as holidays taken but which they were not paid.

A calculation will be made to work out the employees’ accrued holiday entitlement from the start of the company’s holiday year to the date of redundancy (plus any carried over holiday should the employment contract permit this). A maximum of 6 weeks holiday can be claimed, again capped at £538 per week. Any additional holiday entitlement will have to be claimed as a creditor in the CVL process.

Statutory Redundancy Entitlement
Any employee who has been continuously employed by the insolvent business for 2 years or more is entitled to statutory redundancy (despite what contractual redundancy they may or may not be entitled to). Statutory redundancy is calculated based on the employee’s age and length of service (again capped at £538 per week).

  • ½ a week’s pay for each full year of employment under the age of 22
  • 1 week’s pay for each full year of employment between the ages of 22 and 40
  • 1 ½ weeks’ pay for each full year of employment aged 41 or older

An employee can claim a maximum of 20 years employment. If you would like to see what your statutory redundancy entitlement could be, you can use the government’s Statutory Redundancy Pay Calculator.

Statutory Payment In Lieu Of Notice
Every employee is entitled to a statutory notice period, regardless of what provisions are stipulated within their employment contract. Statutory notice entitlement is worked out as one week’s notice for every year of employment, up to a maximum of twelve weeks. This entitlement is again capped at £538 per week.

It is also worth noting that the Redundancy Payments Service will not process this element of the employee’s claim until their statutory notice period has actually expired. The statutory notice pay is designed to compensate an employee for loss of earnings for the specified statutory period if they are unable to obtain alternate employment. For example, if an employee has 8 years’ service they would be entitled to 8 weeks statutory notice pay. If they were able to secure new employment 2 weeks after the date of their redundancy, they would only be entitled to claim for the 2 week period in which they were unemployed.

When calculating statutory notice pay, the Redundancy Payments Service will always deduct any benefits/ Job Seekers Allowance/ Universal Credit from the notice pay that the employee was entitled to, regardless of whether or not they actually claimed it. We would therefore always advice employees to talk to the Job Centre or Citizens Advice Bureau as soon as they are made redundant to maximise any benefits claims and gain a better understanding of their employee rights.

What Other Claims Can Be Made?

Compensation For Unfair Dismissal Or Protective Awards
On some occasions, employees may lodge a claim with the Employment Tribunal, for unfair dismissal for example, as a result of the company’s failure to consult with employees regarding their redundancy. This is covered by standard employee rights and a protective award may be granted in the employees favour.

Whilst the failure to consult cannot be avoided in many instances, such as when a company enters creditors voluntary liquidation, it does not affect the employees’ ability to claim for that additional notice/consultation period. This could result in additional claims being made to the Redundancy Payments Service. Any employee wishing to lodge such a claim should take their own independent advice.

Unpaid Pension Contributions
As all employers are now obliged to operate an occupational pension scheme for employees, it is not uncommon for an Insolvency Practitioner to be notified that contributions (both employee and employer) have not been paid over to the pension scheme provider. If this occurs, the Insolvency Practitioner will work alongside the pension scheme provider to lodge an additional claim with the Redundancy Payments Service for unpaid pension contributions.

Unpaid Expenses
Unfortunately, unpaid expenses cannot be claimed from the Redundancy Payments Service. Unpaid expenses rank as an unsecured claim in the CVL and may not be repaid if there are insufficient funds in the liquidation to facilitate a dividend to creditors.

Claims Over & Above The Statutory Limits
As mentioned above, the Redundancy Payments Service will cap any claim made at £538 per week (correct as at 06/04/2020). Also, whilst the Redundancy Payments Service will process claims for statutory notice pay and redundancy pay, they will not process additional claims that may exist for contractual notice pay or contractual redundancy. These, again, will rank as an unsecured claim in the creditors voluntary liquidation process and may not be repaid if there are insufficient funds to facilitate a dividend to creditors.

How Can My Liquidation Help?

When employees are made redundant as a result of, or in contemplation of a creditors voluntary liquidation, we endeavour to guide those employees on how to lodge a claim that is then processed by the Redundancy Payments Service.

We understand that being made redundant can be both confusing and an emotionally difficult situation for people to find themselves in. This is why we will always provide those affected with a letter detailing their employee rights as well as guidance on how to lodge claims following their dismissal.

We will work with the directors to ensure that all employee details have been obtained and passed on to the Redundancy Payments Service (separately from the employee’s individual claims) to expedite the payment process.

At My Liquidation, we will ensure your employees maximise their claims with the Redundancy Payments Service. Directors are also employees and, if paid through the PAYE scheme, can also benefit from government payments. If you would like more information on how to place your company into voluntary liquidation, your employee rights, or the claims that can be made by employees and directors, please contact us.

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