Workers’ rights on insolvency
Iain Birrell explains the rights of employees and what they should do if their employer goes into insolvency
Insolvency comes suddenly and unannounced. All too frequently the first that employees know is when the gates are locked against them, or the administrator starts handing out paperwork. So what, if anything, can workers do about it?
Limitations of insolvency law
In the UK the purpose behind insolvency arrangements is to free the indebted from debt, not to ensure that creditors are paid. Companies and partnerships with limited liability can cap pay-outs (precisely because their liability is limited), leaving staff and other creditors to fight over any money that is left after the government and the liquidator have been paid. Even the Transfer of Undertakings (Protection of Employment) Regulations 2006 free the transferee from the wound-up company’s liabilities.
Although individuals and groups of employees have certain rights, these are frozen on insolvency and workers cannot issue proceedings without the consent of either the court or the administrator. This measure, known as the ‘moratorium’, is designed to give debtors some breathing space, but is an additional impediment for staff with bills to pay and mouths to feed.
Employees can make a claim to the Redundancy Payments Office (RPO), but payments are limited in nature and employees have to recoup any outstanding balance through the insolvency process (which involves filling in the RP1 form, sending it to the RPO and then waiting). Creditors can also go after partners who have unlimited liability and that includes personal assets such as their house and car.
Employees who are owed wages by their employer have to make a claim through the courts as a breach of contract, or the tribunal system as a breach of contract or unlawful deduction from wages claim. Getting a judgement in their favour is just the first step, however, as it still has to be enforced.
Employees can also recover maternity and sick pay from their employer or Her Majesty’s Revenue and Customs or the Department for Work and Pensions respectively.
Statutory redundancy payment
Shutting a workplace down automatically creates a redundancy situation, although to qualify for redundancy pay, employees need two years’ service. If the dismissal occurs out of the blue and without due process, it will also be unfair. The employee is likely to be owed holiday, wages, notice pay and other sums (which require one year’s service).
Employees have a minimum statutory notice entitlement of one week’s pay for every complete year worked, up to a maximum of 12, although sometimes contracts allow for a longer notice period. Since employees are frequently dismissed without full notice on insolvency, this entitlement may need to be enforced as a wrongful dismissal (breach of contract) claim. The statutory element can be claimed from the RPO but any contractual excess must be claimed through the insolvency process itself.
Under the 1998 Working Time Regulations, workers are entitled to a lump sum payment for holiday accrued until their dismissal, but which they did not take. There is no equivalent right for holiday that accrues outside that regime, unless the contract of employment allows for it.
Failure to consult (the protective award)
When an employer proposes to dismiss as redundant 20 or more staff within 90 days they are under a duty to consult with them or their representatives. They cannot get round this even if the insolvency is very sudden. If they don’t consult, the employer will be liable to pay each affected employee compensation of up to 90 days’ pay.
If there is a recognised union at the workplace, then the employer also has to consult with the trade union. If they don’t, then the union can bring a claim for a protective award. Once an award has been made, the individual employee has to lodge a tribunal claim in their own name in order to enforce it. Payment can then be claimed through the RPO and the insolvency arrangements.
If there is no recognised trade union, however, the employer has to set up representative bodies and then consult with them.
The statutory safety-net operated by the RPO is perhaps the most immediately useful procedure available to an employee. Funded by National Insurance contributions, this is a no-fault compensation system that is accessed by completing a form called the RP1.
The RPO’s regime is however limited in scope, and does not provide a complete solution. Firstly the company must actually be in a recognised insolvency situation which the RPO defines as being one where:
• there is a court winding-up order
• there is an administration order
• a resolution has been passed for its voluntary winding up due to insolvency
• a voluntary arrangement has been made with creditors
• a receiver or manager has been appointed over the company's undertaking, or has taken possession of property secured by a floating charge under a debenture (England and Wales only).
For employers who are individuals the RPO requires:
• a voluntary arrangement with creditors, or
• the death of the employer and the administration of their estate under the Insolvency Act 1986.
The second major restriction is that the RPO caps the amounts that it pays out, as follows:
• wages: up to eight weeks
• holiday pay: up to six weeks
• statutory notice: in full
• statutory redundancy payment: in full
• unfair dismissal basic award: in full
• protective award: treated as wages
The RPO also places a maximum amount on the weekly sum that it will pay out, and deducts notional amounts for tax and National Insurance. The current maximum weekly rate (as of 1 February 2009) is £350. As more than half the working population earn more than the weekly maximum, most lose out.
Since the RPO treats the protective award as wages, two key consequences follow: firstly only the first 56 days of any award can ever be paid out; and secondly any payout will be further reduced by the amount of any wages already paid out under the scheme.
Phoenix companies and continuous employment
Some directors escape their debts by placing the company into insolvency, buying the business back from the receivers and then setting up shop again. Often this is in the same place, with the same assets and the same staff. These are known as phoenix companies as they rise from the ashes to operate “business as usual”. Unscrupulous employers can (and do) do this repeatedly.
When looking at entitlement to claim unfair dismissal, or a statutory redundancy payment in these circumstances, the issue of continuous employment is key. Most breaks from employment will be fatal to this concept but where there is a “temporary cessation of work” the gap does not count.
In the recent EAT decision of Da Silva -v- Composite Mouldings and Design Ltd (see weekly LELR 100) the claimant was employed by a company that became insolvent, entered liquidation, and then rose again as a phoenix company. He was then rehired by the director who was the majority shareholder and therefore had control of both companies. Some months down the line he was dismissed but the Employment Appeal Tribunal held that his continuous employment was preserved and that he had been employed long enough to bring various claims to an employment tribunal.
If a company has limited liability, employees are very unlikely to recover everything that is owed to them. They can try claiming the money from the directors themselves but this only applies if they have traded fraudulently, or in full knowledge that they could not pay their debts (also known as wrongful trading).
In those circumstances the courts might be persuaded to allow creditors to seek payment from the directors. This though is a difficult, expensive and slow process and one that is rarely recommended as a viable route to redress.
Sources of information
Trade union members can ask their union for information about whether their employer is insolvent. They can also find out about who the liquidator is from the Companies House website (wck2.companieshouse.gov.uk). The liquidators themselves may also be a good source of information, as is BERR’s website (www.berr.gov.uk).