With many businesses facing the dual challenges of rising costs and reduced consumer spending, employees may be concerned about the future of their roles and the stability of the company more generally. If you are a business facing financial difficulties, it is important to understand what happens to employees and the duties of both the employer and the administrator, so you can meet your legal requirements and be able to answer questions from employees.
Once a company enters administration, licensed insolvency practitioners acting as administrators will take control of the business with the aim of achieving one of the statutory purposes of administration. These include rescuing the company as a going concern, realising property to pay off creditors or achieving a better result for creditors than if the business were to be wound up (without first being in administration). There are several potential outcomes for employees:
Administration does not automatically terminate employees’ contracts. However, administrators will often make redundancies, especially if the business is unable to trade.
If staff are made redundant during the first 14 days of the administration period, they will be entitled to arrears in pay and a redundancy payment if they are eligible. Those in this category of employee will become ‘ordinary creditors,’ which essentially means that they will be last in the line to receive any money they are owed from the business.
In many cases, the administration process will not release enough funds to pay employees. If this happens, workers will be able to recover some of the amount they are owed from the National Insurance Fund (NIF), provided they made a claim against the company within six months of their dismissal. The amount that can be claimed from the NIF is capped and limited to certain categories including unpaid wages, holiday pay, statutory notice period and statutory redundancy payments.
Sometimes, employees may continue to work while the administrators are involved. If those employees remain employed past the first 14 days, the administrators will take responsibility for their employment rights. Of course, they may still be made redundant further down the line. Those employed past the first 14 days will become ‘preferential creditors’, meaning they will fare better in the hierarchy of creditors and stand a better chance of recovering any money they are owed.
Qualifying liabilities are restricted to ‘wages and salary’ including holiday pay, sick pay, payments in lieu of holiday and contributions to occupational pension schemes. Pay in lieu of notice and statutory redundancy payments will not be preferential. Other payments owed will need to be claimed under ordinary creditor status and, failing that, through the NIF.
Transfer of employment
If the company’s business is sold, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) could apply, leading to a transfer of their employment to the buyer.
TUPE protection broadly means that existing terms and conditions of employment and continuity of employment is preserved, although rules about the new employer changing terms of employment are more relaxed where the company has been in administration. It is not always clear when TUPE applies, particularly when only parts of the business are sold, or are sold to multiple buyers, and specialist advice on this should be taken.
Employees could still be made redundant following their transfer to the buyer.
For employers that are proposing to make 20 or more redundancies in a 90-day period, there will be an additional obligation on the company (or any future buyer, as applicable) to follow a minimum consultation procedure for collective redundancies. If the correct process is not followed, employees may be eligible for a protective award of up to 90 days’ pay.
Laura Tracey is an employment partner at Freeths