Redundancy in insolvency: What happens to the employees?

The recent demise of Thomas Cook and Zenith Home improvements left the public in shock and with Thomas Cook, required a significant operation to repatriate travellers. But what happens to the employees in such a situation, when an insolvency is sudden and unexpected? Jobs may be lost at short notice, leaving employees in a potentially very difficult financial situation. The employees are technically redundant, but the employer may be in a position where it is unable to pay statutory redundancy, notice pay or even outstanding wages.

Fortunately for such employees, certain amounts owed to employees by an insolvent employer are payable out of the National Insurance Fund (NIF), subject to certain conditions being met.

The NIF can pay:

1. Unpaid wages up to a maximum overall limit of eight weeks’ pay and subject to the current maximum statutory limit on a week’s pay (£525 at present), less tax and National Insurance contributions (NICs);
2. Holiday pay taken or accrued in the 12-month period ending on the date of the insolvency, up to a maximum overall limit of six weeks’ pay and subject to the current maximum statutory limit on a week’s pay, less tax and NICs;
3. Statutory notice pay (one week per full year of employment, up to a maximum of 12 weeks) up to the current maximum statutory limit on a week’s pay, less “notional” tax and NICs. The notice pay is reduced by the “notional” tax and NICs to reflect the fact that the employee would receive the net amount had it been paid directly by the employer. There is no actual deduction of tax and NICs that is paid to HM Revenue & Customs (HMRC). However, the employee is required to mitigate their loss by trying to find alternative employment and if they do so, then the notice pay can be reduced by the amount of actual pay they receive in the new role;
4. Statutory redundancy payment (broadly one week per full year of employment, depending on the employee’s age, up to a maximum of 20 years and subject to the current maximum statutory limit on a week’s pay) less any amount paid by the employer. Only employees with more than two years’ continuous service are entitled to a statutory redundancy payment;
5. A protective award where the employer has failed to inform and consult the employees’ representatives when proposing to make 20 or more redundancies.

In addition, HMRC becomes responsible for unpaid statutory sick pay, statutory maternity pay, statutory paternity pay, statutory adoption pay and statutory shared parental pay from the date of the formal insolvency.

The conditions for payment are that:

1. An individual must be an employee of an insolvent employer;
2. The employee’s contract of employment must have been terminated;
3. On the “appropriate date” (the date when the employer became insolvent for unpaid wages and holiday pay; the later of the date when the employer became insolvent, the date when employment terminated or the date on which the award was made in relation to a protective award; and the later of the date on which the employer became insolvent and the date of termination of employment in relation to any other payment), the employee must have been entitled to be paid a “relevant debt” (one of the payments identified above);
4. The employee obtains a lifting of the automatic stay on proceedings in administrations and compulsory liquidations to claim a protective award and the claim must be established by an employment tribunal;
5. No payment will be paid out of the NIF unless the Secretary of State has received a statement from the relevant insolvency practitioner of the amount of the debt in question (except where the Secretary of State decides that no such statement is required);
6. In relation to a statutory redundancy payment, the employee must also show that their employer is liable to pay them an “employer’s payment” (broadly, a statutory redundancy payment or equivalent payment) and that one of the following applies:
   1. the employer is insolvent and the whole or part of the payment remains unpaid;
   2. the employer is not insolvent but the employee has taken all reasonable steps (but not necessarily legal proceedings) to obtain payment from the employer.

This will bring relief to employees who have concerns about ending up in such a situation, but where the insolvency involves a considerable number of employees, the liability to make such payments could have a significant impact upon the National Insurance Fund (which is also responsible for state pension and other government benefits).

Carla Gowing is an experienced Employment Solicitor who is able to advise employees regarding their particular circumstances. Call 01603 660 811 or email [email protected]