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“Take care of your employees and they’ll take care of your business.” 

Richard Branson’s popular quote on employee engagement and well-being is a mantra I believe many directors echo. But what happens when you can no longer take care of your employees because your company is insolvent?

Regardless of the reasons why the company is now in an insolvent position – a matter which becomes the duty of an appointed liquidator to investigate – it is important to consider your employees’ circumstances as much as the business.

Reality

It is likely that some employees will already be aware of the impending news, or perhaps rumours have started about the financial state or management of the Company. This does not, however, prepare them for the reality that is losing their job. As an employer you must give notice to employees that you are terminating their employment. How much notice you give is dependent on the terms of your employment contracts and whether the Company can continue to trade for that duration. 

Where liquidation is imminent, it is unlikely that employees will be given their full notice entitlement, if any at all. Employees may become angry or upset at the news and this is where a good Insolvency Practitioner can assist directors to calm the situation and explain clearly the steps required.

Employees will have questions about what entitlements they can claim and when they may expect to receive these. In practice, this is usually discussed as part of an initial meeting with the employees and later summarised in writing. 

Employees may also question how they are going to meet their mortgages, bills and other payments in the interim. Fortunately, banks and creditors are not blind to this issue and many will grant holiday periods in order to allow entitlement to be received.

Depending on the size and nature of the business, many IP firms will also bring in HR specialists to assist employees with making claims there and then. Similarly, representatives from a local Job Centre Plus may be asked to be in attendance, who can assist employees with planning their next career steps.

Employee claims 

Fortunately, where companies go into a formal insolvency process, the RPO steps in as a ‘safety net’ to meet certain employee claims.

Employees must now complete an online form (previously known as a RP1 form) and submit it to the Redundancy Payments Office. The following can be claimed from the RPO which is capped at £508 per week (at the time of writing this article):

1. Unpaid wages – up to eight weeks

2. Holiday pay – up to six weeks accrued, but not taken

3. Compensation in lieu of notice – as per statutory minimum (see below)

4. Redundancy pay – calculated by reference to age and length of service only employees who have been employed continuously for a 2 year period (see below)

Up to 12 months outstanding pension contributions may also be claimed from the RPO.

Notice pay is essentially compensation for the employer not giving you the statutory required duration and are as follows:

• 1 week – continuous employment more than 1 calendar months but less than 2 years

• 1 week – for each year of continuous employment for more than 2 years and less than 12 years

• 12 weeks – where continuously employed for 12 or more years

To claim notice pay, the RPO will forward employees an RP2 form at the expiry of their notice period which will ask employees to disclose what earnings and benefits they have received in the notice period. As notice pay is compensatory, the employee will lose their entitlement if they gain employment within their notice period and earn the same or more than they did with the insolvent company.

To be entitled to redundancy, employees must have been continuously employed for 2 years and is again dependent on length of service and age. The schedule of entitlement is set out below:

• ½ weeks’ pay – for every year of service where employee is 18-21 years old

• 1 weeks’ pay – for every year of service where employee is 22-40 years old

• 1 ½ weeks’ pay – for every year of service where employee is 41-65 years old

There is a maximum of 20 years’ service for redundancy calculations.  

Directors

Directors who can meet certain criteria may also be able to claim entitlements similar to those claimed by the employees of a company.

To be eligible, directors will have to prove their status as an employee. An additional form (RP3) is required to be completed and will ask for such details as contracts of employment, day to day responsibilities, hours worked and whether s/he was paid through PAYE. If enough criteria is met, directors will often find themselves being entitled to a compensatory pay-out also.

We understand that placing a company into Liquidation and dismissing employees is a difficult decision Thomas Westcott Business Recovery LLP have many years of experience in these situations and can provide empathetic professional support at times when it is most needed. Please do not hesitate to contact one of the members of the Business Recovery & Insolvency team on 01392 288555 if you wish to discuss the Liquidation process or employee claims further. 

 

By Laura Tudor, Insolvency Administrator