If your company goes into administration you will need to know about the rights of your employees and your liability for any outstanding monies owed to them on termination or transfer of their employment. It is also important that your employees know exactly where they stand with regard to their pay, pension and workplace rights, and what they may be entitled to if they are made redundant.
Employees must be kept informed of the plans and potential timescales for the company during the period of administration, as well as given advice on their rights and entitlements. This should help employees to plan ahead, alleviate immediate concerns and improve overall staff morale.
In this guide for employers, we explain the rights of your employees if the company is facing administration.
Company in administration employee rights: retention or redundancy?
If your company is going into administration, this means that your company has become insolvent. An employing company is said to be insolvent when it has insufficient assets to meet all its debts, or is unable to pay its debts as and when they fall due.
Once in administration, the daily control and management of your company will pass from the directors to the appointed administrator – a licensed insolvency practitioner – with the aim of resolving the financial situation.
During the period of administration, the company is protected from legal action brought by creditors, providing the administrator and company directors with the necessary time and breathing space to formulate a rescue plan.
The primary objective of any administration is to rescue a still viable company through financial restructuring so that it can continue trading, typically by either entering into a Company Voluntary Arrangement (CVA) with the company’s creditors – which may or may not affect employee’s jobs depending on how the company is to be restructured – or by selling part or all of the company as a going concern, thereby helping to preserve the retention of staff.
If these options prove to be impossible, an appointed insolvency practitioner can instead liquidate the company, selling off its’ assets to recoup as much money as possible to pay off creditors or, alternatively, elect to close the company where there are no assets to sell, signifying the end of the business with the dismissal of all members of staff by reason of redundancy.
In essence, this means that the rights of your employees will largely depend upon the plans for the administration, including if an employee is:
- Made redundant (staff redundancy)
- Asked to keep working (staff retention)
- Transferred to a new employer on the sale of the business (staff transfer)
Redundancy due to insolvency
Employment contracts do not automatically terminate when a company enters into administration. This is because the administrator is regarded as an agent of the company, there to promote, if at all possible, the rescue of the company as a going concern. Further, going into administration does not necessarily mean that your employees will be dismissed, either immediately or at all.
However, where redundancies are inevitable, an employee’s rights will depend on whether or not they are dismissed in the first 14 days. This is because the administrator will be deemed to take responsibility for their rights in employment after the initial two weeks of administration, adopting any existing employee contracts, until such time as the business is sold on or liquidated.
Those employees who retain their jobs within this timescale will stand a far better chance of recouping any payroll arrears – where they will acquire ‘preferential creditor status’ – thereby placing them higher up the hierarchy of creditors, below secured creditors but ahead of creditors with floating charges and all other unsecured creditors.
Payments to employees as preferential creditors
Even though an employee with preferential creditor status could still face redundancy, this means that any monies owed to them must be paid through the proceeds of the company’s assets ahead of several other creditors. However, whether your employees will recover all that is owed to them will primarily depend on the value of the assets still owned by your insolvent company.
Further, only certain “qualifying liabilities” arising out of the employment contract have super-priority in this context, with claims limited to:
- Any arrears of wages, including any commission, overtime or contractual bonuses, for work done in the four months before the date of the insolvency order, up to a maximum of £800 in total
- Accrued holiday pay of up to 6 weeks, uncapped
- Pay in lieu of notice and redundancy pay, where the amounts due will usually be defined in an employee’s contract of employment
- Unpaid contributions to occupational pension schemes and state premium pensions, all within certain limits.
The protection afforded under preferential creditor status does not always cover all the money that an employee may be owed, where anything over and above these payment limits must instead be claimed under ‘ordinary unsecured creditor’ status from money generated by the sale of any assets. This also applies to any claim by employees who are ‘non-preferential unsecured creditors’.
Payments to employees as unsecured creditors
If there are insufficient funds to meet employee claims as ordinary unsecured creditors, including any shortfall in claims for preferential creditors, there are special government funding arrangements in place that guarantee a basic minimum payment from the NIF (National Insurance Fund).
The NIF is operated and managed by the Redundancy Payments Service, to whom employees make their application for repayment. The appointed administrator will provide employees with a case reference number, known as a CN number, to enable them to apply.
This scheme means that if your company has been declared insolvent, and you cannot or refuse to pay an employee what they are owed, as long as they have already made an unsuccessful claim from your company within 6 months of their dismissal, they can apply to the NIF for a direct payment for the following:
- Unpaid statutory redundancy pay
- Arrears of pay or other outstanding money
- Accrued or arrears of holiday pay
- Statutory notice pay
- Unpaid pension contributions
- An unpaid basic award for unfair dismissal
All guaranteed payments through the NIF are subject to legal limits in both the period that they can be paid and the maximum weekly amount, currently £538 per week (6 April 2020). Each of these payments is considered in turn below.
Unpaid statutory redundancy pay
In order to qualify for a statutory redundancy payment, the employee must have been dismissed by reason of redundancy and have two years’ continuous employment with you. The way in which the redundancy payment is calculated will depend on both the employee’s length of service and their age bracket:
- 0.5 week’s pay for each full year they were employed under 22 years old
- 1 week’s pay for each full year they were employed between 22 and 40
- 1.5 week’s pay for each full year they were employed and 41 or older
The redundancy payment is capped at 20 years, with a maximum applicable amount set each year by the government. For redundancies on or after 6 April 2023, weekly pay is capped at £643 and the maximum statutory redundancy pay is set at £19,290.
It is worth noting, that if a redundancy payment is being funded via the NIF, then employees will be limited to a claim at the statutory redundancy level, rather than for any enhanced contractual redundancy entitlement.
Arrears of pay or other outstanding money
In addition to any redundancy pay, affected employees can claim payment for up to 8 weeks of unpaid wages and any other money owed, such as overtime, bonuses and commission. However, any arrears of statutory payments, such as sick pay and maternity and paternity or adoption pay are not claimed through the NIF, but instead may be covered by HM Revenue & Customs.
Accrued or arrears of holiday pay
Employees will also be entitled to claim for unused holiday days, as well as for holiday days actually taken but not paid. An employee can receive up to 6 weeks accrued holiday, and can include holiday carried over from the previous year if the contract of employment allows this.
Statutory notice pay
Where there is no contractual provision for a period of notice on termination of employment, your employees will still be entitled to a minimum paid statutory notice period, even where they are not required to work their notice.
The statutory notice period depends on how long your employee has worked for you. This is calculated as one week’s notice where they have worked for you for between one month and two years, and two week’s notice – with an extra week for each year worked – up to a maximum of 12 weeks.
The employee will be sent a separate LN reference number, having indicated on their primary application for a redundancy payment, unpaid wages and holiday that they also wish to claim for notice pay. This must be applied for separately.
Unpaid pension contributions
The trustees of an occupational pension scheme or personal pension scheme may apply in writing claiming that an insolvent employer has failed to pay pension contributions into the scheme – either on their own account or on behalf of the employee if deducted from the employee’s pay – during the 12 months preceding the date on which the employer became insolvent.
An unpaid basic award for unfair dismissal
Finally, where an employee is unfairly dismissed by reason of redundancy, for example, where a fair selection or consultation process was not followed, they may be entitled to lodge a claim for unfair dismissal.
If successful, the employee can claim an unpaid basic award of compensation made by an employment tribunal. They may also be eligible to claim a redundancy protective award where the appointed administrator, as your agent, has failed to consult with your employees in accordance with the strict statutory requirements for collective consultation in the context of large-scale redundancies, ie; of more than 20 employees from a single company.
However, this remains subject to a cap of 8 weeks where an employee cannot get a payment for a protective award and arrears of pay for the same time period. If they have already received money for their arrears of pay claim, this amount will be deducted from their protective award payment.
Staff retention following administration
During the period of administration, where an employee is required to keep working, even in the short-term, their standard employment rights will remain the same. Such rights include not being paid less than the minimum wage, working hours and rest breaks as prescribed under the working time directive, statutory holiday entitlement and parental rights.
The administrator will become responsible for employee rights after the initial two weeks of administration has passed. Whilst employee rights must remain intact from this point onwards, the administrator can ask employees to take a pay cut or defer a portion of their pay to help the business survive.
The administrator will remain responsible for your employees’ rights until the business is sold on, closed down or taken out of administration.
Staff transfer following insolvency
If your business is to be sold as a going concern, employment contracts may be transferred to the new buyer, with employees’ rights protected under rules that apply to the transfer of undertakings (TUPE).
As long as your company is sold out of administration – for example, using a pre-pack administration where a sale agreement is reached with a buyer prior to the appointment of an administrator to facilitate the sale – the TUPE provisions mean that the new owners are required to transfer the contracts of employment of all existing employees over to the new business.
The existing terms and conditions of employment contracts cannot be changed. This includes rate of pay, working hours and holiday entitlement. The new employer will also become responsible for outstanding payments that may be owed to employees.
The original start date for employees will also remain the same, such that if they face redundancy in the future they will retain their continuation of service to enable them to claim a redundancy payment having accrued a total of two years.
DavidsonMorris’ employment lawyers can help with all aspects of workforce management and reorganisations, including redundancies, dismissals, settlements and contentious exits relating to company insolvency. Working closely with our specialists in HR, we provide comprehensive advice on the options open to you as an employer and practical support through the process. For help and advice with a specific issue, speak to our experts.
Employee rights on company administration FAQs
What are employee rights when a company is in administration?
If a company is liquidated, its employees will be made redundant and may be entitled to claim redundancy pay and other statutory benefits.
What happens to employees if a company goes into administration?
Employee rights will depend on whether the company is sold as a going concern, in which case their employment may be transferred to the new employer. If the company goes into liquidation, its staff will be made redundant.
Do employees get redundancy pay if company goes into administration?
Eligible employees are entitled to claim redundancy pay, and other applicable benefits, if they are made redundant due to company liquidation.
Last updated: 13 June 2023