Understanding your employee rights in insolvency can help you feel more confident about how this could impact your current and future employment prospects. This article will cover the rights of an employee if a company becomes insolvent.
What is Insolvency?
Insolvency occurs when a company is not bringing in enough revenue to match the debts it has accrued. It can take the following forms:
- Administration
- Company voluntary arrangement (CVA)
- Receivership
- Liquidation
When insolvency occurs, many employees are left wondering whether they will face redundancy and whether they can claim under the work rights for employees. The answers depend on what type of insolvency the company is facing.
What is administration?
In administration, a licensed professional takes control to try to rescue the company or sell the assets for a better price than if it were closed down immediately.
Contracts do not automatically end if a company goes into administration, but the administrator may need to make some employees redundant to keep the company trading.
What is a company voluntary arrangement (CVA)?
In a company voluntary arrangement, a company agrees to pay off debts over a set period so it can continue trading.
Most jobs are therefore usually safe, but a company may make some employees redundant or change contracts in an attempt to cut costs.
What is receivership?
A receiver is appointed to sell specific assets to pay off debts. These days, insolvent companies are more likely to go into administration than a receivership.
The impact on employees varies, depending on which assets the receiver sells. If they sell a core part of the company, employees may lose jobs or have their employment transferred.
What is company liquidation?
Company liquidation is the process of formally closing down a company which can no longer trade viably. Assets are converted into cash or cash equivalents and used to pay off debts.
All contracts are automatically terminated, and employees can claim company liquidation rights. Being aware of these rights can help you claim them.
What are company liquidation employee rights?
If your company undergoes liquidation, you have the right to claim remuneration. Once the company’s assets have been liquidated, they are distributed to creditors and then applied to the insolvency itself. Any remaining assets are used to cover ‘preferential’ employee debts, including wages and accrued holiday pay.
If you don’t receive everything you are entitled to, possibly because the company cannot afford to pay, you can receive help from the government through the Redundancy Payments Scheme. This is a statutory payment employees can claim if they have worked for a company for at least 2 years and have been made redundant.
The amount is based on a formula that considers employees’ age, length of service and weekly earnings. Under the Redundancy Payments Scheme, eligible debts include:
- Pay for the mandatory notice period (or standard compensation for the notice period not being offered)
- Up to 8 weeks of pay arrears
- Up to 6 weeks of holiday pay that you have become entitled to in the last 12 months
- Statutory redundancy pay (subject to how long you worked for the company)
- Certain unpaid pension contributions from your employer
The Liquidation of Carillion
In 2018, construction and facilities management company Carillion went into immediate, compulsory liquidation. The UK part of the company employed around 20,000 people at the time and was working on a number of prolific government projects.
In an unusual turn of events, employees were advised to keep coming to work and told their employment would continue on the same terms and conditions. The key here was to try and obtain direct confirmation, in writing, from Carillion via the Official Receiver.
The concept of continued trading and fulfilment of contracts is alien to compulsory liquidation, but because Carillion had 43,000 employees worldwide, this was not an ordinary case. For more insights into the Carillion case, you can listen to what our insolvency solicitor, Andrew Cawkwell, had to say when he appeared on Stray FM.
Employment Law for Individuals
If you’re an employee seeking advice on your rights in insolvency, or wanting support to understand the Redundancy Payments Scheme, please don’t hesitate to contact our specialist employment law solicitors or visit one of our offices.