One of the hardest parts of a business entering into liquidation is always the loss of employment for the workforce. In most cases, these people who have worked hard for months with the uncertainty of financial difficulty hanging over their heads, will be made redundant through no fault of their own.
Then what if the assets of the closing firm have been liquidated and all proceeds are distributed to creditors, leaving little left over in order to pay employees, what happens then? Fortunately, former workers in this scenario are entitled to claim redundancy payment. All of these claims are calculated according to government guidelines.
However, with various different forms of payment available, and terms being dependent on a number of factors and moving parts, calculating your redundancy pay when a company goes into liquidation can be difficult. Find out more in our blog.
What are Employees Rights During Liquidation?
Employees rights during liquidation include eligibility for compensation payments under the National Insurance Fund. This includes wage arrears, statutory notice and redundancy pay, and unpaid pension contributions. This is intended to support those who’ve lost their livelihoods through no fault of their own, and ensure they are able to support themselves while trying to find a new job.
First established in 1911, reformed in 1948, before assuming its current form in 1975, the National Insurance Scheme provides unemployment benefit, sickness benefit, retirement pensions, and other benefits in situations where an individual has met certain qualifying conditions. Redundancy pay when a company goes into liquidation will often, at least in part, come from this fund — the rest will likely be derived from money recovered during the liquidation process.
Types of Employee Compensation Following Redundancy
From statutory redundancy payments, to overdue holiday pay and pension contributions, when employees face redundancy there are a number of compensatory packages designed to help ease the transition and mitigate the immediate financial impact. The specific type of compensation will vary depending on a number of factors.
The primary types of employee compensation following redundancy include:
Statutory Notice Payment
When an employee has worked for a business for a certain period of time and is made redundant, they become eligible for a paid notice period. The employee is not actually required to work this period in order to receive the money. This is known as gardening leave.
A statutory notice period will depend on how long the employee has worked for their current employer at the time notice is handed in.
| Time With Employer | Minimum Notice Period |
| 1 month – 2 years | 1 week |
| 2 years+ | 1 week for each full year (up to a maximum of 12 weeks) |
Pay in Lieu of Notice (PILON)
Under normal circumstances, employees will be given notice by their employer that they are about to be made redundant. Unfortunately, this is not always possible if the business is put into liquidation. In this situation, employees can expect to receive pay in lieu of notice.
PILON entails the workforce receiving their notice pay at once, and their jobs ending with immediate effect. Any state benefits, such as Universal Credit/Jobseekers’ Allowance, that the employees are entitled to claim for will automatically be deducted from any pay in lieu of notice — whether they actually claim for them or not.
It is therefore extremely important for them to lodge claims as soon as possible to avoid missing out. However, if they manage to find new employment while redundancy is still being claimed, these wages will be deducted from their claim.
Holiday Pay
Employees can claim for any holiday pay that they are owed, whether this be for days not yet taken, or for vacation time that has been taken but not yet paid for. This can be for up to six weeks’ holiday pay, up to a maximum of £538 per week.
Tax and National Insurance Contributions (NIC) will be deducted before these payments are made.
Arrears of Pay
A company’s workforce is entitled to apply for compensation on any unpaid wages owed when the business enters into liquidation. This entitlement is capped at eight weeks of wage arrears and will have tax and NIC dedicated beforehand.
Wage arrears is not limited to just wages, it also includes the following:
- Bonuses
- Commissions
- Overtime
Unpaid Pension Contributions
If an employer with a defined pension scheme stops making payments to its employees’ occupational pensions scheme, this duty may be safeguarded by the Pension Protection Fund (PPF). This fund was set up in 2005 in order to cover compensation payments for people who meet a certain criteria.
In this scenario, the PPF will assess the case to determine the viability, legitimacy, and affordability of the claim — they will also assess the options available. The two most likely scenarios are:
- Pension contributions are covered by an organisation like the PPF.
- The pension scheme is bought out by an insurance firm and the employee is paid as a result.
Calculating Redundancy Pay when a Company goes into Liquidation
Any employee that’s worked for a business for two or more years is eligible to claim redundancy payments by submitting an online claim to the Redundancy Payments Office (RPO). The actual amount they can claim is based on age and length of service. Any amount paid will be capped at £538 per week, with the first £30,000 being tax-free.
There is also a cap on the number of full years’ employment that can be used as part of the redundancy calculation. This currently stands at 20 years.
The entitlement is calculated as follows:
| Age | Redundancy Entitlement |
| 18 – 22 | One half-week’s pay for each completed year of employment |
| 22 – 41 | One week’s pay for every completed year served |
| 41 – 64 | One week and a half’s pay for each completed year |
| 64 – 65 | Redundancy claims are reduced by a twelfth for each month post the employees 64th birthday |
Employees must also be able to prove they have achieved two calendar years of continuous employment before they were made redundant.
Redundancy payment is not available for people over 65. Any ongoing redundancy pay will stop when the person reaches this milestone. Additionally, only time periods after the employee turned 18 years old will be counted — so if they worked for the company between the ages of 17 and 19 before their employment was terminated, they will not be eligible to claim redundancy.
For a term of employment to be considered valid, the employee must have worked at least 16 hours each week, or they were under a contract that normally involved 16 hours per week or more.
Redundancy payments can be extremely complicated to calculate, so it is important to seek expert guidance at the earliest possible opportunity.
Types of Insolvency and Redundancy Pay: How it Can be Impacted
A business entering into insolvency does not mean that, by default, the employee can expect to be made unemployed and receive compensation. The outcome to expect will depend on the type of insolvency process the business undertakes.
Insolvency can impact an employee in a number of different ways. They can be made redundant, kept on despite the financial issues, they could even find themselves transferred to a new employer under TUPE if a buyer comes in to purchase some or all of the company.
The key features with regards to the impact on employees for some of the primary methods of insolvency are as follows:
Administration
Administration involves an insolvency practitioner being appointed to manage the financial affairs of an insolvent company. The administrator aims to rescue the company and potentially sell it, or parts of it, while it is allowed to continue trading.
The appointment of an administrator should not be read as a change of employer, it is not. Employment contracts are not automatically ended when one is brought on board. If the administrator managed to find a buyer for the company, employees might have their contracts transferred to the new buyer in the same or a new role. However, redundancy is also possible in this scenario if the business no longer has sufficient funds to continue paying staff.
National Insurance Fund payments such as redundancy, statutory notice, and unpaid wages may be recoverable in this scenario.
Company Voluntary Arrangement (CVA)
A CVA is a form of voluntary insolvency where the company’s directors can retain control of the firm’s operation, but an insolvency practitioner is appointed to ensure compliance with repayment terms that have been agreed with creditors.
As part of the process of ensuring the company can meet its obligation as part of the CVA, while keeping creditors happy, the insolvency practitioner may be required to make difficult decisions with regards to many elements of the business, including the workforce. This can result in redundancies should it be needed.
CVAs do not affect employment contracts by default because the aim of the arrangement is to help the business bounce back from financial issues. However, if the difficulties are severe enough, it may be necessary. If staff are laid off during the process, National Insurance Fund payments may be recoverable.
Liquidation
Liquidation occurs when a company does not have the funds necessary to satisfy its obligations and cannot be rescued. The process of liquidating the business is the responsibility of the liquidator, whose entire role is to facilitate the orderly closure of the firm and ensure that as much money as possible can be raised to attempt to pay off creditors and shareholders.
There are two types of liquidation, compulsory and voluntary. Compulsory liquidation is where the court orders the business to be wound up as soon as possible, while voluntary liquidation is a scenario where the business owners/directors agree to wind the business up.
In compulsory liquidation, all employee contracts will be terminated with immediate effect once the winding up order is published (unless the liquidator requires a particular employee to stay on for any reason). Contrastingly, voluntary liquidation could mean your contract remains the same for the time being, though redundancies could take place if the liquidator sees it as necessary.
Redundancy pay when a company goes into liquidation is entirely possible if the process leads to redundancies.
Unpaid Pension Contributions
If the business stopped making payments into its employees’ occupational pensions scheme, the RPS will cover any money that was deducted from wages for this purpose, but not actually paid into the scheme. This contribution is solely limited to 12 months prior to the liquidation of the company.
In addition to this, they will cover whichever is lower of:
- 10% of the employee’s wage
- The employer’s total unpaid contribution
Both of these are limited to the 12 months prior to liquidation.
How Inquesta can Help
Putting your business into liquidation, no matter your situation, is sure to be a stressful and highly emotional time for any company director. If you want to get through this process swiftly without any potentially costly errors, it’s vital that you seek independent specialist advice as soon as you are able. This is where Inquesta can help.
Our highly skilled team of insolvency experts has amassed decades of experience assisting businesses from all areas of industry to perform an orderly liquidation and achieve the best result possible for them going forward. We take the time to gain a thorough understanding of you, your business, and your situation, so we can provide a tailor-made service just for you.
For more information about how Inquesta can help you with liquidating your business, contact a member of our team today or book a free consultation.