Employees in Insolvency

Written by Douglas Pinteau on 5 September 2018

Sometimes, when a business is facing insolvency, many of the most significant creditors can be employees of the business, particularly if there is a history of long service. This can be of great concern not only to the employees themselves, but also to the owners of the business who do not wish to see their loyal staff members facing their own financial strife as a result of losing their employment.

In fact, employees are amongst the most protected creditors in a formal insolvency process. This article examines the various claims that can be made in such circumstances by employees in respect of their unpaid accrued wages, holiday pay, redundancy pay, statutory notice pay and pension contributions.

Employees are usually able to claim some or all of their statutory entitlements from the Redundancy Payments Service (“RPS”) via the National Insurance Fund (“NIF”), and they will be paid regardless of whether or not there are assets remaining in the insolvent business to meet the cost. Here we take a look at the various claims that can be made by employees against the NIF as well as in the insolvency process itself.

Arrears of pay:

Arrears of pay constitute unpaid wages, bonuses, overtime and commission, and are ‘preferential’ up to a limit of £800. ‘Preferential’ creditors rank higher than unsecured creditors in the priority of payment from the formal insolvency process.

The RPS with pay any unpaid wages up to a maximum of 8 weeks, capped at the statutory limit which is currently £508 per week.

For any amount exceeding this limit, this will rank as an unsecured creditor claim in the insolvency process. Payments in respect of arrears of pay are subject to tax and National Insurance.

Holiday pay:

Holiday pay constitutes holiday days owed that employees did not take and holiday days taken but not paid. All holiday pay is preferential.

The RPS will pay a maximum of 6 weeks of holiday pay that accrued in the 12 months prior to the insolvency and is again capped at £508 per week.

Any excess above that paid by the RPS will rank as a preferential creditor in the insolvency process, and payments are also subject to tax and National Insurance.

Redundancy pay:

Employees are normally entitled to redundancy pay if made redundant when having been continuously employed for the preceding two years or more.

The RPS will pay a maximum of 30 weeks’ redundancy pay, capped at its weekly limit of £508. Weeks are calculated as

  • 5 weeks for each full year when aged under 22
  • 1 week for each full year aged between 22 and 41
  • 5 weeks for each full year at 41 or older

Employees can get a payment for a maximum of 20 years of employment at a business. Any amounts over that paid by the RPS will constitute an unsecured non-preferential claim. Redundancy pay under £30,000 is not taxable.

Notice pay:

Employees are entitled to a paid notice period when being made redundant, regardless of whether or not this is a contractual entitlement.

Statutory notice pay is paid by the RPS, calculated as 1 week for every full year worked subject to a maximum of 12 weeks, subject to its £508 weekly cap.

Employees are under a positive duty to seek to mitigate their loss under payment in lieu of notice, and their entitlement thereunder will be reduced by both income received during the notice period and for amounts that employees were entitled to but failed to claim, with payment being made by the RPS once the notice period has expired.

For any contractual notice entitlements exceeding what the RPS will pay, will rank as a non-preferential unsecured creditor. Payments made are subject to notional tax and National Insurance.

Pension contributions:

The RPS will also pay employer pension contributions subject to the lower of 12 months contributions or 10% of 12 months’ pay. They will also pay up to 12 months’ of employee contributions that were deducted from salary but not paid over to the pension scheme provider.