When a UK business changes owner in a usual way its employees may be protected under the ‘Transfer of Undertakings (Protection of Employment)’ regulations (“TUPE”).
When a UK business is insolvent and formally enters a UK insolvency procedure the employees will either be taken on by the new buyer or be paid (in part or in full) from the government.
When an employer enters a formal UK insolvency procedure the employees are given some protection.
If the employer enters administration and part or whole of the business is sold as a going concern then in most cases TUPE law applies and all of the company’s employee’s rights and contracts will transfer across to the new owners (whether they want to adopt them or not!).
The new owners are then liable for arrears of pay, redundancy and notice pay even if they do not want to take on those employees and the Redundancy Payments Office / Insolvency Service will not pay out.
If the buyer/s therefore do not need or want all of the employees they will be liable for any redundancy and associated costs for those they make redundant.
Another huge risk in getting this wrong is being taken to a tribunal for unfair dismissal so great care is needed by anyone considering buying an Insolvent Business.
Sometimes directors they think that the workforce can be slimmed down and then the slimmed down version of the business can be sold, perhaps back to themselves as a pre-pack.
The realisation that they will adopt all of the employee’s contracts often scuppers a sale of the business.
If the cost of making redundancies is high (the longer the business has been going usually the higher the cost) this might deter a potential purchaser from acquiring the business at all or they may want a substantial reduction off the purchase price to reflect the potential costs of making some employees redundant after the sale. In some case redundancy may be justified - for example where unprofitable shops or branches are closed and the staff cannot be easily relocated to a continuing site.
As mentioned above, in insolvency situations a government scheme run by the RPO which is a part of the Department for Business, Innovation and Skills, will step in and pay employees their claims they may have for wage arrears, holiday, notice and redundancy pay. However if the RPO believes that a business transfer has taken place they will reject any such claims from employees and point them back in the direction of the new owner.
Employment and insolvency law can be a complicated area and you need to take independent legal advice as to how it will affect you if you are thinking of buying or selling a business.
When liquidation takes place the employees will be paid out by a government fund direct.
The scheme is run by the Redundancy Payments Office (“RPO”) also known as The Insolvency Service.
There are five claims an employee can make when a business stops trading because it is insolvent.
- arrears of pay
- unpaid holiday
- notice pay
- unpaid pension contributions.
Arrears of Pay
The arrears of pay can be for up to eight weeks of unpaid wages/salary. The claim is capped though to a current maximum £475.00 per week.
All payments from the RPO are subject to PAYE and NIC deductions in the usual way, except redundancy pay which is tax free.
Arrears of Pay payments from the RPO are subject to PAYE and NIC deductions in the usual way.
The arrears of holiday pay can be for up to six weeks. The claim is capped though to a current maximum £475.00 per week.
Holiday payments from the RPO are subject to PAYE and NIC deductions in the usual way.
Employees with more than two years of continuous service are entitled to claim redundancy pay.
Redundancy payments are tax free.
The amount depends on their age and length of service and it is a complicated calculation to work it out.
- 1.5 weeks’ pay for each year of employment after their 41st birthday
- a week’s pay for each year of employment after their 22nd birthday
- half a week’s pay for each year of employment up to their 22nd birthday
- Length of service is capped at 20 years and weekly pay is capped at £475.00
- The maximum amount of statutory redundancy pay is £14,250.00
Here is a link to a government online redundancy calculator:
Notice pay is usually based on what is written in an employee’s employment contract. If there is no written employment contract then it is based on a week’s notice is due for every complete year they have worked. The maximum claim is capped at 12 weeks. Again the payout is capped at £475.00 per week.
Notice payments are reduced by any income received by the ex-employee during that notice period, be that from new employment or state benefits.
All notice pay payments from the RPO are subject to PAYE and NIC deductions in the usual way.
Usually claims take about two to four weeks to process but can take longer. If notice is due the RPO will wait for the notice period to pass so any mitigation can be dealt with before making any payment.
If there is a shortfall to an employee’s pension contributions the RPO will step in and pay the Pension Provider the shortfalls into the scheme.