By Catherine Kerr, Partner and Head of Employment Law
Company insolvency, especially when unexpected, can have a devastating effect on employees, whether it’s a small business or a large corporate company. Those impacted are left worrying about their livelihoods and pondering where their next pay cheque might come from.
The effects of insolvency on a company’s staff are expansive and immediate. Compulsory liquidation causes a company to cease trading very quickly. The employment contracts of its employees are automatically terminated from the date the company is wound-up, resulting in job losses among pretty much all staff. There are a few exceptions to this, such as those employees required to stay to assist with the liquidation.
So, whose responsibility is it to pay a company’s staff if it becomes insolvent?
The UK Government does have a duty to assist staff who have lost their jobs as a result of a company’s liquidation. As an EU Member State, the UK is obligated by Article 3 of the Insolvency Directive to set up and finance “guarantee institutions”. These ensure some degree of state-guaranteed financial protection for employees, should their employers become insolvent.
The UK’s guarantee institution, the National Insurance Fund, means that redundant workers can apply to the Fund’s Insolvency Service for redundancy and other employment-related payments such as unpaid wages. The service is able to act quickly, aiming to pay claims within an average of 14 days, although it may pay sooner if it can reasonably do so.
However, even when staff receive these payments, the amount received is subject to certain caps, which means an affected employee may unfortunately still find themselves out of pocket. Furthermore, claims will only be accepted from employees and not self-employed individuals, such as contractors who have carried out work for the company. The process for applying for redundancy via the Insolvency Service can be completed online.
The government’s obligation to assist employees of insolvent companies under EU legislation is a source of comfort to all UK workers, however it can only provide a limited level of financial support to its redundant workers. And with Brexit just around the corner, insolvency legislation changes may come into play.