What are my employees entitled to if my business enters insolvency?

One of the most common questions business owners who are assessing options when facing financial distress is around their employees.  They are keen to understand the implication of insolvency on their employees where there is insufficient monies to make payment of the unpaid wages, holiday pay, notice pay and redundancy that they are entitled to.  Lynn Barr from the Business Recovery and Insolvency team summarises the position here.

In a formal insolvency when there is no money to make payment of the employees’ statutory entitlements, the Government will step in and make these payments. A formal insolvency means that there must be a liquidator, administrator or receiver appointed to a company or LLP and a trustee in bankruptcy in the case of sole traders and individuals. The Government will not pay out if one of these is not in office. There must be a formal insolvency practitioner in office.

What is an employee entitled to receive?

Employees are entitled to receive unpaid wages, holiday pay, statutory notice pay and statutory redundancy pay. 

Unpaid wages – this is money that should have been paid for work that has been done. It includes overtime, bonuses and commission.

Holiday pay – this is for holidays that had been accrued but had not taken. It is capped at 28 days entitlement.

Notice pay – An employee is entitled to receive notice before being made redundant. Only statutory notice from the government will be paid even if a contract has different notice provisions. The statutory redundancy notice periods are:

  • one week’s notice if employed between one month and 2 years
  • one week’s notice for each year if employed between 2 and 12 years
  • 12 weeks’ notice if employed for 12 years or more

Statutory notice is capped at 12 years. This means that it is likely that different employees with the same job and rates of pay will be entitled to different notice periods.

Redundancy pay – This is due to any employee who has worked for the employer for at least 2 years and the entitlement is:

  • half a week’s pay for each full year the employee was under 22
  • one week’s pay for each full year the employee was 22 or older, but under 41
  • one and half week’s pay for each full year the employee was 41 or older

Length of service is capped at 20 years.

Cap on payments

Payments made by the Government are subject to a weekly limit, which is currently £538.  This means that if an employee earns less than £538 a week they will be entitled to the full amount, however, if an employee earned over £538, the weekly payment will be capped at £538. Any balance of sums due to an employee over and above this would be a claim in the insolvency and is submitted by the employee to the liquidator, administrator or trustee.

An employee can’t claim for unpaid expenses. For example, travel expenses which were incurred personally in carrying out their job which would normally be paid on submission of an expense claim. Again, the employee would need to submit a claim in the insolvency

Subcontractors do not qualify as employees and will not be entitled to any payment for unpaid services from the government. Subcontractors will have to make a claim in the liquidation.

What if the employee was on furlough?

They are still entitled to receive money which is calculated using their usual rate of pay rather than a furlough amount. Any amounts the business has received from HMRC in respect of furlough claims submitted should be paid to the employee as soon as it is received.

How does the employee make a claim?

The Liquidator, Administrator or Trustee will provide the reference number called a “CN” and website link to enable employees to submit their claim to the Insolvency Service.  They cannot make a claim without the CN reference. The application is made online and consists of 2 parts.

The first part is the application for redundancy pay, holiday pay and other sums due including arrears of wages, bonuses and commission.  The Insolvency Service aim to deal with 95% of claims within 6 weeks of receiving the applications. The employee will provide bank details when making the application and monies are paid directly into their bank account.

The second application is for statutory notice pay and cannot be applied for until the statutory notice of period has ended. Once the notice period has ended the employee will be sent a CN reference number and then they can make the claim online for the loss of notice. This will be different for each employee depending on the length of service and because employees are expected to mitigate their loss as much as possible by claiming any unemployment benefit and sickness benefit, they may be entitled to, along with trying to obtain alternative employment.  If employees do not apply for benefits when they lose their job, the notice payment from the government may still make deductions for these, so redundant employees are encouraged to check their benefit entitlements and make sure they apply for those they are entitled to.

Get in touch

Henderson Loggie’s Business Recovery & Insolvency team are happy to answer any questions you have on this topic.