Understanding Employee Rights When Made Redundant From an Insolvent Company

An “insolvent company” is one that cannot afford to pay its bills as they fall due or that the value of its liabilities exceeds its assets. It doesn’t necessarily mean that the business will close but an insolvency practitioner must step in to assess the best way forward.

Unfortunately, redundancies commonly follow company insolvency, whether or not the business has to close down completely. So what rights do employees have when they’re made redundant from an insolvent company?

The Right to Claim Redundancy Pay When an Employer is Insolvent

When a company enters insolvency and redundancies follow, employees may have the right to become ‘preferential’ creditors. This means they lie higher up the statutory hierarchy for repayment.

It’s commonly the case, however, that redundant employees have to make a claim from the National Insurance Fund (NIF) as there are typically insufficient funds within the company to support redundancy payments, even after a sale of assets.

The NIF is a fund that holds the National Insurance Contributions (NICs) from employees, employers, and the self-employed and is a crucial resource when an employer becomes insolvent regardless of the type of insolvency.

So what rights do the employees of an insolvent company have when it comes to claiming and receiving redundancy payments?

Do All Redundant Employees Have The Right to Claim Redundancy Pay?

Employees who meet the criteria for redundancy may be eligible to claim:

  • Redundancy payments
  • Unpaid wages and overtime
  • Holiday pay
  • Pay in lieu of notice
  • Unpaid pension contributions

The right to claim redundancy pay and these other entitlements rely on certain criteria being met, however. If an employee has worked for the company under a contract of employment for a continuous period of two years or more, they’re typically able to claim.

How Much Redundancy Pay Can Employees Receive?

The amount employees are entitled to receive depends on their age at the time of redundancy, their length of service, and final wage, as follows:

  • 18-21 years of age: half a week’s pay for each full year working for the company
  • 22-40 years of age: one week’s pay for each full year of employment with the company
  • 41 or more years of age: one and a half week’s pay for each full year working for the company

It should be noted that some elements used to determine eligibility are capped by the government – at 20 years of service and £643 for weekly pay (if made redundant on or after 6th April 2023).

Employee Rights to Claim Other Statutory Payments

Employees made redundant by an insolvent company may also have the right to claim other statutory entitlements, including:

  • Arrears of holiday pay of up to six weeks
  • Unpaid wages of up to eight weeks – wages can include overtime monies due, bonuses, and commission owed
  • Pay in lieu of notice – this is calculated as one week’s notice for each year of employment (capped at 12 weeks)
  • Unpaid pension contributions

A Robust Regime to Support Employees of Insolvent Companies

The UK offers considerable support to employees made redundant from insolvent employers. The Redundancy Payments Service (RPS) is part of the Insolvency Service and facilitates redundancy claims when an employer doesn’t have the money to pay.

The right to make a claim on the National Insurance Fund, via the RPS, is fundamental in this situation given the lack of cash available to an insolvent business. Employees need to make a claim from their employer initially – within six months of the insolvency – and then turn to the National Insurance Fund if the employer cannot pay.

About The Author

Chris Bristow is a business debt expert at Real Business Rescue. The team at Real Business Rescue are company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.