Understanding Employee Rights When an Employer Goes Insolvent

When an employer goes insolvent, addressing the impact on employees, their livelihoods, and futures will likely be the first order of business. As labour costs are typically the biggest costs for a company, reducing employee numbers is often necessary to substantially scale back operating costs and give the company the best chance of survival.

In such scenarios, measures are in place to protect employee rights throughout the process.

Are Employees Protected if Their Employer Goes Insolvent?

If an employer goes insolvent, employee rights are protected. However, the full extent of these rights is subject to the type of insolvency, terminal or non-terminal.

• Terminal insolvency is when the company has no rescue potential and will therefore face liquidation, either compulsorily or through a Creditors’ Voluntary Liquidation (CVL).  As terminal insolvency means the company will soon cease to exist, employment will usually be terminated as a result of liquidation.
• Non-terminal insolvency is when the future of the company can be secured through a formal insolvency process, such as a Company Voluntary Arrangement (CVA), company administration, or administrative receivership. As part of the company restructuring process, redundancies may be made to shed costs and strengthen the viability of the company.

The rules protecting employee rights may be loosened to provide flexibility during the insolvency process. However, TUPE regulations will usually apply if the company is rescued or transferred.

How Are Employees Protected When Their Employer Goes Insolvent?

When an employer goes insolvent, the company may enter pre-pack administration, which is when a buyer for the company is lined up before the company enters administration. The sale may well be agreed by the former directors of the company.

Transfer of contracts

Once the company is transferred to the new owner, employment contracts will be automatically transferred under TUPE regulations. The previous terms and conditions of employment will be upheld, and continuous employment will be maintained.

Changes may be made to employment contracts by the new owners or a licensed insolvency practitioner after the transfer, if they are in the best interests of the company and unrelated to the transfer itself, although this must be agreed by the employee or their representative.

Open consultation

Employees or their representatives must be consulted throughout the process and be made privy to future plans. The employer must explain the reason behind the transfer, the impact on employees, run through any reorganisation plans, and seek the agreement of employees.

If the previous employer fails to protect employee rights, employees are free to lodge a claim for discrimination, even after the new employer takes over.

What Are Employees Financially Entitled to if Their Employer Goes Insolvent?

If the company is being transferred and employees are TUPE-protected, the new employer must settle outstanding payments with employees. If an employer goes insolvent, employees are entitled to wage arrears, holiday pay, payment in lieu of notice, and pension contributions. Moreover, if an employee is made redundant after the transfer for a reason unrelated to the transfer itself, the employee may be entitled to redundancy pay.

It’s crucial to seek professional advice when handling employees throughout the company’s insolvency process. This can ensure fair treatment and avoid future claims of discrimination or unfair dismissal.

About the Author

Jonathan Munnery is a company insolvency and restructuring specialist at UK Liquidators, one of the UK’s leading providers of company liquidation services. Jon is a highly experienced insolvency adviser with an extensive track record of advising distressed company directors, helping them onto the road to recovery.