What Happens to Employees When a Company Goes into Administration?
In this article we’ll be exploring what happens to employees when a company goes into administration, explaining redundancy packages and employee rights
Company administration has three main outcomes:
- the business may placed into a CVA and continue to trade as normal;
- it may be sold to a new owner;
- or there may be no choice but to pursue a liquidation.
What happens to employees varies depending on each outcome but, generally speaking, all carry the unfortunate risk of staff redundancy.
So what happens to employees during the administration process?
Contents
Employees' Creditor Status
The first 14 days of administration are the most important for employees. Whether or not they’re kept in employment during this period will affect their status as a creditor. They will become either a preferential or an ordinary creditor.
Preferential Creditors
Employees who aren’t made redundant in the first 14 days will become preferential creditors of the company.
This means that if they’re later made redundant, they’ll be more likely to successfully claim back any money they’re owed by the business, as they’ll only be behind secured creditors (such as banks) in terms of payout priority.
Preferential creditors can claim up to £800 in outstanding salary and commissions, up to six weeks of accrued holiday pay, and some occupational pension payments.
Ordinary Creditors
Staff who are laid off in the first 2 weeks will instead be listed as ordinary creditors.
Ordinary creditors are the lowest bracket among creditors. As a result, ordinary creditors have to wait until everybody else above them has been paid before they can expect to see payment. Often there is no money left by this point.
However, these employees can still claim through the Redundancy Payments Service (RPS).
Redundancy Payments Service
Staff are entitled to redundancy packages after 2 years of service. Through the RPS, they can claim:
- Redundancy pay
- Outstanding holiday pay
- Wage Arrears
- Notice periods worked but not paid
- Loss of notice compensation
- Employment tribunal awards
The RPS calculates payments based on what employees are paid each week. For claims made after the 6th of April 2023, weekly pay is capped at £643. The maximum redundancy pay is £19,290.
What Happens to Employees Who Aren't Made Redundant?
Employees who aren’t made redundant after the initial 14 days essentially have their employee rights adopted by the administrator.
They’ll continue to collect their usual pay entitlements. However, the administrator may renegotiate levels of pay for the sake of the business and its turnaround. The administrator may also ask employees to defer their pay to be collected at a later date.
If the company is then still forced to undergo liquidation, staff who were kept on will still be entitled to these accrued amounts. They can claim them as part of the liquidation.
What Happens if the Business Is Sold?
Staff who are still under contract will be granted protection under the Transfer of Undertakings (Protection of Employment) Regulations 2006, or TUPE.
This essentially means the new owners must respect the existing employee contracts. Employers will risk breach of contract if they don’t meet the requirements laid out by the transferred contracts. These TUPE protection rights extend indefinitely.
The new employer will have the right to change the terms of the contracts, however. The reason for their changes must be based on economic, technical, or organisational (ETO) grounds.
Employees may also be made redundant on ETO grounds. For example, if the employer moved the location of the business or if they experienced financial issues which warranted company restructuring, the new owners could issue redundancies.
Employees who feel their TUPE rights have been violated can claim through an employment tribunal. They will also be entitled to their usual statutory redundancy entitlements.
What Should I Do if I Think My Business Is Insolvent?
If you think your business is insolvent or you’re worried about meeting the needs of your staff, you should get in touch with an insolvency practitioner as soon as possible.
Our team will guide you towards the best course of action for you and your business. With our advice, you’ll be able to reassure your team and protect yourself from legal liabilities. In some cases, a successful business turnaround could be achieved. The sooner you act, the better.
Contact our team to arrange a free consultation today.
