Insolvency and employment compensation – what happens if your employer can’t pay?

This article looks at certain payments that you may be owed by a former employer and what your rights are if your former employer cannot pay.

Government ‘safety net’

In certain situations the Government will  make the payment out of the national insurance fund if an employee is unable to obtain a redundancy payment from their employer. The following types of payment are covered by the scheme:

  • Statutory Redundancy Payments.
  • Payments under a formal compromise agreement (a settlement agreement where the employee agrees not to pursue employment claims)
  • Payments under a collective agreement (an agreement negotiated by a recognised trade union)

When will the Government pay?

The UK Department for Business, Innovation and Skills (‘BIS’) will make these payments for employees where:

  • the employer refuses to pay, or
  • the employer is insolvent

BIS will also pay any interest which has become payable on a redundancy payment as a result of a tribunal’s decision and the Employment Regulations.

Proving your entitlement

If the employee is arguing that their employer refuses to pay, they will need to show that they have taken all reasonable steps to obtain payment, which may include taking their employer to an employment tribunal.

The definition of ‘insolvent’ is quite involved: the employee will need to show that one of a number of technical insolvency criteria is satisfied (different provisions apply depending on whether the employer is an individual, a company, or a limited liability partnership).

The employee also needs to show that the employer is liable to pay them one of the payments numbered 1 to 3 above.

BIS may not be required to pay  if the time limit has expired for claiming the payment either in writing from the employer or by making a claim to an employment tribunal.

How do I claim?

To obtain the redundancy payment from the Secretary of State, the employee must make an application under section 166(1) of the Employment Rights Act 1996. The employer must provide BIS with any information needed to decide how much the employee is entitled to, and a failure to provide it without reasonable excuse is an offence.

If there is an issue about whether the employer is liable to pay or how much is due, the question is referred to the tribunal. There is no need to join the employer to the proceedings.

This article was written by Lara Murray, a Solicitor in the Employment Department.

31st May 2012