Employer Insolvency and Employee Rights

If an employer does not have enough money to pay in full, those to whom it owes money, it may be deemed to be insolvent.

If the employer is a company or limited liability partnership, insolvency may involve administration, liquidation, receivership or voluntary arrangement with creditors.

If the employer is an individual, insolvency may involve bankruptcy or voluntary arrangement with creditors.

An employee of an insolvent business may be in a precarious financial position; the prospect of not being paid salary, bonuses, expenses or other benefits due may be particularly worrying.

Legal remedies are usually available, but it is important that the employee clearly understands his or her rights.

Redundancy

If an employer’s business closes down, an employee may be entitled to redundancy pay. In circumstances where the employer cannot afford to pay this, the employee may be able to claim statutory redundancy payments from the National Insurance Fund.

Wages

If there are wage arrears, an employee may claim up to eight weeks pay from the National Insurance Fund, together with six weeks holiday pay and compensatory notice pay. There is a cap (currently £380.00) on the amount which can be claimed in respect of a weeks pay, but the employee may be able to submit a claim to an Employment Tribunal in respect of amounts owing, over and above the statutory cap.

Transfer of employment

If an employer finds a buyer for its business, employees’ employment rights should be protected under the Transfer of Undertakings (Protection of Employment) Regulations; individual circumstances will determine the extent to which rights and liabilities transfer to a buyer of an insolvent business.

What to do next?

The first step for an employee is to ascertain the status of the employer - is it insolvent or merely in difficulty?  The employee should establish details of any insolvency and the identity of any insolvency practitioner appointed.  

Once the employee has this information, he or she will be in a position to seek specialist legal advice as to protection and enforcement of employment rights.

This article was written by Lara Murray, a Solicitor in our Employment department.

November 2009