Employee rights in company administration procedure

Recent reports have suggested the number of companies entering administration has increased over the past several years. The Toys R Us administration has been headline news, along with other retail giants, such as Maplin and even New Look, also closing stores. As recent news has been drawing attention to insolvency procedures, we take a look at what it means for employee rights when a company enters administration.


Company Administration: what does it mean for employee rights?

Company administration is a formal insolvency process, referring to the directors, the shareholders, or floating charge holders placing the business into administration. A licensed insolvency practitioner (IP) is engaged to provide a clear path as to the future of the business and the IP will work with the primary aim of saving the company. Administration is a time restricted process, which must be handled by a licensed IP.

Company Administration Employee Rights

The first 14 days of the company entering administration are crucial for your employee statutory rights and responsibilities. Once a company has entered administration, the administrator is not required to cover employee contracts within the first 14 days, whilst they establish their strategy. They will, however, generally ensure employees are paid for this period to ensure the employees continued assistance.

During this time period, the administrator can confirm they are “adopting” the employee contracts, and after 14 days, they will be automatically adopted. This means that the company in administration will be required to meet any pay entitlements accrued during the administration ahead of the costs of administration.

Sale of business in administration

If the business happens to be sold on, your employee rights in administration are protected under the TUPE legislation. The Transfer of Undertakings (Protection of Employment) legislation protects those who have retained their jobs. The terms of your employee contract will be held under TUPE legislations, and the new business must comply with the conditions.

This will also mean that the start date of your employment remains the same as if you had continued working for the company in administration. Your new employer should give you formal notice of the transfer. It is also important to note that TUPE cannot be contracted out of. If your new employer tries to ask you to sign a new contract of employment on less favourable terms you should seek legal advice from an employment solicitor.

Preferential creditors

As detailed above, the first 14 days will demonstrate your employee rights in administration. If you’re made redundant as a result of the administration procedure, any entitlements accrued prior to the administration period will become either a preferential or unsecured claim in the administration, or possibly both.

When a company faces an insolvency procedure, a hierarchy of creditors is produced, listing the order of payment. Employees as preferential creditors are high up in the hierarchy. They will be paid after any holders of fixed charges, but before any holders of floating charges.

The administrator overseeing the insolvency process will handle the employee entitlements and subsequent payments, via the redundancy payments office. If you are a preferential creditor, you are entitled to:

  • Up to £800 arrears of pay.
  • Any holiday pay accrued.
  • Outstanding pension contributions.

 

Non-preferential creditors

In some cases of company administration, there may not be enough recouped from the sale of assets to pay all employees’ full entitlements. Where there is a shortfall, this can be claimed through the National Insurance Fund (NIF). The NIF, administered by the Redundancy Payments Service, covers redundancy and statutory payments. Unfortunately, those who are self-employed or agency workers are not entitled to payments from the NIF.

The National Insurance Fund aims to provide payments within two to six weeks of you submitting employee rights claims. The payments are submitted under the provisions outlined in the Employment Rights Act 1996. It’s important to note that you may not receive all you have asked for, but, the top of the preferential claims above, you are also entitled to submit claims for:

  • Statutory notice pay
  • Redundancy pay
  • Up to eight weeks wages

 

Claims are currently capped at £489 per week, this amount generally increases in April of each year. Any amounts in excess of this amount will be subject to the usual order of payments in the company insolvency process and will only be met if there are sufficient assets to allow for a distribution.

Statutory notice pay

Statutory notice is mentioned above and refers to the legal notice your employer must provide for those losing their job. However, if your employer dismisses you without warning or even if you work your notice period but do not receive payment, you can claim statutory notice pay. For the latter, you will have to write to the Insolvency Service, who will discuss your claims.

The payments you may receive depend on your length of employment with the company. For example:

  • One month – two years: you are entitled to one week’s notice
  • Over two years: two week’s notice and an extra week for each year at the company (max of 12 weeks)

 

The redundancy payments service will expect you to claim any state benefits you are entitled to in this time period and to be actively seeking work. Consequently they will automatically make deductions for state benefits and even further deductions from this if you have found alternative employment.

If you would like to discuss the company administration process for your business or if you are concerned about employee entitlements and procedures you must follow, you can speak to our business rescue experts today.

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