A closer look at insolvency - a guide for employees

When a company falls into insolvency, it can be an incredibly distressing and confusing time for both employers and their staff. However, without clear direction and legal know-how, it can be difficult to know where to turn in this situation.

For employees, in particular, insolvency can seem like a term that is never properly explained, but they are ingrained with enough knowledge to know it does not mean good news. However, some people remain ignorant to the fact that in such circumstances they may be liable to lose their job and earnings in a matter of moments, with little or no regard for their financial future.

In this guide, we place the spotlight on insolvency, and what it means for employees.

What is insolvency?

In short, insolvency happens when an employer has no money to pay the parties they owe in full. In such circumstances, they are forced to make special arrangements in a bid to pay off any outstanding debts.

There are a number of titles given to the different types of insolvency, which relate to both the type of debt itself and the people who handle it. If you work for a business that is insolvent, one of the following will apply to you.

  • Liquidation: When a company is closed and its assets are sold to pay those it owes money to
  • Administration: When management teams ask an administrator to come and try to keep the business going
  • Receivership: Similar to liquidation, but is usually arranged by one creditor - such as a bank - that has lent money securely, then the assets are sold to solely pay that creditor
  • A voluntary arrangement with creditors

If your employer is one individual, rather than a company, insolvency means one of the following:

  • Bankruptcy
  • Voluntary arrangement with creditors

What does this mean?

In some cases, the company you work for will continue to operate if there is a chance it will be rescued or sold. So if this happens, you are likely to be asked to continue working, which is good news. What’s more, this does not affect your rights to redundancy pay should your employer be forced to close down further down the line.

When the business is sold to someone else in order to pay off its debts, your employment rights should also be honoured, including any outstanding pay owed to you. If you are owed money from your employer through unpaid wages or overtime, you can claim for it through the business’s insolvency practitioner.

When it comes to claiming back the money owed to you, the insolvency practitioner will usually send through claim forms. However, if this does not happen you should look to contact them to ask.

What can I claim for?

The money you receive will come from the government’s National Insurance Fund and while it is unfortunately not always guaranteed that you will get everything owed to you by your employer, you can make a claim for several things. These include:

  • Redundancy pay
  • Up to eight weeks’ wages, which includes a payment for a protective award if your employer has failed to follow correct procedure and “consult collectively”
  • Up to six weeks’ holiday pay
  • Statutory notice pay, equivalent to one week after one month’s service, increasing to one week per year of service (up to a maximum of 12 weeks)
  • Any unpaid pension contributions, which would be collected through your pensions administrator
  • Basic payment for unfair dismissal

You can apply for statutory notice pay in the following circumstances:

  • You have worked your statutory notice period, but have not been paid by your employer
  • You have been dismissed without the appropriate notice period
  • You did not work your full notice period

What is my statutory notice period?

Your statutory notice period is the minimum legal notice period that your employer has to give you. It depends on how long you have worked for the company, and is outlined in more detail below.

  • If you have been employed for between one month and two years, your legal notice period is one week
  • If you have been employed for two years, you should work two weeks’ notice plus an extra week for every year you have worked (to a maximum of 12 weeks)

Payments are usually limited to £475 per week.

In cases where your employer is not officially insolvent but they are unable to pay you, it is likely that you will be laid off or have your hours cut so they are still able to pay you.

What about redundancy?

You are entitled to make a claim for statutory redundancy pay if you have been made redundant and the following statements apply to you:

  • You have been continuously employed for two or more years
  • You have applied in writing to your employer or an employment tribunal within six months of your job ending

When to contact a solicitor

If your employer has gone into liquidation but failed to carry out the correct legal procedures to ensure members of staff are kept in the loop about their circumstances, it could be time to contact a solicitor to discuss your rights.