Increases in the cost of living and rises in inflation have given many employers additional financial headaches and, for some, these costs have created an unmanageable level of expense, particularly coming after various Covid lockdowns. In these situations, an employer may, unfortunately, end up in a scenario where the business is insolvent. Statistics show that the number of insolvencies is rising, with double the number registered in March 2022 vs March 2021, and with 34% more than registered three years previously. If a business will not be able pay its debts, the question arises as to what happens to their employees and in this blog, we’ll help answer some questions around this topic.
In an insolvency situation, a business may be sold and employees could be transferred to a new employer. In this case, dependant on the type of insolvency, TUPE transfer rules may apply and employee’s rights may be protected. You can read more about this here What is TUPE and when does it apply? – View HR. If, however, the business closes down or becomes bankrupt, employees will need to be made redundant.
Before you tell your employees what’s happening, it’s important that you have prepared well. Employees are likely to be distressed to hear that the business is insolvent and will want to know what their entitlements are, whether they will receive redundancy pay, what the redundancy consultation will look like, how they will be supported through the process and when their employment is likely to end. In these situations, it’s important to check if there’s specific redundancy policies or collective agreements in place at your business, which go beyond ACAS guidelines, that you will need to follow. For more information on things to consider when informing employees, have a read of our previous blog At Risk of Redundancy – Informing Employees – View HR.
Employees will need to be consulted with and this process may vary, dependant on the number of employees who are being made redundant. In a situation where the business is closing down, consultation is still necessary and gives employers a good opportunity to explain how they may be able to support employees with references, updating CVs or putting them in touch with other businesses who might be hiring. You can read more about how to manage a redundancy consultation in this blog Redundancy Consultation – View HR.
If employees are made redundant, the individual who is dealing with the insolvency (the insolvency practitioner or official receiver), will need to confirm how the roles have been affected and what employees need to do next. This will include giving employees a RP1 fact sheet and a CN (case reference) number. An employee who meets the qualifying criteria and is entitled to receive statutory redundancy payments will be able to use the CN number to apply to the government for financial help. This can include a statutory redundancy payment as well as outstanding wages, overtime, holiday pay, notice and commission through the National Insurance Fund.
It’s important to note that employees are entitled to make a claim at an employment tribunal if appropriate consultation did not happen or if they were dismissed unfairly. A tribunal will expect an employer to take all reasonable steps to consult with employees, even in a potentially time sensitive situation such as an insolvency.
The above shows that even in a difficult situation such as insolvency, thorough planning, and strong legal advice if important. If you would benefit from guidance from our team of HR and legal experts, please get in touch for an initial conversation.