Employment rights and insolvency

The Employment Rights Act 1996 (ERA 1996) and the Insolvency Act 1986 (IA 1986) provide two routes by which an employee might seek payment of debts owed to him or her by an insolvent employer. First, the Secretary of State must pay certain debts to employees, effected via the Redundancy Payments Service. Aside from in the case of unpaid redundancy pay, the Redundancy Payments Service will only pay these debts if the employer has become formally insolvent. Second, employees may seek payment from the company’s assets through insolvency proceedings or via administrators.

In outline, the options open to the employee may be summarised as follows:

• The ERA1996 requires the Secretary of State to pay certain debts owed to employees, including arrears of pay and unpaid redundancy pay. This is paid out from the National Insurance Fund via the Redundancy Payments Service.
• Statutory payments such as statutory sick pay and maternity, paternity or adoption pay may be covered by HMRC.
• The State may also cover unpaid employer’s contributions for employees who belongs to occupational pension schemes, and, under the Pensions Act 2004, pension schemes may be protected by the Pension Protection Fund.
• If an employer is put into administration, employees may have claims against the administrator/administrative receiver.
• If the employer is put into liquidation, employees may have claims against the insolvent estate.
• Employees are treated as preferential creditors under the IA 1986 in respect of unpaid wages owed in the four months prior to the insolvency order (subject to an £800 limit), and in respect of the total amount of unpaid holiday pay.

This House of Commons briefing provides detailed information about each of these options. The law discussed applies to the whole UK.

This paper has been updated during the COVID-19 emergency. Many UK businesses are confronting serious commercial consequences, including a fall in consumer demand, delays in delivery of essential supplies, and cashflow difficulties. Some businesses (e.g. retail and hospitality) have been forced to stop trading altogether because of the nationwide lockdown. Despite government measures to protect businesses and jobs, the fear is that some businesses will inevitably fail, particularly those already in financial difficulty before the outbreak.