Redundancy in liquidation

Redundancy is a sad but inevitable part of insolvency

If a company is facing insolvency, Directors will have many questions, one of which is how it will impact employees, their rights, and entitlements.

On this page, we want to give you a guide as to how this works and what employees can claim.

How does the process work?

When a company enters into an insolvency process, employees are entitled to claim monies owed to them by the Company from the Redundancy Payments Office (RPO).

The process is completed online, and the insolvency practitioner can provide details on how to apply, what information the employees will require, and a case reference number.

Once the employee completes the form online, the claim is processed by the RPO.  Payments are then made directly to the employee’s bank account.

Further details can be found by clicking here 

What can employees claim?

There are a number of items that can be claimed as follows:

• Wages
• Holiday Pay
• Redundancy Pay
• Pay in lieu of notice
• Unpaid pension contributions

Wages – Arrears of Pay

An employee can claim up to 8 weeks arrears of pay, based on their weekly salary rate. There is a maximum rate which is £643 per week. Tax and national insurance will be deducted before the payment is made.

Holiday Pay

An employee can claim holiday pay whether this is holiday days not taken or holiday taken but not paid. So, for example, if you are 6 months through your holiday year you can claim half of your holiday entitlement less any days already taken. Holiday pay can be for up to 6 weeks, again capped at £643 per week, and tax and national insurance is deducted.

Redundancy Pay

An employee can claim for redundancy if they have worked for the Company for more than 2 years. The amount that can be claimed depends on the employee’s length of service and age.

• Each complete year aged 18 – 22 leads to you receiving half a week’s wage per year.
• Each complete year aged 22 – 40 leads to you receiving 1 week’s wage per year.
• Over 40 leads to you receiving 1.5 week’s wage per year.

Unlike wages and holiday pay, this is paid tax-free.

Pay in Lieu of Notice.

If an ongoing business makes an employee redundant then that employee would be given notice of the redundancy and continue to receive wages etc during that period. Often in a liquidation process, it is not possible to give this notice period.

Therefore, employees are entitled to claim their notice pay from the RPO. It is based on the number of year’s service, 1 week per year up to a maximum of 12 weeks.

However, unlike the other claims, this claim is limited by what an employee does during the notice period. So, for example, if the employee claims benefits, this will be deducted from their notice pay claim. Employees should be aware that if they do not claim benefits but were entitled to do so, then this can be deducted anyway. Next, if the employee starts a new job during the notice period, that income is also deducted from the notice pay claim. Once this has been calculated the claim is also limited to a maximum of £643 per week and is subject to tax and national insurance.

Unpaid Pension Contributions

If the Company stopped making payments into an occupational pension scheme, the RPO will pay any money deducted from wages for this purpose, but not actually paid into the scheme. The amount is limited to 12 months prior to the start of the liquidation.

This will be paid directly to the pension provider.

Statutory Rights v Contractual Rights.

All employees will have a contract of employment that will detail their rights. The items above are subject to various restrictions. Therefore, it is not uncommon that an employee has rights that are not covered by the RPO scheme.

For example, if a contract of employment provides a 3 months’ notice period but the employee has only been employed by the business for 4 years, the employee will only receive 4 weeks’ notice from the RPO. The balance of 8 weeks is a claim against the Company and any further payment will depend on whether the Company’s assets are sufficient to pay a dividend to creditors. Clearly, because the Company is insolvent, it is likely that any dividend payments are likely to be low.

If you still have questions about your employees’ claims, please feel free to give us a call or visit the government website highlighted above.

Beware! We have seen various sites which claim they can help employees and directors submit their claims to the RPO. The process is designed to allow anybody to submit the claim on their own and so paying a fee or commission to a third party should never be necessary.