Last Updated on 14.6.23 by Gorvins
Job stability can often be a fickle thing, with circumstances beyond our control leading to unexpected financial strains on businesses. The UK economy, despite its resilience, is not immune to these fluctuations. With an increasing focus on the country’s economic health, especially in the wake of election talks, understanding what happens when a business faces insolvency becomes critical.
This article explores the options available for employees when an employer is unable to meet its financial obligations and falls into insolvency.
The Reality of Business Insolvency
Business insolvency is an unfortunate occurrence where a company is unable to pay its debts or has more liabilities than assets. Such situations often arise from decisions that stretch cash-flow beyond its limits or due to third-party pressures like withheld customer payments. The aftermath can leave employees in a precarious position, uncertain of their future and outstanding wages.
State Aid: The National Insurance Fund
Despite the grim circumstances, employees have some level of protection, thanks to the National Insurance Fund (NIF). Established by the state, the NIF can help employees facing employer insolvency under certain conditions. If an employer hasn’t already fulfilled these payments, the affected employees can apply for the following:
- Statutory Redundancy Payment: This is a legal entitlement for employees who have been made redundant due to employer insolvency. The payment amount depends on the employee’s age, weekly pay (up to a certain limit), and length of service.
- Arrears of Pay: The NIF provides up to 8 weeks’ worth of unpaid salary. This also includes any “protective award” if the employer failed to collectively consult with the employees before making 20 or more redundancies.
- Statutory Notice Pay: The NIF compensates for the notice period that the employer was unable to give due to insolvency.
- Holiday Pay: Employees can claim up to 6 weeks of unpaid holiday pay.
- Basic Award for Unfair Dismissal: This is calculated similarly to a statutory redundancy payment.
- Pension Scheme Contributions: The NIF covers certain pension scheme contributions that the insolvent employer could not make.
Except for the pension payments, all of these payments are calculated based on a week’s pay, which, as of the time of writing, is capped at £544 per week (2023).
Complications and Considerations
While the NIF provides a safety net, the process is not without complications. First, the employer’s insolvency has to meet a specific legal definition. Second, claims for a “protective award” or a “basic award” need to be established by an employment tribunal. Moreover, under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), the employees’ employment might automatically transfer to a new business entity.
When companies face insolvency, it can be a stressful and uncertain time for employees. However, assistance is available in the form of the National Insurance Fund. While it might not be widely known or straightforward to access, with the right knowledge and guidance, affected employees can navigate this challenging period more effectively.
It’s crucial to seek professional advice in such situations, and our Employment Law Team is here to help.