Insolvency – Employee Rights

Employees of a business, whether a limited company, partnership or sole trader, that enters into a formal insolvency procedure are creditors of that business in respect of any of the following that have not been paid:

  • Arrears of Pay
  • Holiday Pay
  • Compensation for lack of notice
  • Redundancy Pay

Under the terms of the Employment Rights Act 1996 these entitlements can be met in part or in full by the National Insurance Fund through the Redundancy Payments Service. There are a number of limitations that will effect the claim. The following provides brief details of the stipulations on the most common claims received and should not be considered a full description of the elements that can be claimed or the conditions placed on them.

  • Arrears of Pay – limited to a maximum of 8 weeks arrears.
  • Holiday Pay – limited to six weeks unused holiday or holiday taken but not paid. The holiday entitlement covers that which the employee was entitled to by their contract of employment for the last 12 months only, unless the contract specifically allows for holiday to be carried over.
  • Compensation for lack of notice – if no notice is given then compensation is based on one week for every completed year of service up to a maximum of 12 weeks. It is considered the employee’s duty to mitigate the notice claim as much as possible. The purpose of the claim is to compensate for the actual loss incurred. The claim is therefore adjusted for any earnings, usually in the form of either state benefit or wages from alternative employment, and is then further adjusted for notional basic rate tax.
  • Redundancy – the entitlement for redundancy is based on length of service and the age of the employee. The employee must have completed two years continuous service to qualify. Employment under the age of 18 does not count, between 18 and 21 the employee is entitled to 0.5 weeks for every completed year, rising to 1 week between 22 and 40 and 1.5 weeks between 41 and 64. For employees over the age of 64 the entitlement is reduced by one twelfth for every completed month over the age of 64, once the employee reaches 65 the entitlement ceases. A maximum of 20 years service is applied to the redundancy calculation.

The above are calculated at the employee’s usual gross weekly wage. If the weekly wage fluctuated due to piecework, productivity bonus arrangements or shift work an average of the last 12 weeks is taken. Overtime will only be included in the calculation if it formed part of the normal working hours.

At present the Employment Rights Act 1996 places an upper limit on any claims to be paid by the National Insurance Fund. For those employees earning over this limit the balance of the entitlement can be submitted as a claim in the insolvency proceedings of their employer.

There is no minimum length of service required to be considered as an employee under the terms of the Employment Rights Act 1996. The only occupations that do not qualify are fishermen paid by a share of the catch, merchant seamen and those who normally work outside of the European Union, Norway or Iceland.

There are additional criteria to be met by Directors of limited companies who claim under the Employment Rights Act 1996. Directors need to work under a contract of employment, if they have a controlling interest in the company or only deal with company policy and attend board meetings in return for fees then their claims will probably be rejected. The directors on each insolvency who submit a claim are considered individually, the details given above are a basis guideline only.

Any employee can complain to the Industrial Tribunal if they have been refused payment they consider due, or have received less than they believe they should have had.

The Redundancy Payment Service offers a range of booklets available to both employers and employees providing additional information to that shown above.