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Employment rights and insolvency

Published Friday, June 9, 2017

This briefing describes the options available to employees when owed money by an insolvent employer or one who refuses to pay statutory redundancy pay.

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The Employment Rights Act 1996 and Insolvency Act 1986 provide a number of avenues via which an employee might seek payment of debts owed to him or her by an insolvent employer. The avenues fall into two broad categories. 

First, the Secretary of State pays certain debts owed to employees 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.

The options open to the employee may be summarised as follows:

  • The Employment Rights Act 1996 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 Insolvency Act 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 briefing provides further details about each of these.  The law it discusses applies to the whole UK.

 

Commons Briefing papers SN00651

Authors: Lorraine Conway; Douglas Pyper

Topics: Companies, Employment, Insolvency

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