Coping with a Collapse: Employees’ Rights During an Insolvency

With the rise of e-commerce, it is no secret that things are now a little uncertain on the high street.

Just in recent months we have seen the much-loved US fashion store Forever 21 announce their struggle, resulting in shops outside the US closing, we are witnessing British retailer Mothercare preparing for the worst, and have also waved goodbye to the long-lived travel group Thomas Cook that provide millions with irreplaceable memories – perhaps the one that hit us, Britons especially, the most.

When things come crashing down for companies, employees are usually an afterthought. Take the demise of Toys R Us. The company went to battle with their ex-staff right after their collapse after laying off employees without any benefits or severance pay and, of course, they had to cough up. This leaves us with an all-important question: what are employee rights when a company collapses?

Thomas Cook’s high-profile collapse last month was a reminder of the importance of employees knowing their rights in a company insolvency scenario.

Speaking to Michael Hibbs, Partner in the Employment team at  Shakespeare Martineau , he shares: “Acting quickly and keeping up communication with registered insolvency practitioners can improve workers’ chances of making successful employment claims.” So how can they discover exactly what they’re entitled to and what should they do to help the process run smoothly?

Following their official appointment, the organisation’s liquidators have 14 days to decide whether to adopt the employees’ contracts of employment, or whether to terminate these contracts immediately

With recent headlines being dominated by the financial struggles of well-known brands, a key area of confusion is the difference between the various types of insolvency procedures, and their implications for a business’ workforce. Michael expands on this: “For example, company voluntary arrangements (CVAs), which have attracted attention due to the tough trading conditions facing the retail sector, often enable an organisation to remain running while property rents are renegotiated with landlords. As such, they may not have a significant impact on employees, who will generally carry on working as normal.”

On the other hand, in a compulsory liquidation, like that undertaken at Thomas Cook, the business is shut down completely in response to a winding-up petition by disgruntled creditors. “Following their official appointment, the organisation’s liquidators have 14 days to decide whether to adopt the employees’ contracts of employment, or whether to terminate these contracts immediately”, expands Michael.

Whilst it is important to understand the type of insolvency situation that the business is going through, the organisation’s structure and set-up itself may also have an impact on the rights of its workforce. An example Michael uses: is it a limited company, or does it belong to a partnership? If it’s the latter, insolvency practitioners are unlikely to be appointed, so employees will need to seek the partner with the greatest assets.

“In order to mitigate the personal financial impact of their company collapsing, workers should check their contract carefully to discover what they’re entitled to claim for; in many cases, this will cover unpaid wages and notice pay.” This means, as Michael tells us, they may also be able to claim for any breaches of contract and, if the person has been made redundant, a statutory redundancy payment. In cases where the individual has been made redundant from an office, shop or establishment employing more than 20 people, without a collective consultation taking place, they may also be able to claim a protective award of up to 90 days’ gross pay.

What’s more, workers should not expect to receive the full amount they claim

Another important area to consider when making an employment claim is the question of who will pay. “It’s worth bearing in mind that whilst some compensation payments made by the business are treated as preferential debt by insolvency practitioners, there is likely to be a significant delay between making a claim and receiving payment.

“What’s more, workers should not expect to receive the full amount they claim – in reality, this is likely to be the value of a few pence for every pound claimed. However, if individuals can prove that their employment contracts have been terminated as a result of a formal insolvency procedure, they may also be able to claim money more quickly from Government through the National Insurance Fund; employees are usually entitled to claim up to eight weeks’ arrears of pay as well as redundancy payments through this method.”

In order to boost their chances of an employment claim going smoothly, it’s important for employees to maintain a clear line of communication with insolvency practitioners and respond to any correspondence issued at the earliest possible opportunity. Once they have been formally appointed, setting up a helpline for the workforce is usually high on their agenda, so employees should take advantage of this to resolve any queries or concerns that arise during the process.

Even in distressing times, keeping a clear and logical mindset is essential, as Michael explains. “Finding out as much information as possible about the type of insolvency process being undertaken, and carefully reviewing their employment contract, can help to ensure that workers claim the maximum amount they’re entitled to during a company insolvency scenario. Maintaining regular communication with insolvency practitioners can also help employees to mitigate any impact on their finances, and emerge on the other side of a company collapse in the best position possible.”

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