The number of redundancies has spiked sharply due to Covid-19, exceeding those recorded during the credit crunch recession of 2009/10. Latest Office for National Statistics figures showed that there were 314,000 redundancies in Q3 2020 and 343,000 in Q4 (compared to 118,000 and 109,000 for the same quarters in 2019). Employees (and that includes directors) have certain rights when they are made redundant, including getting redundancy pay. Normally the employer pays this. But what happens when redundancy happens because of the company going out of business?
The answer is that the Insolvency Service, a Government agency, will pay.
What can employees apply for?
The significant levels of support the Government have provided for businesses during the pandemic has certainly stopped the number of redundancies rising even higher. However, even as the Government has published its route map out of lockdown (22nd February), significant damage has been done to many thousands of businesses. In addition to the significant redundancies already seen, The Federation of Small Businesses has also suggested that it expects up to 250,000 SMEs to go out of business in 2021, and that will only mean more redundancies.
Employees made redundant due to the insolvency of the company they work for can apply for the following, although there are caps* on what the Insolvency Service will pay:
• Statutory redundancy pay. The Insolvency Service will pay this if the employee being made redundant has worked for their employer for at least 2 years. However, the claim must be made within 6 months of redundancy.
• Holiday pay that is outstanding
• Unpaid wages, overtime and commission
• Statutory notice pay if the employee has worked for the employer for at least one year.
(* The amount of redundancy pay people are entitled to depends on length of service, age, and rate of pay. The rate of gross weekly wages at the time of redundancy (currently up to a maximum of £525/week) and the length of time in service (up to a maximum of at 20 years) are used to calculate the amount of redundancy pay.)
These statutory payments are claimed through the Redundancy Payments Service and are paid from the National Insurance Fund.
What about Company Directors?
The answer, which is not all that widely known, is that directors are entitled to the same redundancy payments when a business becomes insolvent as normal employees, providing they can prove their status as an employee of the company, and fulfil more than an advisory or non-executive role. In more detail, the eligibility criteria – which will need to be proven to the liquidator – comprise:
• Does the director have a contract of employment?
• Has the director worked for at least 16 hours per week?
• Has the company been incorporated for over two years?
• Was the director genuinely carrying out a practical role for the company?
If the above criteria can be proven, and if the director has been paid a salary through PAYE then it is likely they will be eligible for statutory redundancy pay at insolvency as well as any arrears in salary and holiday pay and pay in lieu of notice.
These statutory payments are claimed through the Redundancy Payments Service and are paid from the National Insurance Fund.
It is our job to save businesses – and jobs.
Clive Fortis of Antony Batty who have an office in Bournemouth states “Although most commentators believe we will see a spike in insolvencies over the next few months – and therefore redundancies – it is the job of insolvency practitioners and restructuring specialists such as us to save businesses (and jobs) as well as implement insolvency procedures. As the most recent R3 survey shows, where insolvency practitioners were involved, 40% of insolvent businesses were saved. And that is certainly something that is needed right now.”
Part of the service we offer to businesses in financial difficulties is to talk to their employees on your behalf – removing the emotional tie directors may feel to them – to give them practical help and guidance.