What Happens to Employees When a Company Goes into Administration?

With the country experiencing a serious economic downturn, it’s no surprise that many companies are facing the threat of insolvency and are being forced to enter into administration. But administration is nothing new. Even before the threat of the pandemic, huge household names such as Thomas Cook and Mothercare were being forced into administration in an attempt to save the business.

With increasing numbers of businesses, small and large, entering into administration, it’s no surprise insolvency practitioners are being asked to help employees, particularly given the uncertainty surrounding the procedure.

As an employee of a company that’s going into administration, or a charity that’s going into administration, you may be left in the dark and are unsure about what happens next.

When a company is going into administration it doesn’t necessarily mean that it will close down. The process of going into administration provides breathing space and enables actions to be taken to keep the company up and running, with the possibility of returning back to being profitable again in the future.

But what happens to employees during this period?

You Could Face Termination of Employment

In the administration period, the first 14 days are crucial for employees. If you’re made redundant during this time, you’ll be put into the last category to receive monies owed and will become an ‘ordinary creditor’. You will still retain your entitlement to redundancy payments and outstanding wages.

However, when your company enters into administration, it’s important to start being realistic about the end game. If the company has been profitable in the past and is only now experiencing financial problems, there’s a high chance that the administrators can save the business and turn it around.

If you’re kept on, then you have nothing to worry about if the company survives and remains solvent. In fact, this is the most desirable outcome for everyone involved, from business owners and creditors to administrators and employees.

However, if the company has seen a steady decline in sales and profits over the past few years, then it’s likely this could be the end of the business. If administrators fail to turn the business around within an acceptable timeframe, the company will inevitably face liquidation.

For employees, liquidation also means termination of employment. It’s a harsh but unfortunately all too common reality of the economy, particularly in difficult times. If this happens, employees will be made redundant and will be out of a job. It’s important to remember though, that you’ll still be entitled to your rights if you’ve worked through the administration period.

Preferential Creditors

If you are lucky enough to retain your employment beyond the two-week period, you will become a ‘preferential creditor’. This position is far better to be in should you face redundancy later on. Preferential creditors have greater rights and a far greater claim over ordinary creditors, purely through having survived the initial 14-day period.

This is because as a preferential creditor you are entitled to claim:

  • Up to a maximum of £800 in outstanding salary and commissions – this covers the four-month period prior to the insolvency
  • Accrued holiday pay for up to six weeks
  • Some of your occupational pension payments.

Preferential creditors may find themselves chasing money if the company is liquidated after the administration period ends if it has not been successful at turning the business around. Any payments that are owed from before the four-month period will be paid as if you are an ordinary creditor. Payments owed from during the four-month period before the administration period will be paid preferentially, giving you a financial advantage and money to fall back on when you are looking for a new job.

What If There Aren’t Enough Funds from Liquidation to Pay Redundant Employees?

However, not all employees will be able to receive their full redundancy pay if the liquidation process doesn’t produce enough funds for this to be achievable. In this case, redundant employees should make claims through their insolvency practitioner and should be aware that there are national insurance funds in place to prevent these disastrous outcomes.

So long as you are aware of the amount you are to be paid, you can claim any shortcoming by making a claim via the insolvency practitioner and then contact the Redundancy Payments Service (RPS).

This claim is made from the National Insurance Fund. However, the amount you can claim through the National Insurance Fund is limited to £464 per week. This can include up to eight weeks’ pay and six weeks’ holiday pay.

Other payments that are owed to an employee, including sick pay and maternity leave pay, are not covered by this insurance fund. If you are owed money for these or other similar allowances, you need to claim your money back through the Department of Work and Pensions or HMRC. Again, an insolvency practitioner can assist you in your claims and calculate your entitlements to make the process easier for you.

Continued Employment During Administration

If the administrators choose to keep you on after the 14-day period, you also accrue your entitlements during the administration period. The administrator then acts as your employer.

During this employment period, they might ask you to take a cut in your wages or to defer your wages entirely. In this situation, you’ll again have to chase payments at the end of the administration period if the company enters into liquidation, but you are entitled to the deficits.

The Company Could Be Sold

Employees who survive the initial 14-day period as well as the administration period might find that the company is being sold to another owner or entity. In this case, your rights are also protected under the Transfer of Undertaking (Protection from Employment) Regulations.

For employees this can be a positive outcome, as the new employers are entitled to keep you on as per government regulations. This also protects any outstanding wages or holiday pay, or other payments you might still be owed. As the new owners get the business up and running again, you are entitled to receive any back pay or other pay you may have been forced to previously forfeit.

New owners may also be forced to make changes to your existing employment contract, which can affect your new rate of pay, holiday allowance, sick pay or pension funds. While this isn’t ideal, it’s permissible as what’s called ‘Permitted Variation’. This is allowed when the contractual changes are deemed to be necessary for the overall viability and survivability of the business. For employees, there’s little they can do legally in these circumstances, and they often have to accept the changes or face termination.

Of course, new owners can also seek to fundamentally change the business around to ensure it survives and becomes profitable in the future. For employees, this can also mean redundancy if the new owners don’t deem their role to be necessary. At this stage however, an employee will be entitled to redundancy rights and should be able to claim payments owed to them.

Employees facing redundancy need to be aware that the amount they are entitled to is dependent on several factors. The most important factor to consider is their length of service; for most companies, you need two years of service to qualify for redundancy pay.

Contact Irwin Insolvency Today for Your Free Consultation

Irwin Insolvency is ready to provide you with expert advice that could help you and your colleagues when your employer is facing administration. Our professional team can provide you with the expertise and knowledge that you need to make the best financial claims you can.Our staff have years of experience working across a range of industries, and we’re ready to help you through these tough and trying times. Contact Irwin Insolvency today for your free consultation.

Contact Irwin Insolvency today for your free consultation

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.