Redundancy can often occur when financial difficulty arises. Cutting down on staff costs, sadly, is an effective way to save the company.
But what happens when an employer finds themselves in a difficult financial position where they are unable to pay their employees statutory redundancy payments?
With many businesses still facing the impact of the pandemic, staff across the UK are facing the real prospect of being made redundant.
You need to know how redundancy is calculated and what happens to your employees if you can’t afford redundancy payments.
Do employees get paid when a company goes into liquidation?
Employment law entitles those that have worked for a company for at least two years to be paid statutory redundancy pay. You calculate this based on employee age and length of service.
The rate of pay is subject to a weekly maximum, which as of 6 April 2021 is £544.
Whilst companies are free to provide an enhanced rate of redundancy pay, they cannot provide less than is stated in the statutory minimum. This is how the statutory minimum rate is calculated:
To work out redundancy pay, the formula is:
- One and a half weeks' pay for each complete year of service after reaching the age of 41
- One week´s pay for each complete year of service between the ages of 22 and 40 inclusive
- Half a week´s pay for each complete year of service under the age of 22.
In these circumstances, it’s the company that foots the bill, alongside any additional pay for notice and untaken annual leave. However, who pays redundancy when the employer cannot?
The short answer is the government.
Claiming redundancy when a company goes into administration
Individuals are able to apply for their payments associated with redundancy if company goes bust if they meet certain eligibility requirements. This means that they need to be an employee of the company for at least two years prior to being made redundant, a UK or EEA national or a foreign national with permission to work in the UK.
They must also apply for the payment within six months of being dismissed.
Applications will be processed on the government website and can be made as soon as the individual is made redundant. More information on making a claim can be found on gov.uk.
It should be noted that the government will only provide payments in relation to statutory redundancy pay. Any additional, contractual pay is not included in this.
Employers must remember that if they remain in business, they must facilitate these payments themselves. Failure to do so could result in costly claims to an employment tribunal.
Types of insolvency
- Company voluntary arrangement
- Individual voluntary arrangement
- Debt relief order
Usually, someone called an 'insolvency practitioner' or ' Official Receiver' is appointed to deal with the insolvency. They will be in charge of the case and could act as one of the following:
- Supervisor (of a voluntary arrangement)
- Trustee (in bankruptcy)
The Redundancy Payment Service
The above is if your business has gone into liquidation. As mentioned before, you still must pay employees statutory redundancy payments if not.
If you cannot afford to pay your employee’s redundancy pay, you can apply to the Redundancy Payments Service (RPS), part of the Insolvency Service, to make payments directly to your employees.
You must demonstrate that you have exhausted all other funding options available before applying for this scheme. When you apply, they will require written evidence that you have done so.
As the employer, you are financially liable for payments to your employees. If the service makes payments to your employees, it will create a debt to the government.
If you apply for payments through this scheme, they cannot make any other types of payments such as arrears of pay, holiday pay, or notice pay unless you enter formal insolvency proceedings.
Redundancy payments made by the RPS are subject to statutory limits. These include a maximum of 20 years redundancy and payment is capped at £544 per week from 6 April 2021.
Who can apply
Any employer not subject to formal insolvency proceedings can apply. This includes businesses that:
- Are still trading
- Have stopped trading but not entered formal insolvency
- Are going to stop trading soon, but are not expecting to enter formal insolvency
Expert support on reemployment after redundancy with Peninsula
Handling redundancies is rarely a simple process. Mishandling the process can lead to employment tribunals, which can cost employers time and money.
Peninsula offers expert advice and specialised services to help avoid these fines and confusion. If brought to tribunal, we offer tribunal representation. To avoid getting to an employment tribunal, you can get 24-hour HR advice.
For all other HR enquiries and specialist help, call us on 0800 028 2420.