Retailers BHS and Austin Reed have recently gone into administration, leaving 11,000 and 1,200 jobs respectively at risk. In such uncertain times, what rights do affected employees have?

What is administration?

Administration is a legal process which usually involves an insolvency practitioner taking over the running of an insolvent company, with a view to restructuring the business or realising its assets. Administration can give organisations 'breathing space' to enable a rescue, as creditors are prevented from enforcing their claims against the company. A company will normally continue to trade while the administrator looks at options for restructuring. The outcome of an administration may be the sale of the business as a going concern, the sale of part of the business or, as previously in the high profile case of Woolworths, the closure of the business and sale of assets.

What if my employment continues?

Once administrators are appointed, initial cost saving measures are likely to be needed, invariably involving a reduction in the wage bill. However, if the administrators are considering a sale of some or all of the business certain employees may be retained in order to keep the business running whist a buyer is found.

In such a situation, retained employees remain employed by the insolvent company, although in practice employees will take instructions from the administrators. Employees will have the right to receive their salary and benefits during this time, although whether wages can actually be paid will depend on the cash flow of the insolvent company.

In the event that the employees are not paid their salary and benefits, then they will have a debt against the insolvent company. The majority of debts owed to employees are unsecured and rank second to last in the order of priority on a realisation of assets. In practice, this is likely to yield, at best, a few pence of every pound that the company owes them. However, certain debts owed to employees are classed as a preferential debt and as such rank third in priority and are paid in full (after secured creditors and expenses).

Preferential debts consist of:

  • wages or salary (including sick pay, bonus and commission) owed for the four month period before the start of the relevant insolvency proceedings, subject to a maximum overall claim (per employee) of £800
  • accrued holiday pay in respect of any period prior to the start of proceedings
  • certain pension contributions into occupational pension schemes and contributions deducted from the employee's pay.

In addition, if an administrator does not dismiss employees within 14 days of appointment, any wages or salary (including holiday and sick pay) due to employees after that date will rank as an expense of the administration. This means that they are paid (in full) ahead of the distribution of assets to holders of floating charges and unsecured creditors.

Will TUPE apply?

If the business, or part of the business, is sold as a going concern, it is likely that the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply, so that any employees assigned to the business or part being sold automatically transfer to the buyer on their current terms and conditions of employment (albeit that there is some scope to vary terms in an insolvency situation). Employees are entitled to object to transfer, but this will be akin to them resigning at the point of transfer so that they would lose any rights to redundancy or notice pay.

Where a TUPE transfer is proposed, the insolvent company should undertake a process of informing and consulting with representatives of the affected employees. A failure to do so could give rise to a protective award of up to 13 weeks' gross pay per employee, which would rank as an unsecured debt against the insolvent company.

What if I am made redundant?

Often insolvency proceedings will result in redundancies being made. Where 20 or more redundancies are proposed at one establishment within a period of 90 days, the insolvent company will be required to undergo collective consultation. Practically, this means that representatives of affected employees should be provided with certain information and consulted with about the proposals for a set period of time (either 30 or 45 days) before the first dismissal takes effect. A failure to consult can give rise to protective awards of up to 90 days gross pay per employee, which again would rank as an unsecured debt against the insolvent company.

The obligation to collectively consult sits alongside the obligation to consult individually with the affected employees. A failure to do so could give rise to claims for unfair dismissal. In addition, if employees are not paid their notice pay then this could also give rise to wrongful dismissal claims.

Employees who have been employed for two years or more will be entitled to a statutory redundancy payment based upon their age, length of service and weekly pay. The maximum amount of statutory redundancy payment that an employee can claim is currently £14,370.

Can I claim from the National Insolvency Fund (NIF)?

Where the employer is insolvent, the NIF guarantees a basic minimum payment of specific debts, such as:

  • statutory redundancy payments
  • up to 8 weeks' arrears of pay
  • up to 6 weeks' arrears of holiday pay
  • statutory notice pay
  • unpaid pension contributions owed to employees by their employers provided certain conditions are met.

If an insolvent employer fails to pay all or part of these debts that it is liable to make to an employee, the employee may apply to the Secretary of State for the payment (or outstanding balance) to be paid out of the NIF.

If the whole of the employee's claim cannot be paid out of the NIF, the employee will retain the right as a creditor to claim the balance against the insolvent company in the insolvency. It is therefore advisable for employees to make claims both to the NIF and in the insolvency to try and maximise their chances of recouping some of the debts owed to them.

What about bringing an employment tribunal claim?

In some cases, the insolvent employer's liability for payment of a particular debt (for example, in relation to the basic award in unfair dismissal cases, the protective award or damages for breach of contract) will need to be established by a court or tribunal before the employee can seek payment from the insolvent employer or the NIF.

Where the company is in administration it will be protected by a "stay" on legal proceedings, meaning that no legal process may be instituted or continued against the insolvent company or its property without the consent of the administrator or permission of the relevant insolvency court. Employees therefore need to accept that it could be some time before they see any payment of the debts owed to them.