News broke this morning that construction giant Carillion Plc has gone into compulsory liquidation. It has since been confirmed that the High Court has appointed the Official Receiver as liquidator of Carillion Plc and its group companies. This will be of concern to many people, but particularly to the 43,000 individuals employed by Carillion, some 20,000 of which are based in the UK.

This is a complicated matter given the number of public sector contracts held by the Carillion group. Full details of how Carillion’s liquidation will be managed are yet to emerge, but The Official Receiver has announced that its priority is to ensure the continuity of public services whilst securing the best outcome for creditors. Unusually for a liquidation situation, the employees, agents and subcontractors of Carillion have been asked to come into work (unless told otherwise) and assured that they will be paid for the work they do during the liquidation.

The position of Carillion employees may therefore be different to that of most employees in a similar situation, at least in the short term. But what is the position of employees generally if their employer becomes insolvent? The answer is likely to depend on the type of insolvency involved.

The general rule is that a contract of employment is between the employer and the employee. Therefore, because of the personal nature of the contract, the contract should terminate if either party changes. However, it would not benefit either the employer or the employee if an employment contract always terminated automatically in an insolvency situation. The employee’s position therefore depends on the particular circumstances and whether or not the employer is continuing to trade. Employees may also have some protection by virtue of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Compulsory liquidation

The effect of compulsory liquidation is normally to terminate all employment contracts with immediate effect from the date the winding up order is published. This is because if there is no longer a trading employer and there can be no on-going contract. This will normally amount to wrongful termination which may mean that the employee has a claim for failure to provide adequate notice. However, if the liquidator decides to trade the company in liquidation, employment can continue provided the employee agrees (the employee is under no obligation to agree). Employment cannot continue if the employee is retained only to help the liquidator wind up the company, although the liquidator could employ the employee on a temporary basis for this purpose.

Voluntary liquidation

Voluntary liquidation may not immediately affect employment contracts, as the business of the company does not automatically cease. However, liquidators have only limited power to carry on the business as far as is necessary for the winding up of the company and any employment contract will end if the liquidator decides to cease trading. As with compulsory winding-up, this may amount to the wrongful dismissal of the employees.

Administration

An administrator acts as an insolvent company’s agent rather than stepping into the shoes of the company. The company doesn’t therefore change its identity, so employment contracts will continue unless the administrator takes steps to terminate them. The administrator may choose to carry on the business of the company whilst trying to find a buyer and may continue to employ the employees. If the administrator decides to terminate contracts of employment on behalf of the company this could amount to wrongful or unfair dismissal. However, there will be a moratorium on unfair or wrongful dismissal claims whilst the administrator is in office, and any employee wishing to bring a claim would need to apply to the court to have this lifted.

Court appointed receiver

The position here is different to an administration in that when a court appoints a receiver it vests control of the company in the hands of the receiver. This does therefore affect the contract of employment and the employment contract ends. The employee may be able to bring a claim in damages against the company for breach of contract.

What if the employee is owed money?

The general rule is that claims for arrears of wages and benefits, or damages for wrongful dismissal would rank as unsecured claims and would have the same status as other unsecured debts. However, employees have preferential status for some of their claims including claims for maternity pay, sick pay or suspension pay, as well as holiday pay and remuneration for redundancy, but only up to a limit of £800.

National Insurance Fund (NIF)

Where the employer is insolvent, the NIF guarantees a basic minimum payment of some debts owed to employees, provided certain conditions are met. This applies regardless of the type of insolvency or whether the debt is unsecured or preferential. The categories of claim include:

  • Employee debts, such as capped arrears of pay and statutory notice pay and unpaid pension contributions
  • An “employer’s payment” (which is a statutory redundancy or equivalent payment)

TUPE

TUPE normally protects the position of employees who transfer from one business to another as part of a business transfer. How the TUPE regulations apply in insolvency situations is complicated and beyond the scope of this note. However, it is important to bear in mind that there are specific provisions in TUPE which are intended to aid the rescue of insolvent businesses. The employees of an insolvent business may therefore have less protection than would normally be the case in a transfer situation.

Pensions

This is likely to be a major concern for the employees of insolvent companies and it has been widely reported that Carillion has a pension fund deficit approaching £600 million. The protection available to employees will depend on the kind of pension they have.

Employees recruited in the last few years will almost certainly have a “defined contribution” pension scheme. This is perceived as being less valuable than the traditional “final salary” pension scheme, which many employers have now phased out for new recruits. However, a defined contribution scheme is better protected in the event of an employer’s insolvency as the savings in the scheme are the property of the employee and not the employer.

Employees with a final salary pension scheme may be protected by the Pension Protection Fund (PPF), who may absorb the scheme of an insolvent employer in certain circumstances. There are complicated rules on the compensation that will be paid out if the pension scheme is eligible. However, as a general rule the PPF will pay the full basic pension of anyone who is already receiving their pension. However, for those yet to reach retirement age, payments are capped at 90% of a member’s pension and there is also a monetary cap (currently set at £34,655 where the 90% rule applies).

As mentioned above, full details of how Carillion’s liquidation will be managed are yet to emerge.