The Insolvency Service has issued a call for evidence inviting comments on the issues with, and improvements that could be made to, the collective redundancy consultation requirements for employers faced with insolvency. 

This comes after calls for evidence issued by the Department for Business, Innovation and Skills in November 2011 and June 2012 which led to changes in April 2013 aimed at making consultation simpler and more effective. However, recent Employment Tribunal findings have highlighted that there could be further improvements in the way in which the duty and benefits of consultation are understood in insolvency situations. As a result, the government is inviting comment on the following four areas: 

  1. Employer and insolvency practitioner (“IP”) understanding of consultationrequirements: 
  • The extent of directors and IP’s understanding and implementation of the consultation requirements and the requirement to notify the Secretary of State of proposed dismissals before any redundancies take effect.
  • The considerations of directors and IPs in deciding whether or not to start consultation. 
  • The way in which the requirement to have a meaningful consultation with employees with a view to reaching agreement works in practice. In particular, the role played by employees and employee representatives in considering options to rescue the business and reduce the impact of redundancies.​
  1. The factors that facilitate and/or inhibit effective consultation. 
  2. The role of directors and insolvency practitioners:
  • The extent to which directors are starting consultation prior to the appointment of an IP and, if they are not, recommendations on how to encourage early consultation.
  • The way in which the handover from directors to IPs works in practice.
  1. Ensuring timely notification and effective consultation:
  • Whether there is a need for further guidance to ensure timely notification to the Secretary of State and effective consultation.
  • Recommendations on how the government can best incentivise and disincentivise director and IP behaviour to ensure this happens.
  • If the current sanction of Protective Awards (where an employer is liable to pay a value of up to 90 days’ pay for failure to consult an employee) is proportionate, effective and dissuasive to employers facing, or that have moved into, a formal insolvency process.

The closing date for responses is 12 June 2015, following which the government will analyse and consider whether any policy changes are necessary. 

The aim is to strike a balance between fairness to employees (who are not responsible for their employer’s insolvency) and appreciating the practicalities and realities of insolvency. The cases in this area make it very clear that insolvency is not a special circumstance allowing a director or IP to disregard the consultation requirements. However, it has been accepted by the Employment Appeals Tribunal that the compensation payable to employees may be reduced to reflect the fact that, financially, it is not always possible to continue trading while a consultation takes place. Indeed a director can find himself stuck between a rock and a hard place, as a director who trades while knowing there is no reasonable prospect of avoiding insolvent liquidation in order to comply with the consultation requirements will likely find himself liable for wrongful trading and may face personal liability for the company’s debts. 

Certainly once an IP is appointed, in the majority of cases redundancies will be inevitable as the business simply will not have the funds to continue paying its workforce. There will not be sufficient cash at bank to pay employees’ wages and keep the business trading while a full consultation is achieved. In any event, the employer’s insolvency will mean that any consultation will be little more than window dressing as (unless a buyer is found and the employees transfer) job losses cannot be avoided. It is also worth bearing in mind that from an insolvency law perspective, employees simply represent another category of creditor. Although they enjoy preferential status in respect of certain liabilities, in the same way that insolvency is not a special case when it comes to consultations under employment law, employees are not a special case under insolvency law. A balance needs to be struck, but at present it is difficult to see how the current law is fit for purpose when it cannot be complied with. 

The hope is that via a combination of the outcome of the awaited ECJ judgement in the USDAW/ Ethel Austin case (expected on 30 April 2015) on whether employers need to collectively consult when making redundancies from multiple sites, and possible policy changes proposed by the government as a result of the call to evidence, that a clearer picture of how to handle redundancies in an insolvency situation will emerge. However, for the time being employers will have to find a way to cope with the current uncertainty and the particular approach taken in any given case is likely to turn on its own facts.