In the current economic climate, many companies are facing the prospect of their business becoming insolvent.

From an employer’s, and indeed an insolvency practitioner’s perspective, the rights and obligations owing to employees of which they need to be aware depend on the nature of the insolvency and the terms of the contract of employment.

The question for most employees is where their claims for payments for arrears of pay, holiday pay, pay in lieu of statutory notice, for example, will lie in the event that their employer has insufficient funds to discharge monies owing to them.

In the first instance, certain employee claims have preferential status in a winding up (section 285 of the Companies Act 1963). The justification for giving these employees’ claims preferential creditor status is based on the fact that employees are usually wholly financially dependent on their employers. While this preferential status affords employees a certain level of protection, it only does so in circumstances where the company has sufficient assets to discharge the monies owing. This may not always be the case and, in any event, claims for arrears of wages, for example, are limited to €3,174 per employee. The balance of any claim for arrears of wages is unsecured. The other difficulty that employees face in this regard is the significant length of time it can take for winding up proceedings to be finalised and for payments to be made.

In Ireland, there is a Social Insurance Fund (the “Fund”) in place to deal with situations where an employer is insolvent. The Fund includes an Insolvency Payments Scheme (the “Scheme”’).

Where an employer is insolvent, his employees can claim from the Scheme, normally through the Liquidator or Receiver, for arrears of pay and various other entitlements that may be owed to them by their employer. If an employer is unable to pay these amounts then the employee/Liquidator can claim such payments from the Fund. Some limitations and conditions apply to payments made under the Scheme. All entitlements based on pay are limited to a maximum weekly limit which is currently €600 per week. There is also a limit of eight weeks for arrears of pay, sick pay, holiday pay and pay in lieu of statutory notice.

The Scheme does not operate in circumstances where an employer shuts down without becoming legally insolvent as defined in the Insolvency Acts. In those cases, the employer remains responsible for the payment of employees’ pay and other entitlements.

Clearly, any type of insolvency situation can have far reaching consequences on the employment relationship. While the preferential status afforded to certain employee claims, together with the provisions of the Scheme, assist employees in this regard, employees who find themselves in “informal” insolvency situations face an appalling vista of not being protected to any degree.