What Employment Rights do Staff Have When a Company Goes into Administration?

July 9, 2020

 

Over the past few months, we have heard of household names such as Debenhams and Carluccio’s dealing with administration and staff redundancies. Unfortunately, predictions of the Coronavirus pandemic’s economic impact mean these administrations and job losses are expected to continue.

But what happens to staff’s employment rights in this situation, when their employer is in administration and is subsequently bought out by another company?

When a company becomes insolvent, what happens to its staff will depend on whether it goes into liquidation (meaning it closes down completely), or administration (when insolvency practitioners take over to try and save the business or sell it off).

Liquidation

In liquidation cases, staff have very limited rights; their employment will automatically come to an end, and they will only be able to claim their redundancy pay, notice and holiday pay from the UK Government’s National Insurance Fund (NIF). The amounts they can claim from the NIF are subject to certain limits, so many staff will lose out financially in this situation.

Administration

In administration cases, the situation may be very different. If the business is bought out, the TUPE Regulations 2006 will often apply. TUPE can give employees the right to transfer from the old company in administration to the new company buying the business with most of their employment rights preserved. While they can still claim their statutory redundancy and notice pay from the NIF if they are dismissed, they may also be able to claim additional sums from the buying company if it does not allow their employment to continue under TUPE.

This position was recently made more complicated by the creation of the Coronavirus Job Retention Scheme (CJRS), or furlough scheme. This gave administrators a third option to consider (other than making employees redundant or preserving their employment so that they may transfer to a buyer): placing staff on furlough, so that 80% of their ongoing wages could be covered by the CJRS. How exactly this works has already been the subject of urgent litigation in the High Court and Court of Appeal in the Debenhams and Carluccio’s cases. The courts confirmed that administrators were able to place employees on furlough and that this would amount to “adopting” their contracts rather than bringing them to an end.

While this uncertainty has been clarified, there are likely to be further issues brought to the courts and Tribunals over the coming months, as employees who have been made redundant by administrators may complain that they should have been placed on furlough for as long as possible instead so that they could still receive 80% of their wages under the CJRS. This may lead to unfair dismissal claims being brought against not only companies in administration, but also potentially under TUPE against purchasing companies.

However, it is no longer an option for staff to be placed on furlough for the first time under the CJRS – the deadline for doing so was 10 June 2020, meaning that this option is now only open in relation to staff who had already been furloughed by their employer previously.

In addition, the CJRS will begin to be wound down from 1 August (when the amounts payable by the Government under the scheme will start to be reduced). This makes it likely that the risk of unfair redundancy claims from staff who argue that they should have been kept on furlough will also reduce, as the increased costs employers will have to pay from that date will make it easier for employers and administrators to justify redundancies.

Click here for our Insolvency Partner Mark Rostron’s write-up of the Carluccio’s case and its implications for administrators.

For more information from an employment law perspective, please contact the Employment & HR team:

 

For more information on an insolvency query, please contact the Insolvency team:

 

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