What rights do employees have during company administration?

During a company’s administration, employees face redundancy risk until a way forward is determined. If the company can be saved and sold to another party, employee contracts will move to the purchasing company under TUPE regulations.


Employee Rights & Company Administration

As a director or employee of a company entering administration, you might worry about job security. The administrator’s main legal duty is to act in the creditors’ best interests, which may involve liquidating the company and selling assets to recover funds. In some cases, company ownership may transfer if it is sold. As an employee, you’ll understandably be concerned about how this could impact your employment status. Here’s what you need to know.


Awareness about Employees’ Rights during the Administration

After a company enters administration, it often continues trading as a way forward is explored. Control of the business automatically shifts from current owners to the appointed administrator, a licensed insolvency practitioner. If the administrator runs the business for over 14 days without dismissing you, they must ‘adopt’ existing employee contracts. Unpaid wages or unused holiday entitlement from this point become ‘preferential creditors’ and are paid from the company’s assets ahead of other creditors.

However, while the company is in administration, redundancy remains a risk as the business may not successfully navigate through administration. Eventually, the company will have to exit administration one way or another.


What if the company is subsequently liquidated?

While preserving the business and ongoing trade is ideal, if the procedure leads to total liquidation, there won’t be a company to employ you, and your employment will end. In such a situation, you might be eligible for compensation in the form of employee redundancy, depending on your time and length of service at the time of redundancy.


When does TUPE apply?

The Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as TUPE, is a robust law designed to safeguard employee rights during the sale or change of ownership of their company. This can happen for various reasons and impacts employees in both successful and struggling companies. TUPE is typically relevant after a business merger or acquisition by a larger company, changes in a business’s service provision, or when a company is sold out of administration to a connected or unconnected third party.

Under TUPE rules, when a company is sold out of administration, the new owners must transfer the contracts of all existing staff to the new business and take responsibility for any outstanding payments owed to employees.

Importantly, under TUPE, new owners cannot selectively choose employees to transfer; they acquire the entire workforce along with other business assets. Existing terms and conditions of employee contracts remain unchanged, and crucially, your start date as an employee remains the same as before the company was sold. This continuous service is vital in case of future redundancy.

Note that in insolvency proceedings, TUPE applies only if the company is sold out of administration; if the company ceases trading and enters liquidation, TUPE regulations are not begun.


What Can You Do If Your Employee Rights Have Been Violated?

If your employer has entered a formal insolvency procedure and owes you money or if you believe they have violated your employee rights, you can file a claim against them with the Department for Business, Energy and Industrial Strategy (BEIS). This organisation will then represent you in lodging the claim against the insolvent company. Unfortunately, employees are often not fully paid from insolvency proceedings due to insufficient funds.

Regarding redundancy pay, if the company is unable to pay what staff are entitled to, funds from the National Insurance Fund will be used to cover this shortfall. When redundancy pay is funded in this way, employees can only claim at statutory redundancy levels, not any enhanced redundancy entitlements stated in their employment contract.

Claims for arrears of pay are limited to the statutory limit of £571 per week (for redundancies made on or after 6 April 2021), covering wages, sales commissions, and salaries. Notice pay is also capped at this level. 


Employee Rights: Pre-Pack Administration vs. Company Administration

In a pre-pack administration, the sale of the assets of the insolvent company is organised before an administrator is formally appointed. This sale could involve existing directors or an unconnected third party. As employees are considered a class of company assets, their salaries and contracts are included in the pre-pack sale. With a pre-pack sale already agreed upon, it often provides more job security for employees as the transfer of their contracts upon completion of the sale.

Since TUPE employment rights and regulations apply to the newly formed company, it is illegal for the new company to terminate the old company’s employees. This poses a challenge for businesses attempting a successful pre-pack sale, as the new company may struggle to afford the old company’s payroll. Fortunately, TUPE is mandatory, and adopting existing employee contracts must be followed in all cases. In the UK, employees have the right to file claims against insolvent companies that fail to meet their employer obligations.

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How Vanguard Insolvency can help

If you are a company director contemplating administration, ring us at 0121 769 1915 for expert assistance and advice. We can guide you through the advantages and disadvantages of company administration, elucidate alternative options in a free consultation, and clarify how your employees might be affected by your decisions going forward.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.