What happens to employees when a business goes into administration?
By Mr Bankruptcy
20th October 2023
Financial uncertainty looms over many businesses, no matter their size. With the likes of Wilko going into administration and putting 12,000 UK jobs at risk, it’s important to understand the impact to employees should the worst happen and your business has to bring in the administrators.
It’s also critical that everyone in your business understands their options and subsequent rights, which will depend on the outcome that administrators can find.
What does going into administration mean?
Being in administration doesn’t necessarily mean that a company will be closed down. It’s just the start of a legal process that allows time for opportunities to be explored in order to the keep the business running and to save jobs.
However, as this process is undertaken, it can lead to different possible outcomes, which impact on employees in different ways.
The impact of administration outcomes on employees
There are three main ways in which employees can be impacted when a business is in administration:
- Redundancy:
This is the most likely outcome if a business goes into liquidation as a result of administration. If an employee is made redundant in the first 14 days of their business being in administration, they will be entitled to arrears in pay and redundancy payment, if eligible. However, these employees will be considered ordinary creditors, which means they are last in line to receive money owed.
Money left owing to an employee may be claimed through the Redundancy Payments Service from the National Insurance Fund, but the claim needs to be made within six months of their dismissal. It is also worth noting that only specific types of monies can be claimed, such as wages, redundancy and holiday, and that these amounts are capped.
- Continuation of employment:
If an employee remains employed beyond the first 14 days of administration, the administrator then takes responsibility for employment rights. At this stage, these employees become preferential creditors should their employment eventually terminate and they are still owed money. This means they move up the list of priority creditors and are more likely to receive the money owed to them.
Again, what can be claimed is specified and capped and anything owed above this is claimed as an ordinary creditor, so they have less chance of receiving the additional monies owed.
- Transfer of employment
If the business is sold, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) could apply and employment would be transferred to the new owner of the business. Continuity of employment is preserved, and existing terms and conditions of employment may continue, although there is flexibility to change terms of employment in these circumstances to help ensure the company survives.
Business owners, administrators and employees all hope that a business can be turned around so no one loses their job. But when this isn’t possible, all parties need to prepare for the worst case scenario and understand their rights and obligations in every likely situation.
James Rosa Associates
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