Navigating the realm of business, particularly in times of financial instability, can be challenging and fraught with uncertainty.
For employees, the news of their employer’s company going into liquidation can evoke anxiety and confusion.
This article will endeavour to shed light on the implications of company liquidation for employees, particularly focusing on the UK context.
We will delve into several critical aspects such as employee rights, possibilities of claiming redundancy pay and unfair dismissal, as well as the impact of different types of liquidation on employees.
Understanding these elements will equip employees with essential knowledge, allowing them to navigate the rough seas of corporate insolvency more smoothly.
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What Happens to Employees When a Company Goes Into Liquidation?
When a company is placed into liquidation, it signifies the end of the business’s trading life.
The business assets are sold off to repay creditors, and then the company is formally dissolved.
Employees, being company creditors, are affected in several ways.
Firstly, their employment contracts are usually terminated unless the liquidator decides it’s beneficial for the business to continue trading temporarily.
This could mean that employees may lose their jobs.
It’s important to note that this does not necessarily happen immediately, as the winding-up process can take several months or even years, depending on the complexity of the company’s financial affairs.
Employees may also be entitled to certain payments, including unpaid wages and holiday pay.
However, these payments often depend on the company’s financial state and might be significantly delayed.
Do Employees Get Paid When a Company Goes Into Liquidation?
When a company goes into liquidation, employees become ‘preferential creditors.’
This means that they are prioritised over unsecured creditors when it comes to the distribution of assets from liquidation.
However, being a preferential creditor doesn’t guarantee full payment.
If the company’s assets are insufficient, the employees might only receive a portion of their owed pay or, in the worst-case scenario, nothing at all.
Any unpaid wages, overtime, commission, or holiday pay accrued four months before the liquidation are given preferential status.
However, any contractual redundancy payments or notice pay are not, and employees may have to apply to the National Insurance Fund for these.
Related Post: What Happens During the Process of Company Liquidation UK?
What Are Liquidation Employees’ Rights in the UK?
In the UK, the rights of employees when a company goes into liquidation are safeguarded by several legal provisions.
Under the Employment Rights Act 1996, employees are entitled to certain payments from the National Insurance Fund if their employer is insolvent.
These include arrears of pay, holiday pay, redundancy pay, and compensation for unfair dismissal.
Furthermore, employees can make a claim for statutory redundancy pay if they have been working for their employer for two years or more.
The amount an employee can claim depends on their age, weekly pay, and the length of their service.
Employees are also protected from being dismissed because of the company’s insolvency.
If an employee is dismissed for this reason, they may be able to make a claim for unfair dismissal.
What Should You Do if the Company You Work For is in Liquidation?
Discovering that the company you work for is in liquidation can be stressful, but taking proactive steps can mitigate the potential hardships.
Firstly, it’s crucial to understand your rights as an employee.
If you’re uncertain, consider seeking legal advice or support from a union representative if you are part of a union.
Ensure you have all essential documents, such as your employment contract and payslips, to substantiate any claims you may have to make.
Contact the appointed liquidator to lodge your claim for any unpaid wages or other entitlements.
You might also need to make a claim with the National Insurance Fund.
Can an Employee Claim Unfair Dismissal During Liquidation?
Yes, an employee can claim unfair dismissal if they believe they have been dismissed because the company has gone into liquidation.
It’s important to remember that legal protection against unfair dismissal applies regardless of the company’s financial situation.
However, the process of claiming unfair dismissal can be complex and may require legal assistance.
It’s also worth noting that any compensation awarded for unfair dismissal would be treated as an unsecured claim, meaning it would only be paid if enough funds were left after paying the preferential and secured creditors.
How Does Compulsory Liquidation Affect Employees?
Compulsory liquidation is when a company is forced into liquidation by a court order, usually as a result of a petition by creditors, directors, or shareholders.
For employees, the effects are often quite severe.
Upon the issue of a winding-up order, all employee contracts are automatically terminated.
While they can make a claim for unpaid wages and other entitlements, they are unlikely to receive these until the liquidation process is complete, which could take some time.
Furthermore, if the company’s assets are insufficient to cover all the debts, employees may not receive everything they owe.
How Does Voluntary Liquidation Affect Employees?
In contrast, voluntary liquidation is initiated by the company directors.
While this situation might still lead to job losses, the process is generally more structured and can provide a greater level of certainty for employees.
The directors have a level of control and may be able to arrange for the business (or part of it) to be sold as a going concern, potentially saving jobs.
Even if this isn’t possible, the fact that the directors are actively managing the situation often means that employees receive better communication and can prepare for the outcome.
Can Employees Claim Redundancy Pay During Liquidation?
Yes, employees can claim redundancy pay during liquidation if they have been employed for at least two years.
The amount an employee can claim will depend on their age, weekly pay, and length of service.
However, employees should be aware that any contractual redundancy pay over the statutory minimum will be treated as an unsecured claim in the liquidation.
This means that it will only be paid if there are enough funds left after all preferential and secured creditors have been paid.
Can Employees Claim From the National Insurance Fund if Their Employer’s Company is Liquidated?
Yes, employees can make a claim from the National Insurance Fund (NIF) if their employer’s company is liquidated.
The NIF covers payments for unpaid wages, holiday pay, statutory redundancy pay, and compensatory notice pay.
However, there are limits to how much can be claimed from the NIF, and any amounts over these limits would be treated as unsecured claims in the liquidation.
Final Notes On What Happens to Employees When a Company is Liquidated?
Company liquidation undoubtedly brings a challenging time for its employees.
Understanding your rights and entitlements, acting promptly, and seeking appropriate advice are essential steps to navigate through the complexity of this situation.
The impact of liquidation can be significant, but with a proactive approach, employees can ensure they are in the best position to manage these circumstances.
