How can employers manage redundancies when going insolvent?
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When a company is facing the prospect of insolvency, whilst the priority may be trying to save the company itself, it is also important to conduct the insolvency in accordance with legislation designed to protect the workforce.
Here Justin Tarka, Partner at Ogletree Deakins explains that even in insolvency, the company is liable for employee debts and may be pursued by employees for a variety of sums including unpaid wages, notice pay, damages for breach of contract at termination or judgment debts for compensation from previous claims. The inevitable question arises – if the company is insolvent, why would the employee make a claim? Whilst the majority of the payments listed above are unsecured debts, employee’s “remuneration” is a preferential debt, ranked third in priority of payments during insolvency. This means the employees are creditors of the insolvent company, and employees who write to the insolvency practitioner with their claim may have these debts satisfied in full.
Transfer of Undertakings (Protection of Employment) Regulations and Redundancies
Employee debts should not be the only concern in an insolvency process, companies may be liable to pay awards for failure to follow the statutory processes for redundancies or transfer of employees.
Selling and/or transferring all or part of their business to another owner is a common scenario in the context of an insolvency. If that is being explored as an option the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will need to be considered. The regulations provide numerous protections to safeguard transferring employees and ensure their employer keeps them informed by consulting them during a company take-over. This is designed to help limit the potential detriments employees may be subjected to if there is a change of owner, such as a drastic variation in their terms and conditions of employment.
The regulations do however recognise that an insolvency situation differs from a typical sale, and provide some flexibility, including the ability to make “permitted variations” to employees’ contracts of employment. However, it’s important to bear in mind that this flexibility only applies where insolvency proceedings have been commenced and an insolvency practitioner has been formally appointed.
Despite this, the company crucially still cannot avoid the responsibility to inform and consult with employees on the transfer. Whilst the regulations do provide a ‘special circumstances’ defence to such failures, given the purpose of the legislation is to protect employees, any application of this is likely to be narrowly construed by any court.
Liabilities can also include awards for a Company’s failure to follow relevant redundancy procedures and the management of any redundancies which may be necessary is where awareness and compliance with applicable legislation becomes particularly important.
Redundancy is a potentially fair reason for dismissal where the reason is ‘wholly or mainly attributable’ to business or workplace closure, or there is a reduced requirement for employees to carry out a particular type of work. If the business is not completely closing and for example some employees may be kept on in the business objective selection criteria should be applied to the group of relevant employees to fairly determine which roles are most appropriate for redundancy. Employers should be careful to document the decision-making process to illustrate how the business came to their conclusions, which will help if the decision is later challenged by terminated employees.
Where redundancies do become necessary, employees with qualifying service of two years are entitled to a statutory redundancy payment. The UK government provides financial assistance via the Redundancy Payments Service (RPS). An insolvent company can apply to the RPS, who then make payments to employees direct. The company is then indebted to the government and failure to repay may lead to enforcement action.
Following the 2008 EU Insolvency Directive, the UK was required to set up a ‘guarantee institution’ to protect the financial interests of employees. The National Insurance Fund (NIF) guarantees certain debts owed by insolvent employers to their staff. If an employer is unable or unwilling to make payments for which they are liable, the Secretary of State may guarantee the payment from the NIF, such as pay arrears and pension contributions to eligible employees. The NIF also covers an ‘employer payment’, including statutory redundancy pay.
Employers must have ‘meaningful’ consultation with the employees they are proposing to make redundant. ‘Meaningful’ consultation is not a tick-box exercise, but it need not be complex. Consultation should involve discussions about ways of avoiding dismissals, reducing the numbers of employees to be dismissed, and mitigating the consequences of the dismissals, for example by offering compensation or outplacement support.
Collective consultation obligations apply where the employer is proposing to make 20 or more employees redundant in the same workplace over 90 days or less. If collective consultation is required, it will still be necessary to consult directly with the affected individuals prior to any final decisions as to individual redundancies or termination of employment being made but there must also be consultation with any existing employee representatives of employees who may be dismissed or may be affected by measures taken in connection with those dismissals (which includes employees who are not dismissed but whose job is changed or affected). Alternatively, if there are no existing representatives such as trade union reps, the obligation is to facilitate the election of representatives.
Under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULCRA) if collective consultation is necessary, there is also an obligation to notify the RPS about the proposals and the number of employees to be dismissed. If 100 or more redundancies are proposed, notification and collective consultation must begin at least 45 days before the first dismissal. If less than 100 redundancies are proposed, the period is 30 days.
The duty to inform and consult employees applies even in a compulsory liquidation scenario and the time and resources spent on an effective consultation may not seem as appropriate as trying to find a solution to prevent the company’s closure. For example, it may be a difficult decision to balance the need to allow time to elect representatives where there is a collective consultation obligation or to consult on proposed changes which involve highly sensitive information where that may jeopardise rescue efforts.
This obligation to simultaneously try to save a company and comply with responsibilities to employees is a recognised struggle. The Government acknowledged this issue by opening a consultation, a short response to which was published in 2018. It highlighted the fact that insolvency practitioners considered the TUPE and TULCRA requirements a hindrance to their role in rescuing the company.
Ultimately, the Government decided they are content that the penalties for non-compliance in existing legislation are effective, but decided that new guidance for insolvency practitioners would be helpful.
Due to the various methods of insolvency and the varying implications these have on the company’s obligations as an employer, advice should be sought to ensure the best course of action is followed. This should aid in meeting obligations to the company, but also to employees.
Insolvency practitioners have agency power and the company will not be absolved from liability in a scenario where little or no statutory redundancy process is followed. Employers who find themselves in this situation should take advice to ensure they comply with their duties of consultation with any redundancy measures they take.