Employees Rights on Insolvency

The 1986 Insolvency Act introduced administration as a method of rescuing potentially viable businesses that are in financial trouble. Where possible, the administrator will run the business as a going concern retaining some or all of the employees. Generally, administration expenses take priority over other company debts. However, in accordance with schedule B1, paragraphs 99(4) and 99(5) of the Act, inserted through the Enterprise Act 2002, the wages and salaries of employees whose contracts of employment the administrator has retained take priority, ranking even above the expenses of administration.

Following two conflicting decisions in the High Court, the Court of Appeal has clarified the position of employees when the company they work for is placed into administration. The Court heard a joint appeal to decide whether protective payments and payments in lieu of notice do or do not enjoy ‘super priority’ in accordance with the 1986 Insolvency Act, as amended by the Enterprise Act 2002, during administration.

Prior to making more than 19 employees redundant, an employer is obliged to follow a procedure outlined by the Trade Union and Labour Relations (Consolidation) Act 1992. Should an employer breach this requirement then the Employment Tribunal may award the employees remuneration for a ‘protected period’ of not more than 90 days from either the date of dismissal or the date of the award.

Payments in lieu of notice can be made in various circumstances. For example, this might be when the employee agrees not to work out his or her notice and payment is made to cover the wages attributable to the proper notice period. Sometimes, the contract of employment may provide expressly that the employment may be terminated either by notice or on payment of a sum in lieu of notice. Or, at the end of the employment, the employer and the employee might agree that the employment should end immediately on payment of a sum in lieu of notice. In some cases, a payment in lieu of notice might be made if an employer dismisses an employee without prior agreement.

The Court of Appeal ruled that in order to rank as ‘super priority’, payments to employees had to satisfy two tests:

1. They had to arise under a contract of employment; and
2. They must be considered to be wages or salary.

Protective payments, therefore, do not take priority as they are not liabilities which arise under a contract of employment.

Payments in lieu of notice will only take priority in the case of a payment made to an employee where he is given proper notice but told that he need not work until the end of his notice period and is paid until the end of his notice. This is because such payments can be regarded as advance payments of wages or salary due under a contract of employment.