What Happens to Employees When a Company is Liquidated?
When a company goes into liquidation, the employees are typically made redundant immediately. These employees then become preferential creditors for most of the amounts owed to them, including unpaid wages, workplace pension contributions and holiday pay. If sufficient funds are available in the liquidation, these amounts are given a higher priority than the payments of other unsecured debts.
If the liquidation does not raise sufficient funds to cover the amounts owed to staff – and employees have worked in the business for two or more consecutive years – they will be entitled to make a claim to the Redundancy Payments Service (RPS). This government scheme will ensure employees receive payment for various entitlements and are compensated (subject to statutory limits), even if the company’s assets cannot meet those obligations.
Employee Redundancy Entitlements During Liquidation
If your company is insolvent, and you cannot pay your employees their wages, redundancy, or holiday pay – you can find information and guidance on their entitlements to statutory payments through the Redundancy Payments Service (RPS).
Employees can claim up to 8 weeks of unpaid wages, with a capped amount of £643 per week and a maximum of £5,144 to be claimed. Employees will also be entitled to funds for any unpaid holiday entitlement accrued for the previous twelve months before the company went into liquidation. The payment allowance is up to six weeks of holiday and capped at £508 per week. You may also be able to claim statutory notice pay.
Employees are entitled to statutory redundancy pay if they have at least 2 years of continuous service. Each individual claim and payment will depend on several factors, from the employee’s age, their length of service in the business, and their gross weekly pay.
The calculations for redundancy pay according to age and service are as follows: half a week’s pay for each year of service under the age of 22, one week’s pay for each year of service between 22 and 40, and one and a half week’s pay for each year of service over age 41. For any employees who have been made redundant after 6th April 2023, the length of service is capped at 20 years, with redundancy pay also being limited to £19,290.
How Will Employees’ Redundancy Be Taxed?
Statutory redundancy payments made to employees, whether by the employer or via the RPS, are usually tax-free up to £30,000, however, any redundancy payments over £30,000 will be subject to income tax. So, for example, if an employee receives £40,000, they would only pay tax on the £10,000 excess.
By contrast, unpaid wages and holiday pay will be subject to tax and National Insurance Contributions (NICs). This is because these payments are treated like regular salary, meaning they will be taxed according to the employee’s current income tax bracket.
How Can Employees Apply to the RPS for Redundancy?
Once your company is declared insolvent, employees can apply for their redundancy and other statutory payments through the UK government’s Redundancy Payments Service (RPS). This will be via an online application on the GOV.UK website, where employees will need their National Insurance number, payroll number, and their Case Reference Number (CN Number). To make a claim, employees will also need to provide their personal details, details of employment, wage details and redundancy details (date of redundancy, unpaid wages, and holiday).
Can Directors Claim Redundancy During Liquidation?
If your company has entered into creditors’ voluntary liquidation (CVL) and is insolvent, as a Director, you may also be entitled to claim redundancy pay and other statutory entitlements. Directors involved in the running of the company, managing daily operations and overseeing departments are likely to qualify. Alternatively, directors who do not participate in the day-to-day work may not qualify, as they are generally not considered employees for these purposes.
To make a claim, you must ensure that you meet several criteria, with the first being having a formal employment contract. This contract should outline the terms and duration of your employment, alongside outlining the duties of your role within the business. You will also need to provide evidence of regular wage payments through the PAYE system (like payslips and your P60) and have been given employee benefits like holiday and sick pay.
As a director, you also need to have worked a minimum of 16 hours a week in the business. This can be proven by timesheets or work schedules, alongside providing evidence of any company correspondence like internal communications, emails, or task delegation records.
How Creditors’ Voluntary Liquidation Protects Employees
Creditors’ Voluntary Liquidation (CVL) can be beneficial for employees, as you are actively addressing the insolvency and meeting your statutory responsibilities. This process can provide clarity for your employees on decisions being made about their future, prevents any prolonged uncertainty and helps to alleviate any anxiety employees may feel during this turbulent time.
The CVL process also protects employees’ rights, this means your employees are also more likely to receive the compensation they are entitled to, including redundancy pay, unpaid wages, and other entitlements through the government. As a director, making the decision to liquidate the business promptly, prevents further financial deterioration that could leave employees in a worse position (and lead to criticism of your conduct as a director).
Being honest and open about the liquidation process also gives your employees a heads-up on the timeline of the winding-up process and allows them to begin seeking new opportunities and making plans to secure their future careers and finances.
What Happens to Employees When a Company Ceases Trading?
If a company ceases to trade, then this is an informal decision to stop its business operations, without going through a more formal process like liquidation. During this process, your employees may not lose their jobs immediately. Instead, the company may suspend operations temporarily, but employment contracts could remain in place. Despite the fact that your company has ceased trading, the business might continue to pay wages for a period of time, using cash reserves. However, if your company begins to run out of funds, employee contracts will most likely have to be terminated, and they will be entitled to a redundancy package with notice pay or pay in lieu of their notice (under this scenario it is unlikely that employees will be able to make claims to the RPS and the Company will remain fully liable). If your company reopens and resumes trading, employees could also be reinstated without the need to find new jobs.
However, if the company cannot be rescued and becomes insolvent, your business will need to go through a formal liquidation process, hiring a licensed insolvency practitioner. During this process, assets will be sold to repay the company’s creditors before the company can officially be dissolved and struck off the Companies House register.
