If your company is heading towards administration, it’s natural to be concerned about what this will mean for you as an employee, or indeed, the regulations that you’ll need to follow as a company owner. In order to help alleviate some of these concerns and to clarify what the ,employee rights are, we’ve put together the following guide explaining exactly what happens to staff when a company goes into administration.

There is a big difference between being an employee whose company has entered ,liquidation, and being an employee whose company has entered administration. If the company is liquidated then all employees will be dismissed. However, when a company enters administration, a licensed insolvency practitioner will work to see if the underlying business can be saved as a going concern via restructuring or by realisation of company assets. This means that what happens to staff when a company goes into administration largely depends on whether or not the business can be sold or become profitable again. That’s why the first 14 days of the ,administration process are crucial in determining the ongoing plan for the business.

The first 14 days

Once an insolvency practitioner has been appointed as administrator, they have a period of 14 days to decide if they need to dismiss any employees in order to offload costs. This means that what happens to staff when a company goes into administration, is largely decided within this initial fortnightly period.

If the administrator elects to retain you as an employee beyond the 14 day period, the employees rights are elevated and it is likely that the administrator will cover ongoing wages and other entitlements as an expense of the administration. However, if the administrator chooses to dismiss you, you become a creditor of the administration process. Let’s take a closer look at what both of these positions entail.

Employees retained beyond 14 days

Employees who are retained beyond the first 14 days i.e retain their jobs, have a better chance of recovering outstanding salary promptly and securing their future employment. Wages and other employment entitlements accrued during the administration period will be treated as an expense of the process, and paid ahead of creditors.

Until the business is sold on (if possible), the rights of employees are controlled by the administrator. Once the business is sold, employee rights become protected under, ‘TUPE’, Transfer Of Undertakings (Protection Of Employment) legislation. If this happens, there is likely to be a new employer but the employment continues as if that employee had always been employed by the new employer. This is the best outcome for an employee in an administration scenario.

Employees as creditors

As we’ve mentioned, what happens to staff when a company goes into administration, depends on whether employees are dismissed or kept on in that initial fortnightly period. When employees are dismissed, they become creditors of the administration. As a creditor, you can claim the amount owed to you from money that is made through the sale of assets in the administration process.

It’s important to note that usually there is not enough money within the business for claims to be met. However, employees can claim from the ,National Insurance Fund (NIF) so long as they have made a claim from the company within six months of being dismissed.

Any NIF claims are subject to a payment cap that currently stands at £544 per week (£538 per week if the employer went insolvent before 6 April 2021). With this ceiling in mind, the following can be claimed:

  • Up to eight weeks wages
  • Arrears of holiday pay for a period of up to 6 weeks
  • Payment for a statutory notice period that was worked but not paid (up to 12 weeks maximum)
  • Basic pension contributions
  • The basic award for unfair dismissal

The statutory notice period depends on how long the employee has worked at the company for. If it is between one month to two years, then it is one week’s notice, and if it is more than two years it will be two weeks notice plus an extra week for each year worked (12 months maximum).

Rights in redundancy

Another important topic to cover when discussing what happens to staff when a company goes into administration is redundancy. Members of staff who were made redundant during the administration process and have worked at the company continually for two years or more, may be able to claim redundancy pay via the NIF. It’s essential that companies meet the minimum requirements for consulting employees about redundancies, otherwise employees can make a claim via an employment tribunal.

For more advice on what happens to staff when a company goes into administration and the steps to take as an employee or business owner, please don’t hesitate to ,get in touch with our knowledgeable team at Ballard Business Recovery.