What Happens To Staff When A Company Goes Into Administration?
January 7, 2022
Knowing what happens to staff when a company goes into administration is very important, regardless of where you are in the process.
For a business facing insolvency, administration can provide additional time to tackle debts and some breathing space from creditor claims.
Typically ending within a year, several outcomes are possible including the company being returned to directors’ control, liquidated, or dissolved.
Naturally it’s an anxious time for employees - so specifically, here are the details behind what happens to staff when a company goes into administration.
The first 14 days
The first fortnight of the process determines what happens to staff when a company goes into administration.
Employees keeping their jobs after the first two weeks of administration become preferential creditors.
While still behind secured creditors - such as banks - in the queue to recover what they’re owed, these employees have the best chance of being repaid if made redundant later on.
In contrast, staff members dismissed to reduce costs during the first 14 days become ordinary creditors. They’re last in line for payments, along with suppliers and other creditors.
Employee rights in company administration: preferential creditors
If administrators can’t save the business, the company will be liquidated and staff made redundant.
Under administration law from the Insolvency Act 1986 and updated in the Enterprise Act 2002, if that happens then employees who are preferential creditors can claim:
- Up to £800 of outstanding salary and commissions, covering the last four months before insolvency
- Up to six weeks of holiday pay
- Some pension payments
To claim the rest of the money they’re owed from over four months before insolvency, preferential creditors can then make another claim as ordinary creditors.
Employee rights in company administration: ordinary creditors
Non-preferential creditors can also try to claim what they’re owed from any funds generated by asset sales, but usually there won’t be much left by this point.
We’ve found that out of all insolvent liquidations, less than half result in anything for creditors at all.
However, employee rights in company administration are protected by the Employment Rights Act 1996 and if made redundant, they can register a claim with the government.
They can seek wage arrears, unpaid holiday, notice and redundancy payments, if they’ve already tried to make a claim from the company within six months.
National Insurance Fund (NIF)
The money is paid out from the NIF, run by the Redundancy Payments Service (RPS), part of the Insolvency Service.
Employees can make a claim for:
- Up to eight weeks’ salary
- Up to six weeks’ holiday pay
- Up to 12 weeks’ statutory notice pay
- Redundancy pay
Staff employed for at least two years receive redundancy pay based on the following calculations:
- Half a week’s pay for every full year employed and aged under 22
- One week’s pay for every full year employed and aged 22-40
- One and a half week’s pay for every full year employed and aged 41 or above
Redundancy pay since 6th April 2021 is capped at £544 per week, for a maximum of 20 years’ service.
That’s what happens to staff when a company goes into administration, unless a new buyer is found.
A buyer for the business
If there are new owners, then employee rights in company administration are protected by the Transfer of Undertakings (Protection of Employment) Regulations 2006.
This TUPE transfer means that retained employees can continue to work and receive their salary.
However, employee contracts may still need to be altered to ensure the company continues to survive.
This could potentially mean a lower salary or holiday entitlement for example. These changes are allowed as ‘permitted variations’.
Summary: what happens to staff when a company goes into administration?
The first 14 days will determine employees’ circumstances during administration.
If they continue working, they become preferred creditors and that’s an advantage if they face redundancy at a later date.
Otherwise they’re deemed ordinary creditors and will likely only recover money from the RPS.
If a new buyer is found, then retained employees’ rights are protected by a TUPE transfer.
For more information about what happens to staff when a company goes into administration, please don’t hesitate to contact us.
