Posted by Caroline Doran Millett, Partner
What about the human casualties when a business goes into administration?
The casualties keep coming in the UK’s stricken high street. Last month, 71 of Patisserie Valerie’s loss-making stores and all its concessions were closed immediately, and though the remaining 122 stores continue to trade while a buyer is found, about 3,000 employees are affected.
Last year saw a string of struggling retailers and restaurant chains, such as HMV and Gourmet Burger Kitchen, falling into administration with an estimated 35,000 jobs placed at risk.
As well as HMV’s Bath and Oxford branches being affected, the flagship store on London’s Oxford Street is closing after nearly 100 years.
So what does a company administration mean for employees?
What is an administration?
An Insolvency Practitioner is appointed as the company’s administrator to take control of its business and assets from the company’s directors. The procedure means that creditors – including employees – are prevented from taking action to enforce their claims against the company while the administrator tries to rescue the business or achieve a better result for creditors.
What happens to jobs during this process?
Administration is a very stressful and worrying time for staff. While businesses can sometimes be rescued from complete closure, some job losses are often inevitable even if a buyer is found. Redundancy is therefore a very common outcome for employees in these situations.
- If redundancy occurs in the first two weeks of administration, employees are treated as ‘ordinary creditors’. They are only entitled to redundancy pay and lost salary payments. As these are unsecured claims, employees have the same rights as the rest of the company’s debtors – this means that ultimately there is a risk that employees will never be paid.
- If redundancies are made after the first two weeks of the company going into administration, employees become ‘preferential creditors’ which means they get priority and should receive payment for outstanding salary up to £800, and accrued holiday pay, before ordinary creditors. Any entitlement to statutory redundancy pay will depend on employees having the requisite two years’ service.
- One way for an administrator to limit job losses is to reduce staff pay, however, this can only be done with the employees’ consent.
- Another option is to temporarily defer staff pay. Any pay then owed is a debt and the employee will rank as a preferential creditor.
What if the business is rescued?
If a buyer is found, the business will be sold to another company and this will be a relevant transfer for the purposes of TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006). Although employees will transfer to the buyer, certain fundamental TUPE protections, such as preserving employment terms on transfer, may not apply; changes to employment terms can be made if necessary for the survival of the business.
What if the business can’t be saved?
If the employer becomes insolvent, employees are entitled to their salary for the preceding four months, and accrued holiday pay in preference to other creditors.
Where a business has insufficient funds to make these payments, employees can apply to the National Insurance Fund for redundancy pay, unpaid wages, statutory notice pay and holiday entitlement, subject to various caps.
Unfortunately employees are likely to bear the brunt of the financial difficulties hitting some of the UK’s most well known retail brands.
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