58. Employment law and insolvency
Employment law and insolvency
58.1 Scope of this guidance
Given the relative complexity and breadth of this area of law, and the official receiver’s involvement in only certain aspects, this is intended to be a brief summary only.
58.2 Employment rights
Employment rights (and obligations) arise from both statutory protection and from common law (case law) precedent. For employment rights to arise there has to be a relationship of employer and employee, which is normally a question of fact demonstrated by the existence of an employment contract [Employment Rights Act 1996 section 230(1) and (5)].
58.3 Defining the employment relationship
The key factor in establishing if parties have the relationship of employee and employer is the existence of an employment contract, and employment has been defined as ‘employment under a contract of employment, a contract of apprenticeship or a contract personally to do work.’ [Equality Act 2010 section 83].
Where it cannot be found that there is a contract of employment, it is likely that the arrangement will be that of self-employment, under a ‘contract for services’ [Bacica v Muir [2006] IRLR 35] and the various employment rights will not apply.
58.4 Existence of an employment contract
A contract of employment may be express or implied [Franks v Reuters Ltd [2003] ICR 1166, Cheltenham Borough Council v Laird [2009] EWHC 1253], in writing or oral [Employment Rights Act 1996 section 230(2)]. The existence of a contract of employment is a question of law [Anar v Dresdner Kleinwort Ltd [2013] EWCA Civ 394] and, whilst the label that the parties apply to the arrangement is persuasive, it is not determinative [Young and Woods v West [1980] IRLR 201]. In deciding that a contract of employment exists, a court or tribunal will seek to identify the following features:
- that the employer exercises some control over the employee [Performing Rights Society Ltd v Mitchell and Booker [1924] 1 KB 762, Yewns v Noakes (1880) 6 QBD 530, Ready Mixed Concrete (South East) :td v Minister of Pensions and National Insurance [1968] 2 QB 497, Montgomery v Johnson Underwood Ltd [2001] ICR 819].
- that there is an obligation on the person to provide work personally [Express and Echo Publications Ltd v Tanton [1999] ICR 693] and that the work being done is integral to the business of the employer and not ancillary to it [Stevenson, Jordan and Harrison v MacDonald and Evans [1952] 1 TLR 101].
- that there is a mutuality of obligation (normally, an obligation to work and an obligation to pay for that work) [Carmichael v National Power plc [1999] ICR 1226, Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471].
58.5 The status of ‘worker’
Certain statutory employment rights are extended beyond employees to ‘workers’ [Pimlico Plumbers v Smith [2018] UKSC 29]. The definition of worker includes employees, but also includes one who agrees, under contract, to perform personally any work or services for another party who is not a professional client of his, or one who is in the employment of a government department (but not a member of the armed services) [Employment Rights Act 1996, Trade Union and Labour Relations (Consolidation) Act 1992 section 296(1)].
The term ‘worker’ would generally include agency staff, contract workers or freelancers, which persons would not normally be included under the definition of employee.
58.6 Company directors as employees
Without more a company director is not an employee of the company of which they are a director (McMillan v Guest [1942] AC 561). If, however, there is in place a service agreement, or similar, with the necessary features of an employment contract then the director will also be an employee, even if the director is the sole director and sole employee [Lee v Lee’s Air Farming Ltd [1961] AC 12].
If the person works full time as a managing director then there may be a presumption that they are also an employee [Folami v Nigerline (UK) Ltd [1978] ICR 277 EAT], but as with other enquiries into employment, it is a question of fact and law [Parsons v Albert j Parsins & Sons Ltd [1979] ICR 271].
58.7 Indicators of a director as an employee
It has been held [Eaton v Robert Eaton Ltd and another [1988] ICR 302] that the main factors in determining the question of a director’s employment were:
- the use of any descriptive term such as managing director, sales/marketing director, etc.
- whether there was an express contract of employment or a board minute constituting an agreement to employ,
- whether remuneration was by way of salary as opposed to a director’s fee.
- whether that remuneration was fixed in advance rather than paid on an ad hoc basis,
- whether remuneration was by way of entitlement rather than being gratuitous,
- the function actually performed by the director.
58.8 Partnership cannot be an employer; partner cannot be employee
As a partnership has no separate legal identity it cannot employ people. Often, the partnership name will be on an employee’s employment contract, but this is just as convenient shorthand for the names of the partners.
Similarly, on the basis that a person cannot make a contract with themselves, a partner cannot be employed by their own partnership [Ellis v Jospeh Ellis &Co [1905] 1 KB 324].
58.9 Terms of an employment contract
The terms of an employment contract may arise from the express statements (written or oral) of the parties to the contract [Nelson v BBC (No 2) [1980] ICR 11], written rules of the employer (even those in the form of a notice posted to the workplace wall) [Secretary of State for Employment v Associated Society of Locomotive Engineers and Firemen (No 2) [1972] 2 QB 455, Petrie v Macfisheries [1940] 1 KB 258[, custom [Sagar v Ridehalgh [1931] 1 Ch 310, Davson v France [1959] 109 LJ 526, Mears v Safecar Security Limited CA 5 April 1982], statutory standards, implied terms and/or collective agreements with trade unions.
58.10 Implied terms of an employment contract
Even if not detailed expressly, a contract of employment will commonly contain implied duties on the employee and employer.
In this context, a term will be implied if it is so clear that the parties to the contract would have considered it to be a term even though they had not expressly stated it, or if the inclusion of the term would be necessary to give the contract practical effectiveness [Scally v Southern Health and Social Services Board [1991] ICR 771, Liverpool City Council v Irwin [1977] AC 239].
58.11 Implied terms of an employment contract - employee
Even if not detailed expressly, a contract of employment will commonly contain implied duties on the employee, as follows:
- to be ready and willing to work [Miles v Wakefield Metropolitan District Council [1987] AC 539]
- to use reasonable care and skill [Lister v Romford Ice and Cold Storage [1957] AC 539]
- to be reasonably competent [Harmer v Cornelius [1858] 141 ER 94]
- to obey lawful orders [Price v Mouat [1862] 142 ER 895, Cresswell v Inland Revenue Commissioners [1984] ICR 508, United Kingdom Atomic Energy Authority v Claydon [1974] ICR 128, Morrish v Henlys (Folkestone) Ltd [1973] ICR 482], but not those orders that, though lawful, might place them in danger [Ottoman Bank v Chakarain [1930] AC 277]
- to take care of the employer’s property [Superlux v Plaisted (1958) The Times 12 December 1958]
- to act in good faith (not to take bribes, etc.) [Reading v Attorney General [1951] AC 507, Dyson Technology v Curtis [2010] EWHC 3289 (Ch)]
- not to act against the interests of the employer (by running a rival business ‘on the side’, for example) [Balston Ltd v Headline Filters Ltd [1990] FSR 385]
58.12 Implied terms of an employment contract - employer
Even if not detailed expressly, a contract of employment will contain implied obligations on the employer, as follows:
- to pay contractually agreed remuneration [Langston v AUEW [1974] 1 WLR 185], though there is no obligation to provide work [Collier v Sunday Referee Publishing Co [1940] 2 KB 647] unless the contract is for piece work, or similar [Devonald v Rosser [1906] 7 WLUK 11]
- to treat employees with trust and confidence [Courtaulds Northern Textiles Ltd v Andrew [1979] 1 IRLR 84, Herbert Clayton &Jack Waller Ltd v Oliver [1930] AC 209, Malik v Bank of Credit and Commerce International [1997] IRLR 462]
- to observe provisions relating to holidays and hours of work [Working Time Regulations 1998] and to permit time off for official duties (for example, time off for work as a justice of the peace) [Employment Rights Act 1996 section 50]
- to indemnify employees in respect of expenses occurred in performing duties under the contract [Lister v Romford Ice and Cold Storage [1957] AC 555]
- not to provide a negligent reference [Spring v Guardian Assurance plc [1995] 2 AC 296]
- to ensure the employee’s safety [Dutton &Clark Ltd v Daly [1985] ICR 780]
- to provide a system of redress of grievances [WA Goold (Pearmark) Ltd v McConnell [1995] IRLR 516]
- to suspend the employee only on reasonable grounds [McLory v Post Office [1992] ICR 758] ## Protection of employment rights
58.13 Statutory protections
In addition to contractual rights afforded them (see above), employees and, in some cases, workers have statutory rights/protections in respect of the following:
- to receive a written statement of employment terms (such as rate of pay, hours of work, holidays, notice period, place of work, etc.) within two months of starting work [Employment Rights Act 1996 section 1]
- to receive at least the national minimum wage [National Minimum Wage Act 1998, National Minimum Wage Regulations 2015], statutory sick pay, statutory maternity pay, itemised pay statements and protection from unauthorised pay deductions [Employment Rights Act 1996 section 8, Employment Rights Act 1996 section 9, Employment Rights Act 1996 section 13]
- to receive rest periods, including holidays [Working Time Regulations 1998]
- to receive equal pay for like work of equal value [Equality Act 2010 Chapter 3] and not be subject to pay confidentiality clauses [Equality Act 2010 section 77]
- not to be discriminated against in respect of gender, disability, age, marriage and civil partnership, pregnancy and maternity, race, sexual orientation, religion or belief, part-time or fixed-term status, trade union membership or gender reassignment [Equality Act 2010]
- family rights such as maternity/paternity/adoption leave [Employment Rights Act 1996 Part VIII Chapter I, Employment Rights Act 1996 Part VIII Chapter III, Employment Rights Act 1996 Part VIII Chapter IA] parental leave [Employment Rights Act 1996 Part VIII Chapter II], leave to deal with caring commitments [Employment Rights Act 1996 section 57A], ante-natal leave [Employment Rights Act 1996 section 55, Employment Rights Act 1996 section 57A]
- health and safety [Health and Safety at Work Act 1974 section 2]
- protection of employment rights where there is a transfer of undertaking [Transfer of Undertakings (Protection of Employment) Regulations 2006]
- notice on termination [Employment Rights Act 1996 Part IX]
- unfair dismissal [Employment Rights Act 1996 Part X]
- redundancy [Employment Rights Act 1996 Part XI]
- payment of outstanding wages, etc. in the event of the insolvency of employer [Employment Rights Act 1996 Part XII]
58.14 Employment Tribunals
Employment Tribunals are, in essence, courts which specialise in hearing complaints that a person’s statutory employment rights have been breached.
Before bringing a claim before a tribunal, the employee must have exhausted an internal grievance procedure [Trade Union and Labour Relations (Consolidation) Act 1992 section 207A].
58.15 Employment tribunals – hearing
An Employment Tribunal hearing is normally in front of a specialist employment judge, a lay-person from a panel of those selected following consultation with employers’ organisations and a lay-person from a panel of those selected after consultation with employees’ organisations, though the panel may be limited to one lay-person if both parties agree [Employment Tribunals (Constitution and Rules of Procedure) Regulations 2013 regulation 9]. Similarly, the hearing may be in front of the judge only if so ruled [Employment Tribunals Act 1996 section 4].
58.16 Employment tribunal claim – insolvency
Where the bankrupt is bringing a claim in an Employment Tribunal, the guidance in chapter 37 should be followed.
Where a claim is being brought against the insolvent, as an employer, the guidance in paragraph 58.59 should be followed.
58.17 Dispute resolution – ACAS code
The Advisory, Conciliation and Arbitration Service (ACAS) have produced a guide to disciplinary and grievance procedures and, whilst adherence to the code is not compulsory, it is admissible is evidence before an Employment Tribunal [Trade Union and Labour Relations (Consolidation) Act 1992 section 207(1)] and the Tribunal can take account of the extent to which it was followed when awarding damages [Trade Union and Labour Relations (Consolidation) Act 1992 section 207A].
The main features of the code are that a disciplinary proceeding should include a written invitation to a meeting, a grievance should be in writing, with both procedures including a meeting (with a right to be accompanied) and a right of appeal.
58.18 Protection of employee rights where business transferred
The legislation [Transfer of Undertakings (Protection of Employment) Regulations 2006] provides protection to employees where there is a ‘relevant transfer’ of an undertaking. Such protection being, in essence, that the employees are retained by the transferee, subject to their agreement [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 4(7)], under existing contract terms [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 4(1), Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 4(2)].
A relevant transfer (which would apply to both public and private sector undertakings) may include a transfer by sale of the undertaking from one legal entity to another [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 3(1)(a)], or may be where a part of the undertaking is contracted out, passed from one contractor to another, or ‘insourced’ (that is, taken from a contractor back to the client business [Transfer of Undertakings [Protection of Employment) Regulations 2006 regulation 3(1)(b)]. A transfer of share-holding does not qualify as a ‘relevant transfer’ [Initial Supplies Ltd v McCall [1992] SLT 67].
58.19 Transfer of employment rights in insolvency
A relevant transfer does not occur where the employer is in formal insolvency, the transfer is conducted after insolvency and is instigated by the liquidator or trustee [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 8, Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 9, Secretary of State for Trade and Industry v Slater and others [2008] BCC 70], but would occur where the transferor was subject to administration proceedings [OTG Ltd v Barke [2011] BCC 608].
58.20 Transfers of undertakings – rights protected/transferred
The legislation [Transfer of Undertakings (Protection of Employment) Regulations 2006] provides protection to the employees of an organisation where that organisation is transferred (through contracting out, privatisation, sale or takeover). The main rights are:
- the employment transfers to the new undertaking,
- the employee cannot be dismissed by reason of the transfer or by a reason connected to the transfer, and
- the employment terms and conditions cannot be worsened because of the transfer (except that the new employer is not obligated to continue an occupational pension scheme [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 10].
Any dismissal in breach of these terms, or failure to ‘carry over’ the existing terms and conditions leading to resignation, will usually be considered an unfair dismissal [Transfer of Undertakings (Protection of Employment) Regulations 2006 regulation 12].
58.21 Continuity of employment
Most of the statutory employment protections outlined above are available only to employees who have attained a minimum period of employment (which can be between one month and two years depending on the protection). The calculation of the length of continuous employment is with reference to the legislation [Employment Right Act 1996 Part XIV Chapter 1]. In particular, a person’s employment by a particular employer is considered to be continuous unless the contrary can be shown [Employment Rights Act 1996 section 210(5)]. There will normally be no break in employment where the employee transfers to an associated business [Employment Rights Act 1996 section 218(6)], or where there is a transfer of the employer’s undertaking [Employment Rights Act 1996 218(2)].
58.22 Termination of employment
Under common law, a contract of employment may be terminated or otherwise ended by:
- either party by notice in accordance with the terms of the contract of employment,
- in the absence of such a term in the contract, by notice of such period as agreed by the parties (providing that either term is not less than the statutory minimum applying to that employment [Employment Rights Act 1996 section 86)]. The minimum period for termination can be waived by agreement (where there is a ‘golden handshake’, for example) [Employment Rights Act 1996 section 86(3)],
- expiration, being the expiration of time on a fixed-term contract,
- termination by frustration. This is where it is impossible for the contract to be performed in a way that might be reasonably expected (for example where the employee is imprisoned [FC Shepherd Ltd v Jerrom [1987] QB 301] or ill [Egg Stores (Stamford Hill) v Leibovici [1977] ICR 260)], or
- dismissal (by notice or summarily).
58.23 Notice on termination
Where an employee has been continuously employed for a period of one month or more, they are entitled to receive at least the following period of notice before dismissal [Employment Rights Act 1996 section 86]:
- one week, if employed less than two years [Employment Rights Act 1996 section 86(1)(a)].
- one week for each year employed if employed between two and twelve years [Employment Rights Act 1996 section 86(1)(b)].
- twelve weeks if employed over twelve years [Employment Rights Act 1996 section 86 (1)(c)].
An employee is entitled to a written statement of the particulars of the reasons for the dismissal [Employment Rights Act 1996 section 92].
58.24 Termination without notice
Termination without notice (summary dismissal) is allowed where the termination is by reason of the employee’s conduct [Employment Rights Act 1996 section 86(6)], but such dismissal is generally wrongful unless it can be shown that the conduct of the employee was such that it prevented further satisfactory continuance of the relationship [Sinclair v Neighbour [1967] 2 QB, Laws v London Chronicle (Indicator Newspapers) [1959] 1 WLR 698].
Where an employer fails to give the statutory notice period, it must pay compensation equal to the pay attributable to the notice period [Employment Rights Act 1996 section 87, Employment Rights Act 1996 section 88].
58.25 Unfair dismissal
In simple terms, a claim for unfair dismissal is a claim by an employee that that they ought not to have been dismissed from their job (it was ‘unfair’ to have done so). The primary remedy for an unfair dismissal claim is to reinstate the employee to the job from which they were unfairly dismissed, or re-engage them in an alternative job. Protection from unfair dismissal arises from statute rather than case law [Employment Rights Act 1996 section 94]. A dismissal may be unfair even if it was conducted within the terms of the contract.
Unfair dismissal applications are heard by an employment tribunal.
58.26 Unfair dismissal – Considerations for the tribunal
Assuming the employment tribunal is satisfied that the dismissal was a dismissal and not a resignation or termination by consent, it is for the employer to show the reason(s) for the dismissal and that that reason(s) was/were [Employment Rights Act 1996 section 98]:
- related to the capability or qualifications of the employee for performing work of the kind which they were employed to do;
- reasons related to the conduct of the employee;
- that the employee was redundant;
- that the employee could not continue to work in the position which they held without contravention (either on their part or on that of their employer) of a duty or restriction imposed by or under any enactment; or
- some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held.
58.27 Unfair dismissal – Remedies
Where an Employment Tribunal finds in favour of a claimant in an unfair dismissal claim it will explain that it can make an order to reinstate the employee and ask the claimant if they wish the Tribunal to make such an order [Employment Rights Act 1996 section 112, Employment Rights Act 1996 section 113]. If the claimant is minded not to accept such an order, the Tribunal will instead make an order for financial compensation.
58.28 Unfair dismissal – Basic awards and compensatory awards
When an Employment Tribunal finds in favour of a claimant in an unfair dismissal claim and reinstatement is not possible/desirable, it must make a basic award, which is a payment based on a calculation relating to the length of service of the employee and their wages [Employment Rights Act 1996 section 119 to 122].
Additionally, the Tribunal may make a compensatory award to take account of the employee’s immediate lost earnings, future lost earnings, lost fringe benefits, expenses, loss of employment protection and the manner of dismissal (where there has been reputational damage) [Employment Rights Act 1996 section 123 and 124].
Finally, the Tribunal may also make a compensatory award where an order for reinstatement is not (fully) complied with [Employment Rights Act 1996 section 117].
58.29 Wrongful dismissal
A claim for wrongful dismissal is a claim that the person was dismissed in breach of their contract of employment (where, for example, a contractual notice period was not given or where an inefficiency procedure was not followed correctly). Fairness (or otherwise) is not at issue – maybe, for example, the employee was inefficient and it was ‘fair’ to dismiss them, but the correct procedure (as provided for in the contract) was not followed. The remedy for wrongful dismissal is normally financial compensation. Wrongful dismissal is a concept of common law and claims are brought before the court.
58.30 ‘Constructive’ dismissal
An employee is entitled to bring their employment to an end where the employer is in breach of a fundamental term of the employment contract. Even though it is the employee’s decision to leave the employment, they will be considered to have been dismissed for the purposes of unfair dismissal and redundancy protection [Employment Rights Act 1996 section 136(1)]. The employee is also likely to be able to seek damages for wrongful dismissal.
Leaving the employment in such circumstances is known as ‘constructive dismissal’.
58.31 Redundancy - General
A redundancy (for which compensation is payable) has occurred where a dismissal is wholly or mainly attributable to [Employment Rights Act 1996 section 139(1), Murray v Foyle Meats Ltd [2000] b1 AC 51]:
- the fact that an employer has ceased or intends to cease, to carry on the business for the purposes for which the employee was employed, or has ceased or intends to cease the business in the place where the employee was engaged, or
- the requirements for the employee to carry out work of a particular kind, or work of a particular kind in the place where employed, have ceased, diminished or are expected to cease or diminish.
Under legislation, where the employment is terminated by the death, dissolution or insolvency of the employer it is automatically considered to be redundancy [Employment Rights Act 1996 section 139(4)].
58.32 Consultation prior to redundancy
Before declaring a redundancy scheme, the employer must hold a consultation with the employees [Polkey v A E Drayton Services Limited [1988] AC 344, Trade Union and Labour Relations (Consolidation) Act 1992 section 188] or, where the employee has more than 20 employees, with the employees’ representatives [Mugford v Midland Bank plc [1997] ICR 399, Trade Union and Labour Relations (Consolidation) Act 1992 section 188]. The consultation must be fair and proper, at a time where there can be meaningful discussions [King v Eaton Ltd [1996] SC 74]. Where the employer has failed to follow this procedure properly, the employees may, following a claim to an employment tribunal [Trade Union and Labour Relations (Consolidation) Act 1992 section 189 to 190] be awarded compensation in the form of a protective award.
58.33 Redundancy payments
A right to a redundancy payment arises where the employee has been continuously employed for two years or more at the relevant date (which date is essentially the date that the employment is ended) [Employment Rights Act 1996 section 155].
An employee loses a right to a redundancy payment if they refuse a reasonable offer of alternative employment from the employer [Employment Rights Act 1996 section 141].
The claim for a redundancy payment must be made within six months of the relevant date [Employment Rights Act 1996 section 164(1)] and the amount of payment is based on the employee’s age, length of service and gross average wage.
58.34 Protective awards
A protective award is an award made by an Employment Tribunal to an employee or group of employees where an employer did not properly consult prior to instigating a redundancy scheme.
The Tribunal can order the employer to pay a week’s pay to each employee for the period starting with the first dismissal or the date of the award and ending with a period determined fair by the Tribunal, but not exceeding 90 days pay, and subject to payments already made by the employer to the employee [Trade Union and Labour Relations (Consolidation) Act 1992 sections 189 to 191].
58.35 Practical aspects of dealing with the employees of an insolvent
Certain practical aspects of dealing with the employees of an insolvents business are covered elsewhere in the Operational Guidance, as follows:
- dismissing the employees of a trading insolvent (see chapter 11).
- dealing with a pension scheme operated by the insolvent for its employees (see chapter 57).
- The position of employee claims as debts of the insolvent (see chapter 43).
58.36 Practical aspects arising from the bankrupt’s employment
Certain practical aspects of dealing with matters arising from the bankrupt’s employment are covered elsewhere in the Operational Guidance, as follows:
- employment claims (see chapter 37)
- income payment orders and income payment agreements (see chapter 35)
- pensions (see chapter 57)
- employee share schemes (see chapter 33)
- employee car loan schemes (see chapter 27)
58.37 Effect of formal insolvency of an employer on a contract of employment
Where an employer goes into liquidation or is made bankrupt, there is no automatic termination of the employees’ contracts [Fox Bros v Bryant [1979] ICR 64, Smith v the Lord Advocate (1978) SC 259]. The non-payment of wages resulting from the cessation of trade is, however, likely to be a breach of contract allowing the employee to bring the contract to an end and seek damages for (constructive) wrongful dismissal or redundancy.
58.38 Effect on an employment contract of a bankruptcy order against the employee
It is a general legal principle that an employment contract (one that requires the bankrupt to provide their skill and/or labour) cannot vest in the trustee in bankruptcy. The official receiver, as trustee cannot carry out the role of the bankrupt, nor can the bankrupt be forced to remain in the job [Beckham v Drake (1849) 9 ER 1213].
In essence, the only benefit that can be derived for the bankruptcy estate from an employment contract would be through an IPA/IPO, or in respect of a claim in relation to an employment contract that has come to an end (for wrongful dismissal for example).
58.39 Dismissal of employees engaged by an insolvent business
Generally speaking, unless in the very rare circumstances that the business is to be continued, the official receiver, as liquidator or trustee will be required to dismiss the insolvent’s employees (see chapter 11).
Such a dismissal is likely to lead to a monetary claim by the employees, in particular a claim for redundancy since the termination of an employment contract as a result of insolvency is automatically considered to be redundancy.
58.40 An employee’s claim for monies owed - General
Following the insolvency of their employer, an employee can make a claim in the insolvency for monies due to him, some of which will be treated as a preferential claim. No priority is, however, given to monies due under a claim for wrongful dismissal [Re Leeds United Association Football Club [2008] BCC 11].
The employee can also make a claim for outstanding monies to be paid to him/her from the National Insurance Fund.
58.41 Claims to the National Insurance Fund – General
The legislation [Employment Rights Act 1996] provides that, if an employer becomes insolvent, certain debts [Employment Rights Act 1996] owing to employees, and a redundancy payment may be paid by the Secretary of State from the National Insurance Fund.
Wages, holiday pay, notice pay, a basic award for unfair dismissal and protective awards for an employer’s failure to consult representatives about proposed redundancies (a protective award) are payable only if the employer is insolvent. However, insolvency is not a pre-requisite for the Redundancy Payments Service to make a payment in respect of statutory redundancy.
The amount payable can also be off-set against a debt owed by the employee to the employer [Secretary of State v Wilson [1997] ICR 408].
58.42 The Redundancy Payments Service
The Redundancy Payments Service (RPS) administers the redundancy and insolvency provisions of the Employment Rights Act 1996, acting on behalf of the Secretary of State.
The main function of the RPS is to make payments from the National Insurance Fund, on behalf of the Secretary of State, to employees who have been made redundant and whose employers are unwilling or unable to pay the statutory and contractual debts owed to the employees.
58.43 Claims to the National Insurance Fund – Practicalities – Employee claims
To make a claim to the National Insurance Fund, the employee needs to complete their claim online via gov.uk, guidance is also available. A fact sheet is also available for the office holder to provide to employees.
If an employee is unable to complete the application online then they should contact the Redundancy Payments Service:
redundancypaymentsonline@insolvency.gov.uk Telephone: 0330 331 0020
In order to make a claim an employees will need a unique CN reference number which will be provided by the official receiver or appointed insolvency practitioner (see chapter 11).
58.44 Claims to the National Insurance Fund – Provision of information to RPS
The official receiver should notify RPS of the insolvency using the RP20 template which should be completed and returned to the email address on the template. The RPS will then set up the OR case on their system which will generate a unique reference number. RPS will email the official receiver’s office a spreadsheet that will need completing and returning to enable them to send the EMPLET letters to the employees. Once the letters have been issued to the employees, RPS will email the official receiver’s office
The official receiver should be aware of the possibility of fraudulent claims being made to the RPS and should pass on any concerns in that regard to the RPS as appropriate.
58.45 Claims to the National Insurance Fund – Insolvency practitioner appointed
Where an insolvency practitioner has been appointed liquidator or trustee, the official receiver should pass all details held regarding the employees and their claims to the insolvency practitioner as part of the handover and also notify the employees of the appointment.
58.46 Definition of employee for the purposes of employee claims to the National Insurance Fund
The types of employment arrangement that can lead to a claim to the National Insurance Fund are limited.
In summary, self-employed persons and members of a partnership, in particular, will not qualify (not being considered to be employees). Such non-qualifying persons may lodge a claim in the insolvency as an unsecured creditor.
The official receiver need not get too involved in establishing whether a person’s claim qualifies or not and, where there is doubt, should simply provide the employee with the standard claim forms stating that any decision will be made by the RPS.
58.47 Limitations in respect of payment from the National Insurance Fund for outstanding wages, and similar (but not redundancy)
There are certain legislative limitations that apply in respect of claims to the National Insurance Fund for outstanding wages, holiday pay, notice pay, unfair dismissal and protective awards. In particular, claims may only be made in relation to situations where:
- the employer is formally insolvent, and
- the employment contract of the employee is terminated, but not necessarily by the insolvency.
Additionally, only those debts specified in the legislation may be paid, subject to financial limitation.
Insolvency is not a prerequisite where the claim is for redundancy
58.48 Definition of insolvency for the purposes of claims to the National Insurance Fund
Where insolvency is a requirement for a successful claim, the legislation [Employment Rights Act 1996 section 183] defines it in terms of formal insolvency proceedings and does not extend to those employers who have simply ceased trading or, in the case of a company been dissolved without any preceding liquidation. In particular, insolvency is defined as:
- Where the employer is a company:
- A winding-up order has been made, or a resolution for voluntary winding-up has been passed.
- If the company is in administration under the Act.
- If a receiver or manager of the company’s undertaking has been appointed or if possession has been taken on behalf of or by the holders of any debentures secured by a floating charge.
- If a company voluntary arrangement (CVA) has been approved.
- Where the employer is an individual:
- They have been adjudged bankrupt.
- They have made an arrangement or composition with creditors.
- If an individual voluntary arrangement (IVA) has been approved by creditors.
- They have died and their estate falls to be dealt with in relation to the provisions for deceased insolvents.
58.49 Circumstances not considered to be ‘insolvency’ for the purposes of claims to the National Insurance Fund
In addition to cessation of trade and dissolution, the following circumstances are not considered to be insolvency for the purposes of deciding an employee’s qualification to make a claim to the National Insurance Fund:
- receivers appointed under an express term under a fixed charge.
- winding up of a partnership, where no bankruptcy orders have been made against the individual members).
- receivership under the law of property act 1925
- appointment of a provisional liquidator.
- appointment of an interim receiver.
- receivership under the Agricultural Credits Act 1928.
58.50 Debts payable from the National Insurance Fund
The following is a brief list of those debts guaranteed and payable from the National Insurance Fund where the employment has been terminated due to the formal insolvency of the employer [Employment Rights Act 1996 section 184]:
- arrears of pay up to a maximum of eight weeks.
- protective awards.
- notice payments in compensation of an employer’s failure to give the correct period of notice.
- holiday pay up to a maximum of six weeks during the last 12 months preceding the award date.
- any basic award for unfair dismissal.
- reimbursement of a fee or premium paid by an apprentice or articled clerk.
- pension scheme contributions.
- maternity pay [Statutory Maternity Pay (General) Regulations 1986].
58.51 Claims for outstanding wages, holiday pay, notice pay capped
A payment in respect of a claim in respect of arrears of wages and holiday pay is capped. The cap relates to the amount payable per qualifying week, and is reviewed each year [Employment Rights Act 1996 section 186, The Employment Rights (Increase of Limits) Order 2019].
Where the employee is claiming for a notice payment in compensation for an employer’s failure to give the correct period of notice [Employment Rights Act 1996 section 184(1)], the amount payable will depend on whether they were dismissed unlawfully without notice or worked the notice period. In the latter case, there will be a deduction to take account of earnings or state benefits received in the period [Secretary of State for Employment v Cooper [1987] ICR 766 EAT, Westwood v Secretary of State for Employment [1985] ICR 209 HL].
58.52 Claims for a redundancy payment
Whether or not the employer is formally insolvent and has failed to make a statutory redundancy payment, the employee may make a claim to the National Insurance Fund for payment of the sum due [Employment Rights Act 1996 Part XI Chapter VI].
This will be equally relevant for those employees made redundant as a result of the insolvency (which, for the relevant provisions is defined in the same way as for claims in relation to outstanding wages, etc.) – in relation to which the two year period necessary to qualify for a redundancy payment will not apply.
58.53 Claims for outstanding pension scheme contributions
The trustee of an occupational pension scheme can make application to the National Insurance Fund for outstanding employer’s pension contributions, the claim will be limited to the lowest of the following: follows [Employment Rights Act 1996 section 124(1)]:
- arrears accrued over the 12 months prior to insolvency,
- arrears certified by an actuary (a pensions expert) to be necessary to pay the employees’ benefits on dissolution of the scheme, or
- 10% of the last 12 months’ payroll for the employees covered by the scheme.
For employee contributions the amount payable is limited to those contributions deducted from employees but not actually paid into the scheme within the last 12 months [Employment Rights Act 1996 section 124(2)].
58.54 Disputes to be resolved by Employment Tribunal
Where there is a dispute regarding the (non) payment of a claim to the National Insurance Fund, the matter may be referred by the claimant to an Employment Tribunal to decide [Employment Rights Act 1996 section 170, Employment Rights Act 1996 section 188, Pension Schemes Act 1993 section 126].
58.55 Time limit for claims to the National Insurance Fund
Except for holiday pay (which must have been owed in the 12 months leading up to the date of insolvency or the date of termination – whichever is the later), there is no specific legislative time limit for a claim to the National Insurance Fund for claims in respect of outstanding wages, etc., though such a claim may become statute-barred, which would happen 12 years from the date of the insolvency for this type of claim.
There is no time limit for a redundancy claim, providing that the individual made a claim in writing to their employer or to the NIF within 6 months of dismissal, otherwise there can be no payment from the National Insurance Fund [Crawford v Secretary of State for Employment [1995] IRLR 523].
58.56 No minimum requirements regarding length of service, age or hours worked in respect of a claim to the National Insurance Fund
To qualify to make a claim to the National Insurance Fund, the claimant is not required to have worked for the employer for a minimum period of time (except to qualify for notice pay or redundancy pay), nor for a minimum number of hours per day/week/month. There is no minimum or maximum age limit to a claim and, where the potential claimant is deceased, the claim may be made by their personal representative.
58.57 Claims by directors of the insolvent company
A director of a company can be an employee of that company and, that being the case, will not be barred from making a claim to the National Insurance Fund. The fact that the director had considerable control over an insolvent company will not, of itself, disqualify them from making a claim to the national insurance fund [Secretary of State for Trade and Industry v Bottrill [1999] ICR 592].
Similarly, a director may make a claim for a redundancy payment [Secretary of State for Business, Enterprise and Regulatory Reform v Neufield (Richard) [2009] BCC 687].
58.58 Subrogation of claims to the Secretary of State
Where the Secretary of State has made a payment out of the National Insurance Fund to an employee, they will take the employee’s creditor rights in the insolvency in relation to those claims settled from the Fund [Employment Rights Act 1996 section 189, Employment Rights Act 1996 sections 167(3) and (4)]. This is known as subrogation of the claim.
Subrogation can also apply to other third parties in respect of payments made by them relating to employee’s remuneration and holiday pay.
58.59 A claim with an Employment Tribunal at the date of the order
Where the official receiver, liquidator or trustee, receives notification of proceedings being brought in an Employment Tribunal against the insolvent by an employee, the Tribunal and the claimant should be informed of the insolvency proceedings and reminded that proceedings may not be brought or continued without the leave of the bankruptcy court (Section 130(2), Section 285(2)).
It may be the case that the employee is bringing a claim in order to establish a liability that may be claimed from the National Insurance Fund (in respect of a claim for unfair dismissal, for example). In such a case, the official receiver should not object to such a claim proceeding providing that no order is made against the property of the insolvent or against the official receiver personally, and should write to all parties in these terms.