In light of the recent annoucements about Poundworld and House of Fraser

What is the effect of Administration and Company Voluntary Arrangements on Employees?

Employment law - what happens when firms go into administration

Poundworld is reported to have entered into administration, putting the roles of 5,100 employees at risk, Rolls-Royce have revealed 4600 job cuts as part of a major reorganisation, while House of Fraser recently announced a rescue plan involving a Company Voluntary Arrangement (CVA) and the closure of 31 stores, resulting in 6,000 redundancies.

Here we explore the potential effect of these events on employees.

Administration

When a company becomes less likely to fulfil its credit obligations it may be put into administration; the primary objective of this step is to try and rescue the company and prevent total liquidation. The business may still be run as a going concern or sold to another business but most important to employees, is its effect on their jobs.

Administration and TUPE

Where the business is transferred to a new owner, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) sets out the protection of employees. An employee’s contract is deemed to be transferred with the business and continues to operate as if it was originally made between the employee and the transferee.

An employee may however, object to this transfer and the contract becomes terminated. Termination in this circumstance would be regarded as a resignation by the employee but where the objection by the employee is as result of a substantial change to the working conditions, it could be treated as an unfair dismissal by the employer.

Administration and Redundancy

The employer may decide that the services of the employee are no longer needed as a result of the administration and redundancy becomes necessary. Where this occurs, the employee becomes entitled to a redundancy pay.

When the notice of redundancy is served on the employee, an alternative employment or trial of a new role may be offered. The employee may also be given time off to look for another job or volunteer to retire early. The employee must be careful in accepting or rejecting an alternative job offer so as not to lose the right to redundancy pay. Any employee that rejects a valid offer suitable for them loses the right to redundancy pay.

Where the company cannot afford the redundancy payment, a claim can be made to the Redundancy Payments Office for:

  • Statutory notice pay;
  • Redundancy;
  • Up to 8 weeks’ wages, including a payment for a protective award if your employer has failed to consult collectively with staff;
  • Up to 6 weeks’ holiday pay;
  • Unpaid pension contributions; and
  • A basic award for unfair dismissal.

Statutory Redundancy Rights

An employee who has an employment contract and has been in continuous service for two years is entitled to statutory redundancy payment once they are dismissed, laid off or put on short-term work. A written statement setting out the detailed payment must be given to the employee and in the event of a dispute, the employee can make a claim to the employment tribunal. Where no prior consultation is made with the employee before redundancy, the employee may sue for unfair dismissal.

Company Voluntary Arrangement

An alternative to Administration is a CVA, which is an agreement to pay creditors over a fixed period and is both arranged and administered by an insolvency practitioner. The arrangement must be approved by creditors who are owed at least 75% of the debt. Should the company fail to meet the agreed payment schedule, any of the creditors can apply to wind up the business.

CVA and Redundancy

Redundancies required during a CVA will attract the same procedure and statutory rights as a redundancy under administration. However, should a CVA fail and the company is then liquidated, in certain circumstances where there is a time limit between when the company is first deemed to be insolvent and the date of the claim, the staff would not be eligible to claim redundancy from the National Insolvency Fund because of the passage of time.

If you require further legal advice or would like to discuss the possibility of redundancy as an employee or an employer please contact our Employment team on 01733 882800 or email info@hcsolicitors.co.uk.

Author

Wendy Davidson, Solicitor

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.