United Kingdom Insolvency Law - Labour Law

Labour Law

In most corporate insolvencies, it is likely that a large number of people's jobs rely on continued business. Accordingly, UK labour law touches corporate insolvencies in three main ways. First, employment contracts cannot be changed except when there are good economic, technical or organisational reasons under the Transfer of Undertakings (Protection of Employment) Regulations 2006. This matters particularly in the case of a sale of a business' assets. Second, special provisions concern the adoption of employees' contracts by an administrator or other insolvency practitioner, but apparently with various limits on the obligations that survive. Third, employees and their pensions have preferential claims above other creditors' rights, and if this is exhausted may claim money from the National Insurance Fund or the Pension Protection Fund.

Often business transfers take place when a company has plunged into an insolvency procedure. If a company enters liquidation, which aims to wind down the business and sell off the assets, TUPER 2006 regulation 8(7) states that the rules on transfer will not apply.

If employees are kept on after an administrator is appointed for more than 14 days, under paragraph 99 the administrator becomes responsible for adopting their contracts. The liability on contracts is limited to "wages and salaries". This includes pay, holiday pay, sick pay and occupational pension contributions, but has been held to not include compensation for unfair dismissal cases, wrongful dismissal, or protective awards for failure to consult the workforce before redundancies. If the business rescue does ultimately fail, then such money due employees achieves the status of "super priority" among different creditors' claims.

Employees wages and pensions have preferential status, but only up to an £800 limit, a figure which has remained unchanged since 1986. Employees having priority among creditors, albeit not above fixed security holders, dates back to 1897, and is justified on the ground that employees are particularly incapable, unlike banks, of diversifying their risk, and forms one of the requirements in the ILO Protection of Workers' Claims (Employer's Insolvency) Convention. Often this limited preference is not enough, and can take a long time to realise. Reflecting the Insolvency Protection Directive under ERA 1996 section 166 any employee may lodge a claim with the National Insurance Fund for outstanding wages. Under ERA 1996 section 182 the amount claimable is the same as that for unfair dismissal (£350 in 2010) for a limit of 8 weeks. If an employee has been unpaid for a longer period, she may choose the most beneficial 8 weeks.

The Pensions Act 2004 governs a separate system for protecting pension claims, through the Pension Protection Fund. This aims to fully insure all pension claims. Together with minimum redundancy payments, the guarantees of wages form a meagre cushion which requires more of a systematic supplementation when people remain unemployed.

• Directive 2008/94/EC of the European Parliament and of the Council of 22 October 2008 on the protection of employees in the event of the insolvency of their employer
• Employment Rights Act 1996 ss 166-170 and 182-190, which allows compensation for up to £400 per week in the event of an employer going insolvent and not being able to pay outstanding wages.
• C-125/97 Regeling v Bestur Van de Bedrifsvereiniging Voor de Metallnijverheid IRLR 379
• C-278/05 Robins v Secretary of State for Work and Pensions IRLR 270