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Few situations create more uncertainty for employees than discovering their employer is facing insolvency. Questions about unpaid wages, redundancy pay, pensions and future employment can quickly become overwhelming, particularly when communication from an employer becomes limited.

The good news is that employees have stronger protections than many people realise. Even where a business becomes insolvent, there are often routes available to recover unpaid wages, redundancy payments and other employment-related debts.

When Is an Employer Insolvent?

A company is generally considered insolvent when it is unable to pay its debts as they fall due, or when its liabilities exceed its assets.

Businesses facing financial difficulties may enter administration, liquidation or another formal insolvency process. In some situations, a business may continue trading while efforts are made to rescue or restructure it. In others, redundancies may follow quickly.

Where insolvency results in job losses, employees may have a range of legal rights and potential claims.

What Employment Claims Can Employees Bring?

Depending on the circumstances, employees may be entitled to pursue claims relating to:

• Unpaid wages, salary, commission or bonuses.
• Holiday pay.
• Statutory notice pay.
• Statutory redundancy pay.
• Unfair dismissal.
• Failure to collectively consult before large-scale redundancies.
• Failure to inform and consult under TUPE where a business transfer is involved.

The legal basis for many of these rights is contained within the Employment Rights Act 1996, whilst collective redundancy consultation obligations arise under the Trade Union and Labour Relations (Consolidation) Act 1992.

Will Employees Be Paid What They Are Owed?

This depends on the circumstances and the type of debt involved.

In an insolvency process, employees are often creditors of the company. Unfortunately, many employment-related debts rank as unsecured claims, meaning they sit behind secured creditors and insolvency costs in the order of payment.

As a result, employees may recover only a proportion of the money owed, and sometimes nothing from the insolvent company itself.

However, certain employment debts receive preferential treatment, increasing the prospects of recovery.

Can Employees Claim Through the Government?

Yes.

Where an employer is formally insolvent, employees may be able to claim certain payments through the National Insurance Fund, usually administered by the Redundancy Payments Service (RPS).

Depending on eligibility, claims can include:

• Statutory redundancy pay.
• Up to eight weeks' unpaid wages.
• Up to six weeks' accrued holiday pay.
• Statutory notice pay.
• Certain basic awards made by an Employment Tribunal.

Statutory limits apply to these payments and may change each year.

Is It Worth Bringing an Employment Tribunal Claim?

Employees are often concerned about whether it is worthwhile pursuing legal action against an insolvent employer.

In many cases, obtaining a Tribunal judgment does not guarantee payment. If the employer has no assets available to satisfy the award, recovery may still be limited.

That said, there are circumstances where pursuing a claim remains beneficial.

For example, employees affected by collective redundancies may be entitled to seek a Protective Award where an employer failed to carry out the required collective consultation process. Establishing entitlement through the Employment Tribunal can sometimes enable employees to recover payments through the National Insurance Fund that might not otherwise be available.

Every case should therefore be assessed individually.

What About TUPE and Business Sales?

Insolvency does not always mean a business closes.

Sometimes a company is sold as a going concern through an administration process. Where this occurs, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may protect employees and transfer their employment to the purchaser.

However, insolvency situations can create exceptions and special rules under TUPE. Employees should obtain legal advice as early as possible if a business sale or transfer is proposed.

Employer Liability Insurance

In some circumstances, employees may also have recourse to an employer's insurance arrangements.

This is particularly relevant where claims involve workplace accidents, occupational illness or other insured liabilities.

Employees should consider:

• Whether a relevant insurance policy exists.
• Whether the policy remains valid despite the employer's insolvency.
• Whether the claim falls within the scope of the cover available.

Practical Steps if Your Employer Becomes Insolvent

If your employer enters insolvency proceedings, consider taking the following steps:

• Gather copies of payslips, contracts of employment and correspondence.
• Keep records of unpaid wages, holiday entitlement and other sums owed.
• Obtain details of the appointed insolvency practitioner.
• Submit any claim forms promptly when requested.
• Seek legal advice if you believe your dismissal was unfair or consultation obligations were breached.

Acting quickly can help protect your position and maximise the prospects of recovery.

FAQs

Can I claim redundancy pay if my employer has gone bust?

If you have at least two years' continuous service and meet the qualifying criteria, you may be entitled to statutory redundancy pay through the National Insurance Fund.

Will I receive all of the money I am owed?

Not necessarily. Statutory limits apply to payments from the National Insurance Fund, and recovery from the insolvent company itself may be limited.

Can I still bring an unfair dismissal claim?

Yes. Insolvency does not automatically prevent an employee from bringing an Employment Tribunal claim.

What happens to my pension if my employer becomes insolvent?

The position will depend on the type of pension arrangement involved. In some cases, protection may be available through the Pension Protection Fund.

Can I be made redundant immediately?

Employers experiencing insolvency are still expected to comply with employment law requirements wherever possible. However, insolvency can affect how and when consultation takes place.

How We Can Help

Business insolvency can create uncertainty for both employees and employers. Understanding your rights at an early stage can make a significant difference to the outcome.

If you are affected by an employer's insolvency and would like advice on your options, our Employment Law team can help you understand your rights and pursue any claims that may be available.