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What happens to employees when going into liquidation?

When a company goes into liquidation, it means the business is closing down, and its assets are sold to pay off its debts. This situation greatly affects employees, as they lose their jobs and become creditors for any unpaid wages, holiday pay, and other entitlements they may be owed by the company. Here’s a simplified overview based on the information from various sources.

Employee Rights and Claims

Employees are automatically made redundant once a company enters liquidation. They have the right to claim unpaid wages, holiday pay, and redundancy pay. These claims are handled through the Redundancy Payments Service (RPS) and are paid from the National Insurance Fund (NIF) if the company cannot cover these costs due to its financial position​​.

How to Claim

To claim their entitlements, employees should contact the liquidator of the company. The liquidator is responsible for selling the company’s assets and distributing the proceeds. Employees will need a case reference number provided by the liquidator to make their claims. 

Claims typically include redundancy pay, arrears of wages, and outstanding holiday pay, and are generally processed within six weeks from the claim date​​.

If you’re confused, this guide should help you claim any money you are entitled to from an insolvent employer.

Employee Entitlements

Employees are entitled to specific payments as preferential creditors, including outstanding salary for up to four months (capped at £800 in total), holiday pay for up to six weeks, and up to four months of occupational pension payments. If the liquidation proceeds do not cover these amounts, or for entitlements exceeding these limits, employees can claim from the NIF. 

This includes unpaid wages for up to eight weeks, capped at a specific amount per week, holiday pay, statutory notice pay, and pension contributions. However, to be eligible for NIF claims, employees must have been employed for at least two years before the insolvency​​.

Legal Protections and Wrongful Dismissal

  • Employees have legal protections: When a company goes into liquidation, employees have the right to claim for wrongful dismissal. This means if they think they were fired without a fair reason, they can take their claim to an employment tribunal. However, it’s important to know that any money awarded from such a claim is seen as an unsecured debt. 
  • Wrongful Dismissal Claims: Making a claim for wrongful dismissal is an option if an employee feels they were unfairly let go. This could be because they weren’t given the right notice or because the reasons for their dismissal don’t add up. If the employment tribunal agrees, they might get some compensation. But, because the company is in liquidation, there might not be enough money left to pay them. 
  • Statutory Minimum Notice Period: Another protection for employees is the statutory minimum notice period. This means the company has to let employees know in advance before their job ends, giving them time to plan for what’s next. The length of this notice depends on how long they’ve been with the company. 

Transfer of Employment (TUPE)

In some insolvency scenarios, such as a pre-pack administration where the business is sold, employees might transfer to the new employer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This protects their terms of employment, although adjustments might be made to prevent job losses. It’s important to note that TUPE does not apply in liquidation scenarios​​.

Final Verdict

Liquidation is a challenging time for employees due to job loss and uncertainty about owed payments. However, UK law provides mechanisms to claim unpaid wages, holiday pay, and redundancy pay, offering a safety net through the RPS and NIF. Employees affected by their company’s liquidation should promptly contact the appointed liquidator to begin the claims process and secure their entitlements.