Redundancy payments and insolvency

If the employer cannot pay statutory redundancy compensation because of insolvency, it becomes payable (subject to a cap) under section 182 of the ERA 96, by the Secretary of State.

The Redundancy Payments Office (RPO) assesses and pays statutory entitlements to redundancy and associated payments when an employer cannot pay its employees. Payments are funded by National Insurance contributions.

Whatever the contract says, all payments by the RPO are capped at the weekly pay levels of the statutory redundancy scheme (£475 in 2015-16). Any payment above this must be claimed as a debt in the winding up of the employer.

If the employer was paying below the National Minimum Wage (NMW), payments by the RPO will be at the NMW rate.

Payments by the RPO are only made if the employer is in a recognised insolvency situation. This is when:

• there is a court winding up order;

• there is an administration order;

• a resolution for voluntary winding up due to insolvency has been passed;

• a voluntary arrangement has been made with creditors; or

• a receiver has been appointed.

The RPO limits the number of capped weeks’ pay it pays out, as follows:

• statutory notice pay (in full);

• arrears of pay (up to eight weeks);

• holiday pay (up to six weeks)

The eight weeks of pay do not have to be consecutive. Workers can choose the weeks most beneficial to them.

“Arrears of pay” includes any statutory guarantee payment, any payment for time off for trade union duties, any pay for suspension on medical or maternity grounds and any pay awarded under a protective award.

Often when a company collapses, the last few weeks of pension contributions have not been paid over by the employer to the pension scheme. In some circumstances, the scheme trustees can make up these unpaid contributions from the National Insurance Fund.

Where a worker was being paid a statutory employment benefit such as statutory sick pay or statutory maternity pay when the company became insolvent, these payments become the responsibility of HMRC.

Employees must mitigate losses by looking for another job and by applying for Jobseeker’s Allowance (JSA). JSA is deducted even if the employee does not apply for it (Secretary of State for Employment v Stewart [1996] IRLR 334).

Under section 188(2) ERA 96, an employee has three months from the date of any decision of the Secretary of State to withhold payment to bring a claim in the employment tribunal. Acas Early Conciliation applies (see Chapter 13).