What the liquidators don't tell you

At a time when mass redundancy due to the financial failure of employers is a constant subject of debate in the news, it is worth reviewing an often-overlooked right of employees: their entitlement to protective awards.

Before we get to those, it’s important to know what someone can expect to be paid if they lose their job because their employer becomes insolvent. In a typical case, where employees are simply told of the employer’s insolvency and that they are being made redundant immediately, what might they claim?

• Any unpaid wages up to the date of the announcement. This is limited to eight weeks at most.
• Between one and 12 weeks’ pay, if they were given no notice of the redundancy, depending on their length of service.
• Any holiday entitlement built up, but not taken in the last 12 months.
• The normal statutory redundancy payment (which depends on age and length of service).

It is important to note that all of these claims are subject to a cap on a week’s pay which is currently £489 per week, but is going up to £508 from 6 April 2018. Someone earning less than those limits (£25,428/£26,416 a year) should have their whole claims paid. 

It is the Government that makes these payments through a fund called the National Insurance Fund (known as the “NIF”). This pot of public money is used to make certain payments to employees if their employer becomes insolvent. Any amounts that an employee is entitled to above those caps can be claimed from the insolvent employer, which might not be able to pay. 

Mixed news

So what is a protective award? When a collective redundancy (involving 20 or more employees) happens, employers are under a statutory duty to collectively inform and consult with the representatives of affected employees before they start the process. This rule has strict time limits. If those time limits are broken, the employees can be entitled to up to 90 days’ pay, called a “protective award”.

The good news is that this protective award is classified as “arrears of pay” for the purposes of the NIF, meaning that employees can make an extra claim over and above the usual four set out above.

The bad news is that the eight-week limit on arrears of pay still applies, so even if a 90-day award is made, the NIF will only pay out a maximum of 56 days (eight weeks of seven days). Also, any other arrears of pay (but not notice pay, holiday pay or redundancy pay) count towards the eight-week limit. If an employee is due four weeks’ pay and gets a protective award of 90 days, the NIF will only pay out a combined maximum of eight weeks. The employee will only get paid for four weeks of that protective award. Finally, the weekly limit still applies, meaning the maximum the NIF can pay out for a protective award is currently £3,912 (£4,064 from 6 April). 

Points to note

As with all the other payments, any part of the protective award which is not covered by the NIF can technically be claimed from the insolvent employer, which might not be able to pay. Some of these payments might count as preferential debts in the insolvency, but other limits may apply once again.

There is one last downside, which is that an employment tribunal must order that an employee is entitled to the protective award before the NIF will make any payment. The tribunal will take into account a lot of factors, including why the redundancies happened so quickly, whether there was any warning or any attempt to consult the employees’ representatives, and whether the employer had any choice in the matter at all. However, usually insolvent employers will not take part in these proceedings, so employees can be left with something of an open goal.

While company administrators or liquidators will usually tell employees all about claiming pay, notice, redundancy and holidays from the NIF, they rarely inform employees about the right to claim a protective award. Any employees who find themselves suddenly redundant, among 20 or more of their colleagues, because their employer has become insolvent should think seriously about seeking a protective award to boost their NIF claim.