TUPE protects staff employment rights, but is that always the case if the employer becomes insolvent?

it is probably fair to say that insolvency law is skewed more towards protection of creditors, rather than the preservation of employees’ jobs.

That said, insolvency practitioners, when acting as administrators, are tasked with trying to rescue the company as a going concern, which does save jobs. Additionally, employees are often creditors and are given preferential status for arrears in wages and accrued holidays, for example.

We are used to seeing headlines such as, ‘7,000 jobs at risk as administrators are appointed’, and it all seems quite clinical. It is highly unlikely that the board of directors will have a great deal of personal contact with the 7,000 employees. But large, impersonal companies are in the minority. Small businesses accounted for 99.3 per cent of all private sector businesses at the start of 2015 and 99.9 per cent were small or medium sized (see this statistical release).

The vast majority of directors know their staff very well, and work alongside them. If a company becomes insolvent, as well as juggling cash, dodging creditors and bailiffs, and worrying about losing their homes, directors face having to make staff redundant – many of whom may have become long-term friends. But while it is easy to become emotional about staff, if the business fails, then everyone will be out of a job.

When a business changes hands

The Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly referred to as TUPE, exists primarily to protect the rights of employees in the event of the ownership of the business changing hands. So, in simple terms, if the business I work in is taken over, generally speaking, I would be entitled to my employment contract to be transferred – same salary, same terms and conditions in all respects. Even my start date for the purpose of calculating redundancy payments and other employment rights in the future is transferred.

There are exceptions, for example pension schemes may not transfer in their current form, and employees facing that situation are advised to take specialist advice. Additionally, changes to terms and conditions of employment may be made for economic, technical or organisational (ETO) reasons entailing changes to the workforce, but such changes will be invalid (even if the employees agree to them at the time) if that ETO reason does not really exist. This is why harmonising terms and conditions of employment with your other employees' terms and conditions when you acquire a business can be problematic.

What about when the employer becomes insolvent?

It's fair to say that TUPE and insolvency law do not always sit well together, particularly as the language of the TUPE insolvency provisions (which are taken from the EU Acquired Rights Directive) do not reflect UK insolvency terminology.

Following a great deal of case law, it now seems clear that, on a business sale following an administration (including a pre-pack), TUPE will transfer the employment of affected employees to the new owners in the usual way (apart from employees made redundant by the administrators), but the new owners will not pick up certain debts due to those employees (as a new business owner normally would under TUPE) arising before the sale. The employees can instead ask for those debts (within certain limits) to be paid by the State's Redundancy Payments Office (this is a government fund to help meet redundancy payments in this situation).

This rule is designed to encourage people to buy salvageable businesses without the fear of having to pick up the tab in relation to unpaid wages and holiday pay.

Where a company is in liquidation, however, and part of its business is sold by the liquidator, TUPE does not apply at all, so the employees of the liquidated company cannot expect to be transferred automatically to the buyer, and the buyer will not pick up any pre-acquisition debts in relation to those employees.

Where a company faces insolvency and enters a company voluntary arrangement (CVA), if it is necessary that some jobs may become redundant, and if the company cannot afford to meet the redundancy payments, an application can also be made to the Redundancy Payments Office.

Any staff who are retained are obviously not entitled to redundancy payments. So, in a situation where the company survives in a CVA for a couple of years and then fails and has to be liquidated, the employees then face redundancy. However, there is a time limit between when the company is first deemed to be insolvent and the date of the claim, and in the situation outlined above, the staff would not be eligible to claim redundancy from the NIF because of the passage of time.

Given that the purpose of both TUPE and NIF is to protect the rights of employees and soften the blow when their employers fail, surely the time has come to re-address the rules to cater for these situations?

About the author

Kris Wigfield is associate director and head of sales at Wilson Field. He is a qualified accountant and insolvency practitioner and specialises in corporate insolvency and has advised on numerous pre-pack administrations.