Mike Smith, of Company Debt, explains why a contract of employment is fundamental to proving a director’s entitlement to statutory redundancy payments. 

As the director of a limited company, you probably have some understanding of redundancy payments and how they apply to your employees, but few company directors know that they may also be entitled to claim statutory redundancy payments.

If your company is struggling financially, despite your best efforts to turn things around, voluntary liquidation may be your best option.

In this case, employees that have been working for the same employer for two years or more can expect to receive a statutory redundancy payment. This includes holiday pay and any salary arrears. Company directors who can prove their status as an employee of the company may also qualify for a number of statutory payments. This can provide a much needed financial buffer following the closure of a company.   

Proving your status as an employee

To receive statutory redundancy payments following the liquidation of a company, directors must be able to prove that they had more than just an advisory or non-executive role in the running of the business. To do this, they must complete a form provided by the Insolvency Service that asks for details about:

• whether a contract of employment was in place
• if the director worked at least 16 hours a week
• whether the company has been incorporated for more than two years
• the details of the directors’ day-to-day responsibilities in the running of the company

If the company director can prove to the liquidator that they had a practical and ongoing role in the running of the company, took a salary using the PAYE scheme and had a similar relationship to the company as other employees, they may be eligible for statutory payments.

What type of contract was in place?

The type of employment contract that existed between a director and the company can have some bearing on how their status will be viewed by the liquidator. One of the first questions a liquidator will ask is what type of contract of employment existed – whether it’s written, oral or implied.

It is easiest to prove a director’s status as an employee where the contract was written, but a contract does not have to be written down to be legal. If, following discussions with the board, a director works similar hours to an employee, is paid through PAYE and has a similar relationship to the business, this oral or implied contract can still be sufficient for statutory entitlements to be paid. However, it will be more difficult to prove, and the liquidator will look at every aspect of the relationship before making a decision.

The key lesson here for directors is to make sure that you can easily prove your employment by having a contract of employment in force.

How to make a claim for redundancy pay

Any company employees that are entitled to do so can use the Redundancy Payments Service, part of the government’s Insolvency Service, to claim their statutory redundancy pay. Claims for redundancy payments should usually be made within six months of the date of liquidation, although this can be extended to 12 months, in some cases.

The claims, if accepted, will then be paid by the National Insurance Fund. The first step in making a claim is to discuss your circumstances with the liquidator and complete the Insolvency Service form.

There are a number of statutory payments available to company directors if their status as a company employee has been proven. These include:

Redundancy pay

If you were made redundant on or after 6 April 2017, you would be able to claim redundancy pay of £489 per week, up to a maximum of £14,670 (capped at 20 years of service).    

You will receive, according to your age:

• under 22 – half a week’s pay for every year of service
• between 22 and 40 – one week’s pay for every year of service
• 41 years old or older – a week-and-a-half’s pay for every year of service 

Salary and holiday pay

You will also be entitled to claim for unpaid wages up to a maximum of eight weeks, and up to six weeks of holiday pay for holiday accrued but not taken.

Notice pay

Payment instead of notice applies in redundancy cases, which means your employment can be ended without notice being given. In this case, you will be paid one week’s pay for each year of full employment (up to a maximum of 12 weeks), instead of receiving notice. As well as the basic pay you would have received during the notice period, you may also receive payment for any extras included in your employment contract.

The message is clear: if you are a director, you should have an employment contract in place, providing a start date, entitlement, position and your role.

About the author

Mike Smith is a director at Company Debt, a member of the Turnaround Management Association,  www.companydebt.com.