Can I Claim Unpaid Wages if My Employer Goes Out of Business?

In September 2019, the Thomas Cook travel group collapsed causing thousands of employees to suddenly lose their jobs without receiving their pay. Amongst the disruption, we are starkly reminded of the risk employees across all sectors face – what happens if your employer goes out of business? Can you claim unpaid wages and redundancy if the company cannot afford to pay?

It is a similar story across the high street as retailers struggle to stay above water in economically uncertain times. Earlier this year, Patisserie Holdings, the company behind the Patisserie Valerie cafes, went into administration threatening thousands of jobs.

Now, Thomas Cook has become the latest high profile casualty. But unlike Patisserie Holdings, there was no potential to save the business. The travel group fell into liquidation, making the majority of its 21,000 staff (9,000 UK based) redundant and potentially seeing up to 2,500 employees transferred into the employment of another company, Hays Travel.

Fortunately, if you are facing a similar situation, you won’t end up completely out of pocket, even where your employer cannot pay your outstanding wages or redundancy pay. Although you are unlikely to recoup 100% of your outstanding entitlements, you can claim statutory redundancy pay and other money you are owed through the Government’s Insolvency Service.

What happens if my employer goes out of business?

If your employer is struggling financially it will likely go into either liquidation or administration. Liquidation is the process of permanently closing (“winding up”) a company. In this situation, you will lose your job automatically once Insolvency Practitioners are appointed.

Administration means the company has been taken over by an administrator to try and prevent it going out of business. In this situation, you won’t immediately lose your job but you could be made redundant whether the business survives the administration process or not.

Can you claim unpaid wages if your employer goes into liquidation?

Under the Insolvency Act 1986, when a company goes into insolvent liquidation it must repay its debts to its creditors. However, not all creditors are equal.

If you lose your job because your employer has gone into liquidation, you will become a “preferential creditor”. This is the second highest rank of creditor (behind creditors with fixed charges over company assets).

However, the process of claiming money back is often lengthy and in many cases the insolvent company simply does not have enough money or assets to repay its employees. There’s also a chance that your legal entitlements won’t cover the full amount you are owed.

Luckily, if there is a shortfall, you won’t necessarily be out of pocket. You are also entitled to claim from the National Insurance Fund via the Government’s Insolvency Service (Redundancy Payments Service).

Claiming from the Government

You can make a claim to the Government for:

  • Redundancy pay – subject to you working at the company for at least 2 years. Pay is capped at £525 per week and the amount of money you get depends on your age, how long you were employed, and the terms of your employment contract
  • Outstanding payments, including unpaid wages and overtime – capped at £525 per week for up to 8 weeks
  • Holiday pay – capped at £525 per week for up to 6 weeks
  • Payments in lieu of your notice period – Capped at £525 per week for up to 12 weeks

If your employer asks you to continue working despite the insolvency, you can still claim redundancy and unpaid wages if you lose your job at a later date. However, you cannot claim wages or holiday pay from the day the company became insolvent to the day you lost your job.

You must apply within 6 months of being made redundant and you will still have to pay Income Tax and National Insurance on unpaid wages and other money you are owed.

Can you claim unpaid wages if your employer goes into administration?

The purpose of administration is to see whether a business can become profitable again. It involves an Insolvency Practitioner (acting as an administrator) being appointed to temporarily take over the business. There are a number of potential outcomes, including:

  • The sale of the business to someone else (as an employee you will form part of the transfer and you have some redundancy protections)
  • A Company Voluntary Arrangement (CVA)
  • The liquidation of the company if there is no way it can continue running

During administration, your employer is protected from any legal action from people and businesses to which it owes money, including claims for unpaid wages. This is called a “moratorium”.

After administrators are appointed, they have 14 days to decide whether to make any employees redundant. If you are made redundant during this time you will become an “ordinary creditor”, meaning you will become the business’s lowest priority when repaying its debts. You will still have a claim for outstanding pay and other entitlements; however, it is unlikely you will recoup all or any of this.

If you are not dismissed within the first 14 days you will become a “preferential creditor” if you are later made redundant, meaning you have a better chance of reclaiming any money owed to you.

In both situations, you will be entitled to make a claim to the Government Insolvency Service if your employer cannot pay you.

What if the business is sold?

If the business is transferred to a new owner after administration and you have not been made redundant, you employee rights will be protected by the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and can claim unpaid wages and other outstanding payments directly from your employer once the moratorium is over.

Get expert advice about your employment law rights

Employees face considerable challenges when their employers face financial difficulty. From uncertainty about the future, to frustration about unpaid wages and entitlements, when a company goes under, its people are hit the hardest.

At Preston Redman, our specialist employment solicitors advise clients across a wide range of employment issues, including claims for unpaid wages, redundancy, and other outstanding payments. Get in touch with our team today by giving us a call on 01202 292 424 or by filling in our online enquiry form