How are employees affected when a company enters a CVA?

What happens to employees during a Company Voluntary Arrangement?

A Company Voluntary Arrangement (CVA), is a formal restructuring process for eligible companies experiencing significant financial pressures. A licensed insolvency practitioner (IP) works alongside the indebted company to present a formal and legally-binding repayment plan to its outstanding creditors.

Given that the business may need to reduce its costs and become more streamlined to meet its new financial obligations, employees can be adversely affected in a CVA. Staff costs can represent a significant proportion of a business’ expenses, so ending employment contracts will be inevitable in some cases.

So how exactly do CVAs affect employees, and are members of staff automatically made redundant as a result of the company’s insolvent position?

Are employees made redundant in a CVA?

Employees aren’t automatically made redundant when their employer enters into a Company Voluntary Arrangement (CVA). This is because a CVA requires a company to continue trading throughout the duration of the CVA in order to generate the money needed to repay creditors. Due to this, the company will often rely on its members of staff to ensure the business runs smoothly.

In some instances, however, redundancies cannot be avoided, particularly if the CVA involves parts of the business being wound down. If this is the case, the company must follow statutory process to ensure any redundancies are fair and legal. The consultation process laid down in employment law must be followed without exception.

“Spoke with Chris who put me at ease straight away. He was very knowledgeable and listened intently to all my worries and concerns. Will definitely be using Real Business Rescue and advise anyone with business issues to give them a call.”

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Chris Bristow
Business Debt Expert

Employees who are made redundant as a result of a Company Voluntary Arrangement can claim redundancy pay and other entitlements if they’ve worked continuously for the company for at least two years.

They may be eligible for the following payments:

Payments are made by the Redundancy Payment Office (RPO), which then becomes a creditor of the company and is repaid as part of the CVA. This helps the company spread the cost of redundancies over the full term, which typically lasts between 3-5 years.

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How much redundancy pay could employees affected by a CVA be entitled to?

The amount of redundancy pay employees can receive depends on individual circumstances. The elements that make up the calculation for redundancy pay are an employee’s age, current salary, and length of service.

The government has capped the monthly wage at £700 for the purposes of calculating redundancy pay, and the total amount of redundancy pay is capped at £21,000 for 2024/25. Additionally, length of service is calculated only in complete years.

Statutory redundancy pay up to £30,000 is tax free and also free of National Insurance, however, other elements such as arrears of wages and unpaid holidays will be taxed. 

How Real Business Rescue can help

It’s crucial to obtain professional insolvency advice early on if you have employees and your business is experiencing financial distress. Acting quickly can open up significantly more options, and help to prevent a slide into terminal insolvency.

Real Business Rescue are Company Voluntary Arrangement experts, and will provide reliable independent advice on your current situation. Please contact one of the team to arrange a free, same-day consultation – we operate an extensive network of offices throughout the UK.