Understanding staff redundancy pay if your company is insolvent

I can't pay my staff redundancy pay

When a business experiences financial difficulty, sometimes there’s no option but to make staff redundant. The business then carries on trading with reduced outgoings, and has a better chance of survival in the long-term.

Alternatively, an organisation may be officially insolvent and has to close down. Either way this is a stressful time for all concerned, so if you can’t afford to pay staff redundancies what should you do given your legal obligations and responsibilities as an employer?

Still trading but can’t pay your staff redundancy pay

Financial difficulty scheme

If making redundancies offers your business a good chance of survival and other jobs will be saved, you may be able to secure help from the government if you can’t afford the redundancy payments.

A loan scheme for companies in this situation allows you to borrow money to pay your staff redundancies, and then repay over a period of time. This can be particularly useful if you’ve also restructured your debt through company administration or a Company Voluntary Arrangement, and can take advantage of more favourable repayment terms on your other debts.

Redundancy Payments Service loan scheme

The scheme is run by the Redundancy Payments Service, or RPS. To back up your loan application you’ll need to provide solid evidence of your company’s inability to pay redundancy, and the likelihood of your business’ survival once these redundancies have been made.

Supporting documents should include management accounts and financial projections, such as sales, cash flow, and profits. The idea is that your company repays the loan at an affordable amount over a period of time, offering the opportunity to improve trade without the same level of payroll liabilities.

But what if your application is refused? What can you do to pay staff redundancy when you want to carry on trading?

Talk to employees earmarked for redundancy

Good communication is key to dealing with this difficult situation. You’re obliged by law to pay redundancy pay to eligible employees, and you may have additional obligations if you’ve also agreed to pay contractual redundancy.

Being open and honest with your staff about the business’ struggles can smooth the way to a solution.

When you’re insolvent and can’t pay staff redundancies

The situation is slightly different if your business has entered insolvency and is no longer trading. If the business enters administration or a Company Voluntary Arrangement (CVA), for example, or is liquidated, eligible employees will be able to make a claim on the government’s National Insurance Fund (NIF).

Employees must have worked for the company for at least two years, and their age and weekly wage determines the amount of redundancy pay they receive. The appointed insolvency practitioner (IP) should advise on how to claim redundancy in this way. It’s also worth noting that you may be entitled to claim director redundancy if you’re an employee of the company.

Claiming redundancy from the National Insurance Fund

There’s no assurance that staff will receive all the money they’re owed, but they may be able to claim such payments as unpaid holiday, wage arrears, notice pay, and some pension contributions from the National Insurance Fund.

Staff can apply for these payments as soon as they’re made redundant, and have up to six months to make the claim. The Redundancy Payments Office (RPO) handles the applications, and typically makes payment within a few weeks. 

For more information on paying staff redundancy when cash flow is compromised, call our expert team at Real Business Rescue. We are insolvency specialists and will provide the professional insight and advice you need. Our network of offices extends throughout the country, and we offer free same-day consultations to quickly establish your needs.