What happens if a company can’t afford to pay redundancy?

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One of the most common queries we receive from company directors is: “If my company cannot afford to pay redundancy, what should I do?” It is always uncomfortable and difficult when redundancies become necessary, both on a personal level and a practical one. It is unpleasant to make someone redundant, and it usually means that you have other, significant financial challenges to deal with on behalf of your business – often, the process of liquidation.

The only upside is knowing that the staff members who face redundancy will receive a redundancy payment, but if your business cannot afford to pay this, you may be left wondering what the outcome will be. In some cases, you feel like you cannot make employees redundant because you cannot afford these payments – in others, you may be facing insurmountable challenges and feel concerned about the future of your business in response to financial difficulties.

This can become even more complicated based on the actions of employees. It is surprising how often Company Insolvency Advice is approached by business directors concerned about one or more of the following circumstances, and how this could affect their organisation’s financial health:

  • Employees who have been with the company a long time and would be owed large redundancy payments
  • The costs of making long-term employees redundant are more than the company can afford
  • Employees with long service who are reluctant to retire and stay in their roles in the hope that the business will make them redundant
  • The financial pressures of these situations cause worry that a company may need to close

Thankfully, there are often solutions that can allow businesses to recover from these situations by managing their financial matters carefully. Speaking to the team at Company Insolvency Advice can help, as our expertise in this area allows us to examine your financial circumstances and identify the best solutions to meet your needs.

There are also ways for redundant employees to access redundancy payments even if the company does not have the resources to pay them. Here, we will explain how this works, outline some of the legal considerations, and help business directors understand how this affects them.

When does my business need to pay redundancy?

The Employment Rights Act 1996 applies to all employees who work 16 hours or more each week and is designed to enshrine some fundamental rights in law. Those working fewer than 16 hours per week are also given rights under the act but may face restrictions on some entitlements. One of these is the right to redundancy pay.

If your company continues to trade, then all redundancy costs must be paid by the employer. This can put businesses in a position where they cannot afford to keep paying members of staff, but also cannot afford to pay the costs of redundancy. This is an extremely difficult situation as it is completely unviable on a long-term basis, and at this stage, it’s important to seek expert advice and support.

Often, the worst case scenario is that these financial troubles continue to spiral, and the company either opts to go into liquidation, or is forced to. In such cases, payments to employees are protected and can be claimed from the Insolvency Service once the company is in liquidation.

In these cases, redundancy costs are paid by the government from the National Insurance Fund. The government’s Insolvency Service handles this process, along with a separate process for claims on behalf of people who have not received statutory notice pay. Once the Insolvency Service has made these payments, it will join the business’ list of creditors, and may receive a dividend to cover some of these costs during the liquidation process.

What is the Redundancy Payment Service (RPS)?

The Redundancy Payment Service or RPS was the government body that was responsible for making redundancy payments on behalf of insolvent companies. However, this role has now been taken over by the Insolvency Service.

What are an employee’s statutory redundancy rights? 

If a business closes and does not have the resources to pay redundancy, the National Insurance Fund will pay directly to any qualifying employee who applies. The amount will be based on the redundant employee’s statutory rights to redundancy pay, and will include the following sums:

  • Any pay arrears for up to a maximum of three months.
  • Any untaken holiday pay due in the last 12 months (generally up to a maximum of 30 days holiday).
  • Wages in lieu of notice of one week for each full year the employee has worked, up to a maximum of 12 weeks.
  • Redundancy of one week’s pay for every full year worked if the employee is under 40. This increases to 1½ weeks’ pay for each year of employment if the person is over the age of 40.

These payments are currently capped at a statutory maximum of £643 per week, but this is subject to regular change.

Can a company director claim a redundancy payment?

A company director can make a claim for a redundancy payment, provided they are also considered an employee of the business. You may need to provide evidence of this, including the following:

  • Evidence that you are on the company payroll
  • A breakdown of the company’s structure, particularly as it relates to directors and shareholders
  • A copy of your employment contract 
  • Wage slips and evidence that you worked the hours for which you were paid
  • Other financial documents relating to your employment

This may not apply if you owe the company money.

By working with Company Insolvency Advice, you can rest assured that you will receive the maximum entitlements you are allowed to claim. With our expert understanding of the complexities of financial processes, we can always advise you on your eligibility to claim, suggest company rescue solutions that could help you out of difficult situations, and ensure you receive everything you are legally owed. Speak to our advisors today on 

Here at the Company Insolvency Advice, we are experts in insolvency and liquidation issues, why not speak to one of our advisers who will be happy to guide you through your options. Call us today on 0800 999 0666 or use our online enquiry form to request a call back

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Business Advice Expert

Robert Cooksey

Robert Cooksey

Director Advice Line: 0800 999 0666


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Company Insolvency Advice is a leading business rescue, corporate restructuring and insolvency specialists, with years of experience in providing corporate debt solutions. We understand the daily pressure you are under as a director and our team of expert consultants cover the whole of the country in order to discuss debt solutions with company directors.

The first port of call should be to consult with a licensed insolvency practitioner to discuss your options. Thankfully, you can arrange a free initial consultation with one of our local insolvency practitioners at your convenience.

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