Do you know the process? What are the practical implications for employees?

When a company goes into administration, it is undoubtedly a worrying time for those affected. The employees of the company in particular, may be left wondering what happens next, what does this mean to me, and even – what is administration?

What is Administration?

Administration is a procedure under the insolvency laws of a number of common law jurisdictions. It functions as a rescue procedure which can allow a company enough time to repay outstanding debts without being pressurised by creditors in order to escape insolvency.

Whilst the future is uncertain, a company going into administration does not always mean the beginning of the end for a business, rather a way of allowing the company time to consider the options available to see if recovery is possible or if a new owner can be found.

What happens next?

Following the administration announcement, administrators will begin their work and one would hope they are keeping employees informed. The administrators have a period of 14- days following their appointment to assess how best to cut costs – one option is usually to reduce the costs of any employees by dismissing them. If they decide to pursue this option within the 14 days’ timeframe, those ex-employees will become ‘ordinary creditors’. While their entitlement to outstanding wages and redundancy payments will remain, this means they will be in the last category to receive monies owed along with suppliers and other creditors.

If an employee is retained beyond the 14-day period, they become a ‘preferential creditor’. This gives them priority over ‘ordinary creditors’ and they therefore stand a better chance of recouping monies owed to them.

Once the initial 14-day period is over, the employment rights of staff are then effectively adopted by the administrator.

What does this mean to me?

Your standard employment rights remain the same, so you can still expect to receive the following (not an exhaustive list):

  • a contract of employment
  • the right to rest breaks in line with the Working Time Directive
  • working hours in line with the Working Time Directive
  • statutory holiday entitlement and sick pay
  • not being paid less than the minimum or living wages
  • parental rights and the right to request flexible working

During administration, these rights are extended to include the right to be paid monies owed, such as outstanding wages and commission up to a maximum of £800, redundancy pay, up to six weeks’ accrued holiday pay and any pension contributions; if the business is sold to someone else, your employment rights are protected.

After the 14 day-period?

The administrators will make a decision on how to move forward, while employee’s rights are still intact, if a buyer has still not been found, they may ask remaining employees to reduce their pay – if the company cannot be saved, this becomes part of the monies owed to employees as preferential creditors.

If the company is purchased by a new owner, employment rights are protected under TUPE legislation. However, if the old company goes into liquidation and closes its doors, employees may be at greater risk of only receiving a proportion of their wages and any other payments owed to them.

Concern about the status of the company, and the position of all of those affected and their future will be unfortunately unavoidable during this process. Therefore, line managers and HR should be on hand to discuss any concerns, the company’s plan for the future and the estimated timescales proposed. Providing support should help to alleviate some of the concerns and help employees plan ahead.