What if an employer cannot afford to make redundancy payments?
Updated: Feb 16
What happens when an employer finds themselves in the difficult financial position where they are unable to pay their employees statutory redundancy payments?
Under the Employment Rights Act 1996, if an employee who is being made redundant has more than two years continuous service, they are entitled to statutory redundancy pay, amongst other payments, as part of their termination package.
This legislation has not been amended and still remains in place despite the current COVID-19 pandemic that has affected the financial situation of thousands of businesses and employers in the UK.
The Redundancy Payment Service
If an employer cannot afford to pay their employees redundancy pay, then the employee could pursue the employer through the employment tribunal or civil court to claim the money they are owed.
An alternative support option for the employer is to apply to the Government’s Redundancy Payments Service (RPS) for financial assistance. The RPS is part of a wider Government agency called the Insolvency Service.
If the employer’s application is approved, then the RPS will make the statutory redundancy payments to the employee directly on the employer’s behalf.
Who can apply to the RPS?
Any employer who is not subject to formal insolvency proceedings can apply, so this includes businesses that:
are still trading;
have stopped trading but have not gone formally insolvent;
will soon stop trading but are not going formally insolvent.
To be eligible for financial assistance from the RPS, an employer must provide evidence that they cannot afford to pay their employees statutory redundancy pay.
The RPS must also be satisfied that the former employees are eligible for statutory redundancy pay. A person will normally be entitled to redundancy pay if they:
have been made redundant;
were an employee;
were continuously employed by the insolvent business for two years or more.
What payments can the RPS make?
Payments made by the RPS are subject to statutory limits, which include that a maximum of 20 years’ redundancy can be paid per employee, and there is a cap on weekly rate of pay. Redundancy payments are capped at £538 a week or £525 if the person was made redundant before 6th April 2020.
A person will receive:
half a week’s pay for each full year they were employed and under 22 years old;
one week’s pay for each full year they were employed and between 22 and 40 years old;
one and half week’s pay for each full year they were employed and 41 or older.
The RPS cannot make any other types of payments unless the employer enters into formal insolvency proceedings. These payments include, but are not limited to:
arrears of wages or salary;
any owed holiday pay;
any owed statutory notice pay;
any owed contractual notice pay.
How to make an application to the RPS
To apply, the employer needs to email the RPS at RPS.FA@insolvency.gov.uk stating in their email the following information:
the name of the applicant;
whether the applicant is the employer;
whether the applicant should be the main point of contact;
headcount number of redundancies.
The RPS will then provide the person who is the applicant with further details on what the minimum requirements are for proving that they meet the qualifying criteria.
If the RPS makes any statutory redundancy payments on behalf of a solvent employer, the RPS will then try to recover the cost of those payments from the employer.
If the employer fails to repay debt to RPS then debt enforcement action may be taken against the employer.
Other elements to take into consideration
Under the Enterprise Act 2002, an employer may be able to use other, more appropriate sources of aid to help them to recover from financial problems.
The RPS cannot advise on whether it remains appropriate to continue trading, and it is advisable to seek professional advice if there is any uncertainty. The RPS says that acceptance or rejection of a financial assistance application must not be used as an indication that a company should, or should not, continue to trade.
Looking for more advice or guidance on this matter, or any other business-related issue?
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