A company going into administration is a stressful and worrying experience for everyone involved. Employees can especially feel the strain as they may not fully understand the process or their rights. Contributor Carl Faulds, Managing Director – Portland Business Support and Advice.

It’s important that employees know exactly what administration entails, and where they stand with regards to their pay, pension and workplace rights. Here we explain everything employees need to know about company administration, their workplace rights, and what they are entitled to if made redundant.

What is company administration?
A company goes into administration when it becomes insolvent (unable to pay its debts). 

But what happens when a company goes into administration? 

Licensed Insolvency Practitioners take over control of the company with the aim of resolving the situation. During administration the company is protected from legal action by creditors. This allows directors and administrators the breathing space to explore their options moving forward. It does not mean the company is immediately going out of business, though occasionally that is the end result. For employees, the first 14 days of administration are crucial. We explore why below. 

The first 14 days of company administration
During administration, an employee’s standard rights remain the same. Such rights include a contract of employment, working hours in line with the working time directive, rest breaks in line with the working time directive, statutory holiday entitlement, and parental rights. In addition, employees must not be paid less than minimum wage.

Employees are also entitled to be paid any monies owed. This includes outstanding wages and commission up to £800 (max), redundancy pay, up to six weeks’ accrued holiday pay and pension contributions.

However, if an employee is made redundant during the first 14 days of administration, they become an ‘ordinary creditor’. This essentially means they are last in line to receive any monies owed. Unfortunately, despite the employee’s entitlement to outstanding wages and redundancy payments, it is often the case that the company is unable to pay. 

In this situation, an employee can make a claim from the National Insurance Fund. However, the employee must have made an unsuccessful claim from the company within six months of their dismissal to be eligible.

Employees can claim the following from the National Insurance Fund: Up to eight weeks’ unpaid wages; Up to six weeks’ accrued holiday pay; Pay in lieu of notice; Unpaid pension contributions; Redundancies beyond the first 14 days.

If an employee is kept on beyond 14 days, they become a ‘preferential creditor’. This gives them priority over ‘ordinary creditors’ should they be made redundant later on. While they don’t quite make it to the top of the list of creditors, they do have a much better chance of recovering any monies owed to them. 

A preferential creditor is entitled to claim: Outstanding wages and commission up to a maximum of £800, covering a period of four months prior to the insolvency; up to six weeks of accrued holiday pay; some occupational pension payments.

If necessary, employees with preferential creditor status may make a claim from the National Insurance Fund if all monies owed are not paid. They do so as an ‘ordinary creditor’. 

The Administrator becomes responsible for employee rights after the initial 14 days has passed. While employee rights must remain intact, the Administrator can now ask staff to take a pay cut or defer a portion of their pay. This is to help the business survive. 

The Administrator remains responsible for the employees until the business is sold on or closed down. 

Employee rights if the company is sold on
If the company is sold on, the rights of any staff still employed are transferred to the new company. This is done under the Transfer of Undertakings (Protection of Employment) or 

TUPE legislation
What does this mean in reality? Well, the new owners cannot pick and choose the employees they want to keep; they must acquire the entire workforce. The existing terms and conditions of employee contracts cannot be changed – which means rate of pay, working hours and holiday entitlement must remain the same. And finally, each employee’s start date remains the same. This is important for any individual facing redundancy in the future as it ensures they receive their full entitlement of redundancy pay.

It’s important that employees are kept informed during company administration. They should be made aware of the company’s plans and potential timescales, as well as given advice on their rights and entitlements. This should help alleviate concerns, allow employees to plan ahead, and generally improve morale at a difficult time.