Does Calling in Administrators Change the Rights of Employees?

Over recent years there have been a significant number of nationwide businesses and high street stalwarts which have been forced to cease trading.

Over recent years there have been a significant number of nationwide businesses and high street stalwarts which have been forced to cease trading. With businesses such as HMV, Comet and Blockbuster calling in administrators, employees across the country have expressed concern regarding their job security and their rights if their employer calls in administrators or ceases trading.

Generally, when administrators are appointed they aim to determine whether the business can be saved and, if so, how it can be saved. Although this is good for employees, it does mean they face an uncertain time without the support of the usual management team. Within fourteen days of being appointed, administrators will decide whether to adopt employees’ contracts or let them go. If let go at this point, these ex-employees become unsecured creditors for large parts of their claims like suppliers and other creditors but with elements of their claims for arrears of wages and holiday pay being preferential which means they are paid ahead of unsecured creditors. However, if employees contracts are adopted, the administrators is liable to pay their wages that accrue after the date of the administration as an expense of the administration which means that they have super-priority for payment before charge holders and preferential creditors. As stated above, claims that relate to the pre-administration period will be unsecured apart from some claims that will be preferential. If the insolvent business is unable to make the payments, ex-employees can apply to the National Insurance Fund to make the payment, providing they meet specific terms and can show they have attempted to obtain the payment from their ex-employer.

However, when administrators successfully devise a strategy for business survival, it generally involves another company taking over the business, either partly or as a whole. In this instance, employees are often simply transferred to the new business with their rights and employment continuity protected under the Transfer of Undertakings Regulations. If, however, they are made redundant by their original employer and hired by the new employer, they may not technically be transferred and are not, therefore, protected under the Regulations and there is deemed to be no continuity of employment.

Whilst in the process of administration, there is hope that the business will survive and that employees will not lose their jobs. However, if the business enters liquidation, there is no possibility of recovery and employees will be forced to seek new employment. Although the process of administration is undoubtedly a period of uncertainty for employees, it does not necessarily indicate impending job loss. Whilst some businesses do face subsequent closure, many administrators are able to facilitate agreements which secure the future of the business and the continued employment of its employees.

Osborne Clarke is an international law firm specializing in employment law. For more information or advice about employment law please visit their website.

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