When a business faces financial difficulty, it is not uncommon to engage the services of an insolvency practitioner, “IP”, to undertake a financial review and assist with restructuring.
Of course, there are times when no amount of restructuring will work because a company is heading for the rocks without any hope of survival. In such cases, what about the employees?
While an IP can provide an independent view regarding a business and its viability, in whole or in part, employment legislation realities mean that if there are to be redundancies as part of a restructuring programme, or complete closure is contemplated and hence 100% redundancies, there is a requirement to consult with employees.
The rules state that where there are fewer than 19 employees, no consultation is required. However, 30 days’ consultation is required if between 20 and 99 people are to be made redundant, and 45 days are needed where more than 100 are to be made redundant within a 90-day period.
One practical difficulty with consultation is that it is almost impossible to keep the process confidential and, particularly with the various social media channels available, those waiting in the queue for consultation can sometimes find out what is likely to happen in the meeting room before they are even called forward for discussion.
If there is no consultation and redundancies occur, it is possible for employees to obtain a compensation payment from the employer for lack of consultation.
If the employer is insolvent and unable to pay anything – as happened when City Link collapsed in late 2014 – the Redundancy Payments Office can be prevailed upon to use taxpayers’ money to fund the compensation payments and lodge a claim in the resultant insolvency process.
Another challenge that arises in relation to consultation when redundancies are inevitable is that those who are consulted can sometimes take action that the IP cannot control.
For example, an employee who has not been engaged for a period of more than two years, and hence has no redundancy payment to protect, might simply walk away at a most unfortunate time in terms of saving the business for those who remain.
Equally, it is not uncommon to be appointed liquidator of a company with, say, 50 employees but no work and no cash.
The IP has no option but to dismiss everyone, accept whatever adverse media publicity occurs, and acknowledge that the taxpayer will be picking up the tab.
Dealing with consultation and redundancies where there is a distinct prospect of a formal insolvency process beginning will always be seen as unfair to those who lose their job but, like it or not in such cases, the taxpayer picks up the tab up to a maximum pay rate of £475 per week for those who find themselves on the wrong end of a redundancy letter.
Another strand of “unfairness” emerged with the recent European Court ruling that thousands of former Woolworths employees will not be entitled to compensation because, although they worked for a huge employer, they worked in a store that had 20 or fewer people and hence enjoyed no legal right of consultation.
This situation is not uncommon, and is all part of the shadowy jungle through which IPs are required to navigate when a company faces financial difficulty and requires advice.
The view from the IPs’ perpective is that the sooner a company speaks to an IP about financial challenges and how best to deal with them, the easier it will be to deal with employee consultation and contain the overall cost.
Michael Reid is a licensed insolvency practitioner and partner with Meston Reid & Co