How to stop your workforce going under when business is close to collapse

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With the recent collapse of Thomas Cook and other established companies in financial difficulty, such as Pizza Express and Links of London, Barry Ross looks at the plight of the workforce when companies face going under and the role of HR.

From an HR perspective, what should companies do to prepare both the business and their workforce for financial problems? Communication at an early stage is key and ensuring that a company complies with its redundancy consultation obligations. Ensure that a genuine, adequate and meaningful consultation takes place.

Regulations apply where there are 20 or more redundancy dismissals proposed at an establishment within a period of 90 days. It is likely that the rules around collective redundancy consultation would have applied to many of the Thomas Cook branches and their head office. Consultation should take place for a minimum of 30 days for 20-99 employees and 45 days for 100 employees or more. If a union is recognised, the company should be consulting with them directly, and if not, consult with the employee representatives who have been elected by the affected employees.

The penalty for failing to inform and consult is up to 90 days’ gross pay, per affected employee. That adds up quickly when there are a large number of employees being made redundant. An employer can argue that there were “special circumstances” which meant that it was not “reasonably practicable in the circumstances to comply with their duties to consult”.

While this sounds like a get out of jail free card, the courts have said that these really do have to be “exceptional circumstances” and this is very narrowly defined by the tribunals. In Thomas Cook’s case, they knew they had problems for some time given their search for further investment.

Before collective consultation with the union or representatives begins, the company must submit a HR1 form to the government, setting out, among other things, the number of potential redundancies. This is a statutory obligation and failing to do so carries criminal sanctions and can result in a director being personally fined or banned from becoming a director of another company for up to 15 years. These penalties were highlighted in recent years with cases involving David Forsey and Robert Palmer at the Sports Direct group company USC and directors at City Link.

Should the worst happen, and employees are dismissed without any process in the face of a company going into insolvency, there are a number of claims they could bring including; unfair dismissal, wrongful dismissal, a redundancy award, holiday pay, any unpaid salary and benefits, and seeking an award for a failure to inform and consult.

But the question will be whether employees will actually be able to recover any money from an insolvent company even with a judgment in hand? The short answer is maybe not, as those employees become unsecured creditors owed money by the company and they are dealt with in order of priority of debts as set out in the Insolvency Act. In reality, this may only be worth a few pence in every pound.

However, if an employer is insolvent, an employee can apply to the government’s national insurance fund for a number of limited payments which are all capped at the current statutory maximum for a week’s pay of £525 including; up to eight weeks of the protective award referred to above, redundancy pay, holiday pay (capped at six weeks), outstanding wages (capped at eight weeks), statutory notice pay (capped at 12 weeks) and pension contributions.

Not all is lost for some of the employees of Thomas Cook stores. Hays Travel has already reopened 368 of the 555 former Thomas Cook shops re-employing many workers in the process.

In an insolvency situation, employees should consider whether TUPE will apply and if so, what rights they have. The rights of the employees will depend on the type of insolvency and employees that do transfer to a new employer could have limited rights.

Thomas Cook went into compulsory liquidation with effect from 23 September 2019, insolvency proceedings with a view to liquidate the assets under an insolvency practitioner are often referred to as “terminal” proceedings and in compulsory liquidation, employees are usually dismissed automatically when the liquidator is appointed. There is no automatic right of transfer to a new owner which means that a buyer can select staff they want without worrying about claims from those they have not picked. The buyer can put the employees on their own terms and conditions of employment, rather than transferring them on existing terms.

There are also “non-terminal proceedings” such as administration, or a pre-pack, which afford employees most TUPE protections with a few differences relating to liabilities for claims to the national insurance fund not transferring, and the transferor and transferee being able to agree permitted variations to employee terms and conditions.

When a company falls on hard times, it’s never easy for anyone involved, but by following correct procedure and remaining transparent with employees at all times, HR can help keep the company compliant at the very least.

Barry Ross

About Barry Ross

Barry Ross is a director at Crossland Employment Solicitors.
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