The amount paid out by the government for unpaid wages and redundancy pay has risen sharply as company insolvencies hit their highest level in two decades.
The data, obtained from the Insolvency Service under the Freedom of Information Act by HR law specialist Nockolds, suggests that increasing numbers of employees are being left out of pocket.
A sum of £52.5 million was paid to employees for arrears of pay in the past 12 months, up from £29 million in 2021-22 and £13.7 million in 2020-21. A further £214 million was paid out for redundancy pay in the past 12-month period, up from £140 million and £169 million in the two prior 12-month periods respectively.
When businesses collapse into insolvency and are unable to meet their obligations to staff – most commonly wages and redundancy pay – employees can apply to the Insolvency Service to recover some of the money owed to them from the taxpayer.
Unpaid wages and redundancies
Proposed redundancies increased in 2023
Employees can claim a maximum of eight weeks unpaid wages capped at £643 per week. The Insolvency Service will pay unpaid redundancy pay up to the statutory maximum of £19,290. In both cases this is substantially less than some employees might be owed in unpaid wages or entitled to receive in enhanced redundancy pay.
Joanna Sutton, principal associate at Nockolds, said the firm had seen “a spike in employers making redundancies to slash costs”. In some cases, she added, “this is not enough to stave off insolvency, which can prompt widespread job losses, leaving increasing numbers of former employees owed thousands of pounds in unpaid wages and redundancy pay.”
Sutton said there were increasing numbers of cases where employers could not afford to pay wages and statutory redundancy pay, let alone enhanced redundancy that many employees expected and relied on. “However in many cases, these businesses are still solvent and so will continue to trade but try to delay paying their staff, leaving many employees with little recourse other than to pursue their employer for payment by bringing claims in the employment tribunal or courts. Payments made by the Insolvency Service are likely just the tip of the iceberg.”
Nockolds said that the restoration of the preferential creditor status of the Crown from 1 December 2020 (under the 2020 Finance Act) meant that HMRC was now a secondary preferential creditor (after employees) in insolvency proceedings.
Many employees will be left with little recourse other than to pursue their employer for payment by bringing claims in the employment tribunal” – Joanna Sutton, Nockolds
But, said Sutton, employees were only preferential creditors up to a maximum of £800. Any money due to employees (or ex-employees), which has not already been recovered from the Insolvency Service and which exceeded the ceiling of £800 would be treated as unsecured debts. This means that any assets remaining will be equally distributed, with any shortfall being shared pro rata between the creditors.
Sutton said: “The restoration of HMRC’s status as a preferential creditor means that less money is being paid to employees in the event of insolvency. While employees are nominally ranked ahead of HMRC, that only covers £800, after which they go straight to the back of the queue. In many insolvencies, a portion of the money that otherwise might have gone to employees is now going to HMRC to pay tax debts.”
She added: “It is never a good time to be made redundant but the surge in inflation and interest rates over the last few years has led to a record drawdown on savings as families struggle to survive. Redundancies that result from business failures can be especially tough as jobs are often shed at very short notice.”
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