When Brexit was announced, some businesses feared for their future. Then COVID19 hit and led to some businesses closing permanently. Now, the UK is working its way towards a post-Brexit, post-COVID future while the world is living through interesting times.
This means that very few businesses can be considered truly safe from insolvency. With that in mind, here is a guide to what happens if your employer becomes insolvent and how you can protect yourself.
What happens if a business goes insolvent?
The broad answer to this is “it depends” on the nature of the insolvency. If a company goes into full liquidation then all employees automatically become redundant. They retain their statutory entitlements as employees up to the point of their formal termination. Typically these are outstanding pay, holiday pay and statutory redundancy.
If the company itself cannot pay them (and there is no insurance), then they can claim the money owed from the National Insurance Fund. Employees do not have preferred claims on any other monies owed e.g. expenses. If these have been paid on a business credit card, then there is a strong possibility that the employee will still need to pay the bill.
If the company uses another form of insolvency, it will be able to continue to trade. It will therefore not automatically need to make all employees redundant. With that said, it may be forced to make some employees redundant. It may also be forced to offer employees a choice between redundancy and accepting a new contract on less favourable terms.
The key point to take away, therefore, is that any insolvency situation carries the prospect of job losses. Employees should therefore be prepared for this. Employees should also recognise the grim reality that they may be the last people to find out about any form of insolvency. It therefore makes sense to look on it as a potential hazard no matter how safe you think you are.
The practicalities of redundancy
Again, the practicalities of redundancy depend very much on the situation. In practical terms, probably the single biggest hazard is being thrown into financial limbo by an unexpected liquidation.
In this scenario, employees may have to wait some time for statutory claims to be settled (e.g. wages/salary to be paid). They may also have to wait for benefits to start and/or for any insurers to pay out (e.g. for Payment Protection Insurance). This is one of the many reasons why it’s important to put together an emergency savings fund if you possibly can.
It’s also advisable to think about your use of business credit cards. If possible, try to get your employer to give you a pre-paid debit card and use it as much as possible. If necessary, keep a business credit card as a back-up.
Also, try to get your employer to pay for any big-ticket items directly. For example, if you travel, ask them to book your fares and hotel. Only put incidental items (e.g. meals) on expenses.
In other insolvency situations, you may have some element of choice about whether or not to accept redundancy. This then becomes a judgement call. What’s more, it can be one with significant implications so it’s important to think about it carefully.
The usefulness of having a backup plan
Insurance is possibly the most obvious backup plan for redundancy. It can be very useful but it’s important that you have both the right type of cover and the right level of cover.
Another potential option is to have a side-hustle to which you can pivot if you lose your main job. At the very least, try to develop skills you could monetise either as a freelancer and/or use to make yourself attractive to employers.
