When a company enters administration, it can be an unsettling and uncertain time for everyone involved, particularly employees. Questions about job security, pay, redundancy and future employment often arise immediately.
Understanding what happens to staff during administration can help reduce uncertainty and provide clarity during what is already a difficult period.
What is administration?
Administration is a formal insolvency process designed to give a financially distressed business breathing space. An insolvency practitioner is appointed as administrator and takes control of the company with the aim of either rescuing it, achieving a better outcome for creditors than liquidation, or realising assets in an orderly way.
Administration usually lasts up to 12 months, although it can end sooner if a clear outcome is reached.
The first two weeks matter
The first 14 days of administration are particularly important for employees.
During this period, the administrator assesses whether the business can continue trading and which roles are required to support that process. Decisions made at this stage can affect how employees are treated if redundancies occur later.
Employees who continue working beyond the first 14 days become preferential creditors. This status gives them a higher priority than most unsecured creditors if the company later enters liquidation.
Employees who are made redundant within the first 14 days are classed as ordinary unsecured creditors, which places them lower in the repayment order.
What preferential creditor status means for staff
If the company cannot be saved and enters liquidation, employees with preferential creditor status may be entitled to claim certain amounts directly from the company’s assets.
This can include limited arrears of pay, holiday pay and some pension-related contributions, subject to statutory limits.
Any remaining unpaid amounts outside those limits are treated as unsecured claims.
What happens if employees are ordinary creditors?
In many insolvency cases, there are limited funds left for unsecured creditors once secured and preferential claims have been dealt with. This means employees made redundant early in the process often recover little or nothing directly from the company.
However, employee rights are protected under employment legislation, and most employees can claim certain payments from the government instead.
Government support through the Redundancy Payments Service
Where a company cannot pay what it owes, employees may be able to claim statutory payments from the Redundancy Payments Service, which is funded through the National Insurance system.
Eligible employees can claim for unpaid wages, accrued but untaken holiday, statutory notice pay and redundancy pay, subject to weekly caps and qualifying periods.
Redundancy pay is calculated based on age, length of service and weekly pay, with statutory limits applying. These limits are reviewed periodically and can change over time.
Claims must usually be made within set timeframes, and employees are typically guided through the process by the administrator.
What if the business is sold?
In some cases, administration results in the sale of the business or its assets to a new owner.
Where a business is sold as a going concern, employee rights may be protected under TUPE regulations. This means that employees who transfer to the new owner usually retain their existing terms of employment and continuity of service.
While TUPE offers protection, changes to roles or terms may still occur in certain circumstances if required to support the ongoing viability of the business.
A difficult time for everyone involved
Administration is often stressful for employees, regardless of the outcome. Clear communication from administrators and early access to accurate information can help staff understand where they stand and what steps they may need to take.
For directors, considering the impact on employees is an important part of the decision-making process when facing financial difficulty.
Final thoughts
The way staff are treated during administration depends largely on timing, the viability of the business and whether a buyer can be found.
Employees who remain working beyond the initial period generally have stronger protections, while those made redundant earlier will usually rely on statutory support.
Understanding the process helps employees and employers alike approach administration with greater clarity and fewer surprises.
If you are concerned about your company’s future, please get in touch.
Adcroft Hilton: Debt, Insolvency & Bankruptcy Specialists
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