The dissolution of a company can be a stressful and uncertain time, not just for business owners but also for employees. When a UK company closes down, there are important legal and ethical considerations around informing and compensating staff. Here’s an overview of what typically happens to employees when their employer dissolves a company:
Notification Period
By law, there is no set notice period an employer must give staff when dissolving a business. However, under common law principles, reasonable notice should be provided. This allows employees time to find alternative work. As a guide, notice periods often align with contractual terms, for example 1-3 months.
For mass redundancies of 20+ employees, there are stricter rules. A minimum consultation period of 30-45 days must be provided under the Trade Union and Labour Relations (Consolidation) Act 1992. This gives staff and representatives a chance to discuss issues like redundancy pay.
Protecting Pay & Benefits
Outstanding wages, paid leave, bonuses and commissions must be paid to employees as normal up to the termination date. Any notice period where staff are not required to work should still be paid. Pension contributions must continue to be made during notice periods.
If the company cannot pay owed wages and benefits due to insolvency, the government’s Redundancy Payments Office may step in. They will assess claims and pay eligible staff their statutory entitlements.
Redundancy Payouts
Most employees made redundant due to dissolution are entitled to statutory redundancy pay if they’ve worked continuously for 2+ years. The exception is business owners or directors. The current statutory rate is:
- 1.5 weeks’ pay for each full year worked aged 41+
- 1 week’s pay for each full year worked aged 22-40
- 0.5 week’s pay for each full year worked aged under 22
The weekly pay is capped at £544 (taxable). Some employment contracts offer enhanced redundancy packages too.
Return of Company Property
Staff will usually be asked to return company property like laptops, mobiles, security passes, keys, and company cars. Often employees can keep basic equipment like pens and notebooks.
Providing References
Employers should provide a reference for staff, including basic details like job title, salary and employment dates. This helps ex-employees secure new roles. References can be given by individual managers or via a central HR department.
Support for Former Staff
Closing down a business can negatively impact employees’ mental health and finances. Responsible employers try to provide support during the transition period, such as:
- Career counseling or coaching
- Job seeking resources e.g. workshops on CV writing and interview skills
- Mental health support like free counseling sessions
- Financial advice such as debt management
For lower paid staff, extra redundancy pay or a ‘hardship fund’ can help ease financial problems. Some firms outplace employees, working with recruitment agencies to match staff with new jobs.
Transferring Employees in a Business Sale
If a company is sold rather than completely dissolved, existing employees may transfer over to the new owner. Their continuity of service and contractual terms are protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Staff must be informed of the transfer and any impact on their jobs. They can object to transferring, in which case their employment would terminate. But they are not entitled to redundancy pay if they refuse to move across.
Liquidation and Insolvency Processes
If a company enters liquidation or administration, employees rank as priority creditors for unpaid wages and other entitlements. Administrators or liquidators will pay these debts first, before other unsecured creditors. They will communicate with staff to validate amounts owed.
During insolvency processes, employees may be asked to support liquidators in collecting company assets or winding down operations. Their cooperation can help maximize creditor payouts.
Most employee rights are unaffected if a company undergoes restructuring procedures like Company Voluntary Arrangements. But as roles and conditions can change, staff should still be consulted.
Overall, employers have a duty of care to inform and fairly compensate employees when dissolving a business. Following best practices around notice, redundancy and support helps maintain goodwill and protect reputations. With empathy and planning, the dissolution process can be handled sensitively despite being a difficult time.
