How a company's insolvency affects its employees
How a company's insolvency affects its employees

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • How a company's insolvency affects its employees
  • The position of an employee on a company's insolvency
  • What happens if a contract of employment is 'adopted' by an office-holder?
  • Priority of claims
  • Preferential claims
  • National Insurance Fund

The position of an employee on a company's insolvency

The general rule is that a contract of employment is between the employer and the employee. This means that due to the personal nature of the contract, if either party changes, the contract in its current form should terminate. However, if this were always to be the case when a company changed its status due to an insolvency occurrence, every contract of employment would automatically terminate. This is not necessarily to the benefit of the employee or the company and so employment contracts can operate differently in insolvency situations depending on the insolvency event.

The general approach is that how the employment contract is treated depends on the particular circumstances of the company, including whether it is continuing to trade or not. The legal position of employees is protected and settled to some extent by The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006), SI 2006/246. The Employment Tribunal has considered the definition of ‘employee’ in regulation 2(1) of TUPE 2006 and concluded that it covers not only ‘employees’ in the traditional sense but also those who are ‘workers’ ie any person who works for another under a contract, with the specific exception of independent contractors who are genuinely in business on their own account. Such workers have the