Spot light beam. Flashlight

The high profile insolvency of City Link continues to command attention, with the spotlight now shifting to employment and, specifically, redundancy consultation.

On 23 March 2015 a joint report into the impact of the City Link administration was published by Parliament’s Scottish Affairs and Business, Innovation and Skills committees. One area that the report focuses on is the uneasy relationship between redundancy consultation requirements and insolvency.

By way of brief reminder, the Trade Union and Labour Relation (Consolidation) Act 1992[1] provides that the duty to consult with employee representatives (and also to notify the Secretary of State where collective redundancies are proposed) arises where an employer is proposing to make 20 or more employees redundant within a period of 90 days or less. Whether such redundancies have to be “at one establishment” (as the legislation says) is a matter currently under appeal before the European Court of Justice, adding further uncertainty to this area. Consultation should be for a minimum period of 30 days (or 45 days where more than 100 redundancies are contemplated). Failures to consult adequately, or for an appropriate period of time, can lead to an award of up to 90 days’ pay to each employee.

Embarking on a consultation exercise, however, can make a company’s financial difficulties very public, with a potential loss of information control that risks significant damage to a business’s goodwill in the period of stress leading up to the insolvency. Obligations to comply with detailed and lengthy consultation requirements can be especially problematic when moving quickly is essential to preserving goodwill and minimising the risk of creditor action. Delays can lead to significant erosion of the value of the business, affecting not only the return to creditors but also the chance of there being a viable business (and future employer) for the appointee to sell.

Often no consultation takes place, leading to a significant award in the Employment Tribunal. Where a company is insolvent and unable to pay this compensation, then the employee can apply for up to 56 days’ of any award to be paid from the publically funded National Insurance fund.

The committees state in the report that “it is clearly in the financial interest of the [insolvent] company to break the law and dispense with the statutory redundancy consultation period if the fine for doing so is less than the cost of continuing to trade for the consultation period and the fine is paid by the taxpayer”. The report concludes by stating that “the example of City Link has made an overwhelming case that improvements should be made to current practices and the legislative framework to help protect the rights of workers, allow for better communication to those affected and to safeguard the taxpayers’ interest”.

Immediately following the publication of the report, the Insolvency Service on 23 March 2015 published a ‘call for evidence‘ inviting stakeholder views on how outcomes from collective redundancy consultation can be improved for employers and employees in insolvency situations.

The consultation is aimed at both directors and insolvency practitioners and asks for responses and evidence to various questions around the following general areas:

  • the extent to which employers are aware of and complying with their obligations to consult with employees about proposed redundancies;
  • the perceived benefits of consultation;
  • best practice and inhibiters;
  • the availability of guidance; and
  • the effectiveness of present sanctions for failure to comply with the consultation obligations in an insolvency situation.

The consultation closes at 12.00am on 12 June 2015, following which the existing policies and legislative framework will be reviewed.

Given the perceived prejudice to employees and burden on the taxpayer where the consultation requirements are not complied with by insolvent companies, it seems likely that there will be some form of shake-up. How far and how deep this will go remains to be seen.

This post was edited by Matt Leech and Clive Day. For more information, email blogs@gateleyuk.com.


Leave a Reply

Your email address will not be published. Required fields are marked *

five × 5 =

This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.