Case Study: Redundancy of Directors

When a company enters into an insolvent process, with insufficient monies to pay amounts due to employees in respect of:

• Arrears of pay – up to eight weeks
• Accrued holiday entitlement – up to six weeks
• Statutory notice pay – up to twelve weeks
• Redundancy pay – must have at least two years service

An employee must complete an RP1 form to make a claim for payment from the Redundancy Payments Service (RPS).

How much you can claim is determined by various factors – how long you’ve been an employee for instance, as well as your age and salary. The amount of gross weekly pay at the time of insolvency is used in the calculation, but caps are applied to:

• Your weekly pay £538
• Your length of service as an employee 20 years
• The maximum statutory redundancy pay that can be claimed  £16,140

When a business is forced into insolvency concerns for the welfare of employees will run alongside the fear for your personal financial position, particularly if you have given personal guarantees in respect of company liabilities.
It is often thought that you have few statutory entitlements as a company director, particularly when the business becomes insolvent. With a bit of forethought however, you will be entitled to the same entitlements as your employees, even though as a director of the company you fulfil an additional role, and also may be a shareholder.

Preparing for adversity is equally as important as planning for growth, so what actions can you take to give you the best chance of receiving a pay out from the RPS should the worst happen? 

To establish a director’s entitlement to claim, the RPS will need to know certain facts about your employment and day-to-day responsibilities, including:

• Whether you have a contract of employment
• If the company has been incorporated for more than two years
• If you have worked for at least 16 hours a week?
• Whether you have carried out a practical role for the company, more than as a non-executive

This information is established by the completion of an additional form RP3.

If you have taken a salary using the PAYE scheme and can demonstrate that you have a similar 
connection to the company as other employees, then it is likely you will be eligible for various statutory entitlements in the event of insolvency.

Points that you need do consider:

Do you have a contract of employment – written, oral and implied?

One of the initial questions in establishing eligibility is whether or not a contract of employment exists, and if it does, whether it is written, oral or implied.

A contract does not have to be written down in order to be legal. Some directors work as an employee following discussions between themselves and the board, assuming this role under an oral contract. However employee status is not as easy to prove as when the contract is written, therefore it is good practice for a director to have a formal contract of employment from day one.

A contract of Employment should include the following: 

• The name of the employer and the employee
• The job title and brief description of your duties and responsibilities as a director
• The date when the employment starts and any previous employment which counts as continuous
• The pay which the employee will receive and how often it will be paid
• The hours which the employee will work, the place of work and end date if applicable
• The holiday, sick pay and pension entitlement provisions
• The length of notice required from the employer and the employee
• Any collective agreements which form part of the employment

Conclusion

Ensure that you have:

• a comprehensive written Contract of Employment
• That your salary is paid through the PAYE scheme
• That your gross weekly salary is at least at the maximum level for payments from the RPS, currently £538 per week