Executive Summary
When a company changes hands, TUPE (Transfer of Undertakings – Protection of Employment) regulations are designed to safeguard employee rights. However, things work differently when a business goes into liquidation. This guide explains how TUPE and liquidation interact, what happens to employees, and what both employers and purchasers need to know.. This guide explains how TUPE and liquidation interact, what happens to employees, and what both employers and purchasers need to know.
Understanding TUPE and Liquidation
There is a lot of confusion surrounding TUPE Transfer of Undertaking (Protection of Employment) Regulations
TUPE regulations are designed to protect employee contracts when their employer’s business is purchased by new owners – for example, when a company goes into administration.
But what about when a company enters liquidation? What happens to the employees then, and how are they protected under TUPE and liquidation rules?
Read on to find out…
Your questions about TUPE and liquidation answered
1. What is TUPE?
Basically, when a contract or business changes hands, the existing employees move over or ‘transfer’ to the new owner who takes on all their rights and liabilities.
This means that the employees continue to be paid the same amount as before, are still covered by the same employment contract as before, and there is no break in their employment.
This part is important, because employees can’t bring an unfair dismissal claims or receive a redundancy payment unless they have had over two years of continuous employment.
So, TUPE essentially protects the employees when a business changes hands to ensure there is no break in their employment.
2. But what about if the employer is in liquidation?
That’s where things get tricky! Basically, TUPE doesn’t apply when a company goes into liquidation. Instead, all employees will be automatically dismissed from the date of the winding up order – and they are also not allowed to bring unfair dismissal claims.
3. Terminal insolvency versus non-terminal insolvency
What happens to employees under TUPE regulations, then, depends on whether the insolvency is deemed terminal or non-terminal.
With non-terminal insolvency proceedings such as company voluntary arrangements, company administration, and pre-pack administration, TUPE regulations apply. This means contracts are automatically transferred and any post-transfer dismissals may be deemed unfair.
Terminal insolvency, on the other hand, includes proceedings such as compulsory liquidation and creditors’ voluntary liquidation.
In these situations, TUPE regulations don't apply, there is no automotive transfer of employment contracts, wider changes can be made to employment contracts, and dismissals aren’t automatically judged as unfair.
4. So, how are employees protected in terminal insolvency?
Don’t worry, though – your employees won’t be left high and dry! If they are made redundant, they will be able to claim from the National Insurance Fund.
Plus, in the instance of terminal insolvency, even if an employee subsequently begins working for a new company that has acquired the assets or operations of the liquidated business, whether it is run by the same directors under a different legal entity or by entirely new ownership, they will be considered a new employee with fresh contractual entitlements. As a result, they may also be eligible to make claims to the National Insurance Fund.
5. What statutory payments can employees claim?
A number of payments can be claimed from the National Insurance Fund, a fund set up by the government to cover statutory payments such as redundancy and state pension. These payments include:
- up to eight weeks of wage arrears
- up to six weeks of outstanding holiday pay
- unpaid pension contributions
- pay in lieu of notice
6. Things for employers to be aware of
Generally speaking, then, if you are the potential purchaser of an insolvent business, it’s important to consider the timing of the sale.
If the company is entering liquidation, you may choose to wait until the company is officially in liquidation to avoid TUPE being applied.
If the transfer takes place after liquidation, however, it will be deemed to have taken place under the supervision of an insolvency practitioner, which means TUPE may not apply.
However, if the business sale takes place before the company is liquidated, employees will be unable to make claims via the National Insurance Fund and instead, you will become liable.
How McAlister & Co can help
Navigating TUPE and liquidation can be complex, but you don’t have to face it alone. Whether you’re a business owner, insolvency practitioner, or potential purchaser, McAlister & Co can guide you through your options and ensure you make informed decisions.
Get in touch today to speak to one of our licensed insolvency practitioners for expert advice on TUPE, liquidation, and the best route forward for your business.
Alternatively, for more information about creditors’ voluntary liquidations, don’t miss this FREE complete guide.
