Administration – what does it mean for employees?

The recent decision of Phones4U to go into administration had implications not just for consumers but also thousands of staff employed by it across the country.

What is administration?

Administration is a procedure under which an administrator is appointed and a company given some breathing space in which to reorganise or realise assets, without pressure from creditors. The administrator will try to rescue the company or, if this is not possible, sell the assets.

Do contracts of employment automatically terminate if a company goes into administration?

No. Employees remain employed by the company until the administrator dismisses them or they decide to resign. 

However, because companies entering administration often do not have enough money to pay staff, administrators often make redundancies on or shortly after appointment.

Dismissals usually take place within 14 days of the administrator being appointed to avoid the contracts being “adopted” and certain employee debts achieving a super priority.  Nothing done by an administrator in the first 14 days is taken as the administrator “adopting” the contracts, so there is a window in which to assess what needs to be done.

Do employees get paid anything if their employer goes into administration?

Laura Daniels, Bond Dickinson
Laura Daniels, Bond Dickinson

In administration, there is a priority of debts:

  1. Fixed charges
  2. Expenses
  3. Preferential debts
  4. Floating charges
  5. Unsecured creditors

The majority of employee debts are unsecured. They rank equally with other unsecured debts and will only be paid if there are sufficient funds to pay. 

The following payments owed to employees qualify as preferential debts: remuneration for the four month period prior to administration (up to £800); accrued holiday pay and certain pension contributions.

“Wages or salary” (including holiday pay, sick pay and pension contributions) due to employees after the adoption of their contracts, however, rank as an expense of the administration and will be paid ahead of the administrator’s fees and the distribution of assets to holders of floating charges and unsecured creditors.

Doesn’t the Government pay if employers can’t?

Employees whose employer is insolvent can apply to the Redundancy Payments Service. However, only certain types of payments (e.g. redundancy pay, notice pay, wages and holiday pay) can be claimed and there are limits to the amounts payable.    

What if a business is bought from administration?

Where a business (or part of a business) is sold, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) may apply. 

TUPE protects employees and, if it applies, employees working in the business (or the relevant part) immediately before the sale transfer to the buyer on their existing terms and conditions of employment (with some exceptions) and the buyer becomes liable for the contracts. 

Debts which can be claimed from the Redundancy Payments Service, however, do not transfer to the buyer.

Laura Daniels is an associate at Bond Dickinson

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