Company directors who are on the company payroll are normally eligible to claim for statutory redundancy pay when their company goes through insolvency, but many don’t simply because they aren’t aware of this. There are a few criteria to qualify, but if you take a salary through the PAYE system and work at the company in a similar manner to other employees, you’re likely to meet them. In this article, we’ll cover these eligibility criteria in more detail, and go over what you could claim if you qualify.
Am I entitled to make a claim?
There are 3 criteria which, if met, normally entitle someone to redundancy pay if the company they work for becomes insolvent:
- They have been made redundant.
- They were an employee.
- They were employed by the insolvent company continuously for 2 or more years. However, the 2 year requirement does not apply to claims for arrears of pay, holiday pay and notice pay.
In a case of insolvent liquidation, the loss of a director’s job would count as redundancy (note that it wouldn’t apply if simply dissolving the company), and the continuous length of employment criterion is fairly straightforward.
Your entitlement to make a claim depends in large part therefore on whether you can prove your status as an employee of the company. The insolvency practitioner (IP) will usually help you to establish this, and to do so they will talk to you about various factors of your role in the company.
To start with they will want to know whether you have a contract of employment with the company. Although it is easiest to prove in written form, this contract could also be oral or implied – i.e. it could be simply a verbal agreement with the board members to work as an employee or it could even be that your day-to-day relationship with the company is similar to that of other employees – e.g. you take a salary through PAYE and work similar hours – to the extent where other staff, suppliers and customers assume you are an employee (implied contract).
Other factors relevant to your role could include:
- whether you worked for 16 hours or more per week
- details of your daily work to help establish whether you had a practical role rather than a purely advisory or non-executive one
- whether you had paid holiday
- whether you had joined or could have joined the company’s pension scheme
- whether you were entitled to contractual or statutory sick pay, and maternity or paternity pay
- whether you worked solely for the company, (or if you had another job, it was completely different from your work for the business)
These could all help to establish your role as an employee, as well as a director.
What could I claim for?
The amount of money you are entitled to depends on your age and how long you were an employee of the company. The statutory redundancy pay you would get would be:
- 0.5 weeks’ pay for each full year of employment when you were under 22 years old
- 1 week’s pay for each full year of employment when you were 22-40 years old
- 1.5 weeks’ pay for each full year of employment when you were aged 41 or above
Pay is capped at £544 per week if made redundant on or after 6 April 2021 (the amount varies year by year) and a maximum of 20 weeks’ worth – i.e. a maximum total of £16,320. Redundancy pay up to £30,000 is tax free.
You can also apply for up to 8 weeks’ unpaid arrears of wages and other money owed, again capped at £544 per week. You would pay income tax and National Insurance on this.
Additionally, you could claim for holiday pay accrued (holiday days owed but not taken) and holiday pay owed (holidays taken but not paid) from the 12 months leading up to the insolvency up to a total of 6 weeks of holiday days. This is again capped at £544 per week and you would pay income tax and National Insurance on it.
Finally, you could also claim for statutory notice pay if you:
- did not work a notice period
- only worked some of your notice period
- worked an unpaid notice period
Statutory notice pay is one week’s pay for every year of continuous employment, up to a maximum of 12. This is also capped at £544 per week but the amount that will actually be paid will be reduced down because the payment is only intended to compensate for any reduction in income in the notice period.
One thing to bear in mind with regard to these statutory pay-outs is that if you have chosen to minimise tax by taking a salary just up to the National Insurance lower earnings limit, or the income tax personal allowance, and then topping-up with dividends as a shareholder, this in turn limits the amount you are eligible to claim for.
How do I make a claim if I am entitled to do so?
If you are entitled to make a claim, you can apply for redundancy pay, arrears of salary and holiday pay online in the same way as any other employee. You will need a CN (case reference number), which will be given to you by your company’s insolvency practitioner when they open a case for you with the Redundancy Payments Service (RPS).
You can apply as soon as you are made redundant, and you must apply within 6 months of being dismissed. However, the claim cannot be processed until the company is actually in a formal insolvency process.
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