Object reference not set to an instance of an object.
Brief Counsel

Managing employment risks in insolvency

31 March 2009

This article identifies some of the practical issues receivers and administrators face when they continue to employ staff and provides strategies to mitigate these risks.

In many receiverships and voluntary administrations the employee issues are straightforward. Employment agreements are terminated, often very quickly, and employees are paid out their preferential entitlements.

But it is not always this simple, particularly where the business continues to trade and/or is likely to be sold. 

In this Brief Counsel we identify some of the practical issues receivers and administrators face when they continue to employ staff and provide some strategies to mitigate these risks.

Receiverships: to re-employ, or not to re-employ?

Receivers have 14 days under section 32(1)(b) of the Receiverships Act 1993 (the Act) to terminate employment agreements. If employment is not terminated by this point, the receiver becomes personally liable for wages and salary accrued during the receivership.

If the receiver decides to continue to employ staff for a period of time, they will need to choose whether to terminate and re employ continuing staff or instead allow the existing employment agreement to continue. 

Terminating and re-employing

The safest option for receivers is to terminate and then re-employ continuing staff, contracting out of personal liability.

If a receiver enters an employment contract, the company (in receivership) is the actual employer. However, section 32 of the Act says that receivers become personally liable for contracts that they enter. In the employment context, this includes payment for un-worked notice, redundancy/holiday pay and compensation for unjustified dismissal and hurt and humiliation.

Importantly though, section 32 allows receivers to contract out of this personal liability, and that is normally what occurs.

When they terminate, receivers can re-engage staff on fixed term agreements and/or use completion bonuses to keep certain staff engaged for key periods during a wind down. 

Terminating and re-contracting has the effect of crystallising the employee's redundancy and holiday pay claims. Receivers usually prefer to crystallize and pay these preferential amounts, although there are situations where it may be better not to do this (for example, where a contingent redundancy liability is likely to be picked up by a business purchaser, without a significant impact on price).

Allow existing employment agreements to continue

This approach is less common. It is generally chosen where the receivership is small and/or the retention of existing staff is important to a successful trade out or on-sale. It can sometimes be difficult to get staff to agree to new terms and conditions, especially terms that release the receiver from personal liability. The receiver may therefore want to minimise disruption to employees and protect morale and productivity. 

Allowing existing employment agreements to continue can also be advisable where:

  • the receiver wants to avoid the (sometimes significant) administrative exercise of re-contracting all staff
  • existing terms and conditions do not create onerous obligations (such as lengthy notice periods or excessive redundancy compensation)
  • there is a collective agreement, and a union appears unlikely to consent to new terms, and/or
  • the number of employees (and therefore the potential liability for additional employment claims) is not large.

The key risk with this option is that employees will later claim the receiver has adopted the employment agreements and therefore becomes responsible for normal employment related liabilities.

To mitigate this risk, it is extremely important that receivers underline the fact that they are not adopting the contract, and that the employee remains employed by the company. This is usually done in a short letter.  

The other risk is that the receiver will become liable for unworked notice. The law on this point is not clear and much will depend on the wording of the contract and the way in which the termination is handled. We consider that receivers should only let employment agreements continue if they are prepared to either pay or let the employees work out the notice period.

Again, if the receiver later enters any sort of written agreement or variation to the employment agreement, it should clearly exclude the receiver's personal liability.

What is an adoption?

Adoption is where the receiver indicates that he or she is taking responsibility for the performance of the contract. In this case, the receiver becomes exposed to all normal employment liabilities, such as payment for unworked notice and liability for unjustified dismissal.

Exactly what is needed to adopt is not clear. Adoption requires less than entering a new contract or written variation of an existing contract but is (almost) universally accepted to need more than just allowing the employment contract to continue.  In the past, assurances to employees that the company will continue to trade for certain periods have been held not to amount to an adoption. However, given the uncertainty we recommend receivers avoid these types of assurances unless they have either:

  • already re-contracted, and excluded personal liability, or
  • made it clear (in writing) that they are not adopting the contract.

What about liability for wages accrued during the receivership?

As we have said, after 14 days receivers who allow employment agreements to continue become personally liable for wages and salary earned by staff from the date of the receivership.

A receiver who re-employs staff can, in theory, contract out of this personal liability.

In practice though, we have never seen this become an issue. Regardless of which option they take, all receivers know that they have to pay staff for work they do post-receivership, and assurances along these lines are commonly given.

Again though, before giving these assurances, a receiver who has allowed employment agreements to continue should ensure that it has been made clear to staff (in writing) that they are not adopting the employment agreements.

Voluntary administrations

Different considerations apply in a voluntary administration. 

Like receiverships, administrators have 14 days to terminate employment agreements. If they do not, the administrator will become personally liable for wages and salary.

Unlike receiverships though, when they re-employ staff, administrators cannot contract out of personal liability. Therefore, there is much less incentive to re-contract (although in some situations it still may be a good idea).

The corollary is that administrators are clearly not liable for additional employment-related obligations unless they expressly adopt the agreement in writing.4 This gives them considerably more certainty and protection than exists in receiverships.  Wider employment claims are unlikely to be successful (or even made) where administrators have plainly said they are not adopting existing employment agreements. 

Footnotes

  1. Disclaimer: the views expressed in this article are necessarily brief and generalised. They are not a substitute for legal advice.
  2. However the receiver is entitled to an indemnity out of the assets of the receivership and they are often also indemnified by the appointer. Therefore, in practice, any liability is usually borne by the secured creditor. 
  3. Although not certain, it is generally accepted that this term would include holiday pay accrued post-receivership (usually an additional 8%).
  4. Section 239Y(2)(a) of the Companies Act 1993.

Our thanks to Geoff Bevan and Anne Shirley for writing this edition of Brief Counsel.

Contacts