Companies going bust without paying staff

[Womaningreen]

I have often wondered why there is no legal protection here

a company like Orla Kiely - most recent example - was big enough to be managed in such a way that a "protected fund" for staff salaries for the month could be held in reserve, untouchable.

I note that Paperchase and Debenhams are having trouble getting insurance now.

obviously there's a whole chain of people who don't get paid when things go wrong, but for staff to have to file a claim to get the pay they were due is incredibly wrong.

what are the legalities, does anyone know? I'd honestly be interested in setting up a lobby group to examine this aspect of workers' rights.

I realise we are operating in a world where payment via Tuxedo card is considered okay and it will be a long slog. But if there's a cause worth dealing with at the moment, I think workers' rights is a good one!

any thoughts?

also, haven't they said that post Brexit, the Mini factory will be closed for a month but staff will be paid?

so clearly companies can plan ahead and some do.

Is there not a government fund underwriting basic redundancy costs? Otherwise employees join the list of creditors, relatively high in priority after hmrc etc.

In an insolvency the order in which creditors are paid (in full or in part, if there are any funds left) is prescribed by law as follows:
1 secured creditors (eg mortgage holders)
2 the expenses of the insolvency process
3 preferential debts (employees are in here)
4 ordinary unsecured creditors (eg customers of a retail business who had placed an order but not had their goods)
Then there’s a few more categories. Companies who believe they are about to become insolvent cannot pay or make provision for any class of creditor at the expense of another; if they do so it will be set aside by the insolvency practitioner.
So the law would have to be changed to move employees higher up the rank.

there is cover, what I'm saying is it's not enough.

you shouldn't have to apply to a fund to get the last 3 weeks pay. It should be protected.

"So the law would have to be changed to move employees higher up the rank."

Agree with this, but would go further and say "protected fund". Before you go bust, you have to pay those staff and tell them not to go to work tomorrow. I know many people will say "in that case, other funds should be protected too" - yes, I agree. And is that why Paperchase and Debenhams are having insurance issues now - suppliers at such high risk of not being paid?

seems like there's a whole rethink of doing business needed.

if you are a director at one of these companies, you have taken on a risk. If you are shop floor staff, you haven't. You should have some protections. Could a government dept just say "we've gone bust, can't pay you, get in the queue?" I know some councils look to be going bankrupt so what will happen to those staff?

It will have cost some staff £15 travel just to turn up on the day they were told the news! Awful. These companies know about the risk but the staff are the first victims.

If companies had to ringfence wages there would be more going into financial difficulties , sooner and higher risk at starting up.

By protecting all these funds though, you are making them unavailable to the business. If that doesn't leave enough available funds to keep the business running that month, is that better than everyone still having a job?

Many businesses run in their overdrafts, they just dont have a buffer big enough to put big wodges of cash aside "just in case that invoice doesn't get paid" - thats money that they need to pay the electric bill, or buy the materials to manufacture their products next month while theyre waiting for payments to come in.

Liz, yes, I've been told this in discussions with others.

but if they had to ring fence wages they would be less able to overstretch themselves initially? When you look at BHS, House of Fraser etc, it looks like a financial house of cards and the victims are not the people who decided the strategy. I'm really wondering if we need to rethink the whole way we do business and the fairness of it.

Ms TopofTree might make a decision to invest in a rebrand, for example, and with no ring fenced staff salary, that might give her more freedom to do that. Is this the right way to run business or it just business eating itself as it's allowed to carry more and more risk?

like the whole "if a bank is too big to fail, it's too big".

ironically I am very busy with work next 2 days but I will certainly be back so if anyone joins the thread, hi and I'm not ignoring you, glad to hear all views.

100% agreed Womaningreen
Ex BHS here and many many people lost out financially due to decisions which they played no part in
Many including me got the minimum redundancy they were due which was paid by the government

Can firms still dodge paying tax and NI for their employees for a few months ?

Certainly back in the 90s there were several stories of firms going under, and not only were the employees unpaid for a while, but it turned out their tax and NI hadn't been paid, so they were responsible for repaying it to the Inland Revenue (as was). Even if their payslips showed it had been paid ?

Just curious ... if it's changed when, and what government ?

@TheMarbleFaun

sorry for your situation.

were all staff in the same boat by the way? I often wonder if senior directors have more protection than say, staff on the shop floor.

AFAIK everyone got the statutory minimum amount paid by the government for redundancy
Some very senior people may have got more but I dare say if they did it would be kept quiet for obvious reasons

HMRC introduced Real Time Information in 2012, this meant that companies reported what tax and NI they owed more often than once a year and was supposed to cut down on unpaid tax/NI I think.

I think there's more than enough in some of these senior directors' golden piss-offs to pay off staff NI contributions and so forth.

HMRC introduced Real Time Information in 2012, this meant that companies reported what tax and NI they owed more often than once a year and was supposed to cut down on unpaid tax/NI I think.

Cut down ? Or stop ? Quite a difference if an employee owed 3 months back wages suddenly gets a bill from HMRC for unpaid tax and NI they could do nothing about ...

agree with you op

as usual i imagine Orla Kiely wont be in dire straights they never are

I think insurance rather than ring fenced money would make more sense. Most companies try hard not to have excess cash in the bank doing nothing and a months wages could be a huge chunk of money.

Directors have less protection, more responsibility, and more risk.

Wrongful trading - or trading while insolvent - can result in disqualification from being a director again and also mean that the company's limited liability is lifted and the directors instead held personally liable for the company's debts. They're officers, not employees, so have different rights and responsibilities (NMW doesn't apply for one). Unlike in BHS generally the directors of a business that is struggling stop drawing wages, or reduce them dramatically.

Quite a difference if an employee owed 3 months back wages suddenly gets a bill from HMRC for unpaid tax and NI they could do nothing about ...

It doesn't really work like that.

This is also why you should always make sure you get your payslips, P60s, P45s to prove how much tax the employer has deducted from you. If you can't prove they've deducted it then HMRC can try to get it back from you. If you can prove it they have to chase the employer. If they don't have cash but are still running a payroll then you would have payslips. If they aren't running a payroll and don't have cash, then what would HMRC be pursuing? They can't just issue demands for tax they fancy receiving if there's no proof it's due.

How many people stick around if they haven't been paid for 3 months? How many people could afford that or would take no action at all in that time? Surely you would consider that to be warning you need to find a new job. I thought the question here was one month's wages. If you haven't been paid for 3 months it shouldn't be a surprise to then be told the business is insolvent.

Businesses need working capital to operate. Requiring them to ring fence any entire month's wages, especially in a sector where that is the main cost would kill most businesses before they got off the ground. If you've got staff costs of £1m but only turn a profit of £200k how do you generate enough cash to keep back the £1m constantly but also have enough cash for the activities that generate your income?

How do you ever get your business off the ground if on day one you have to have thousands and thousands of pounds to set aside that you can't use to grow your business and meet the day to day requirements? Where do you get the flexibility to meet the needs of the business?

Don't forget small enterprises really struggle to raise finance, so it's not like you could just take out an extra bank loan on top of the one to get things going.

The businesses that already exist when you introduced this new rule might be able to set some aside, but most would struggle.

How would you ever grow your business if every bit of growth couldn't actually be invested in the business, eg by taking on extra staff, because before you could do that you first had to have an extra pot of money equal to their wages that you couldn't touch?

How does that help businesses to grow, thrive, create jobs, and feed back into our economy?

The kind of business that doesn't give a stuff about screwing staff over will just find other methods to carry out its activities. So you end up with staff being treated worse because of the penny pinching undertaken to generate this great big reserve.

And just look at how difficult it's proving to sort out the bhs pension deficit, even with PG being pursued personally.

Plus why should only employees be entitled to a ring fenced pot of money in case of insolvency? Why not also the lender with a charge over the business premises? Or the other businesses who are owed money and whose own trade might in turn fail if they don't get paid, thereby jeopardising a whole new set of jobs?

Administration exists to give businesses that may not be solvent for much longer breathing space from creditors to try and trade their way back to normality. Or at least time to find a buyer. That also gives staff warning.

I get where you're coming from in a way, but I can't see how it would be workable. Insolvency law is already complicated enough and it's sure as hell not laissez faire. Plus, HMRC already has powers to intervene where companies are repeatedly going into liquidation to shake off their debts, and then restarting in a new company.

If you had a proposal that would actually be practicable to implement, I would be interested to hear it, but you don't seem to.

"If you had a proposal that would actually be practicable to implement, I would be interested to hear it, but you don't seem to"

I don't pretend to have one. I started the thread to learn and to see if there were ways to protect employees more and I did say clearly in my OP that I realise there are other people to protect - suppliers etc.

so I'm asking for ideas, not ranting and demanding immediate change.

a pp said that staff salaries would be sitting in the bank, a huge chunk of money. but again, is that so bad? Is it completely not feasible to run a retail business with that degree of ring fencing?

also, with administrators, how does that relate to the cases where people get no warning at all? I'm asking because I genuinely don't know.

a pp mentioned directors and risk. Yes, but they have agreed to that and are less likely to have their utilities cut off when they miss 3 weeks work. I'm wondering how we can protect people who are on minimum wage already.

I do think we should be able to go after PG personally for some of the money staff are owed, but do we really have to run big business so that this is the position we are in initially? that's what I'm asking.

Is it correct that most shop workers don't belong to unions? Generally I think workers would benefit from more union membership?