Where do employees’ pay related claims lie on their employer’s insolvency?

One would expect that employers should, from a moral perspective, firstly look after employees in the event of insolvency as employees are usually wholly financially dependent on their employers. That is not the case. Bankruptcy and company legislation do give preferential status to certain employee claims in the distribution of the assets of the insolvent company or the bankrupt. However, as preferential creditors, specified employee debts are only given priority in the distribution of assets after the payment of secured creditors (usually banks) and the costs and expenses of the liquidation/bankruptcy. While this gives employees a certain level of protection, it only does so in circumstances where the insolvent company/employer has sufficient assets to discharge the monies owing after payment of secured debts and the liquidator’s costs and expenses. In the current climate, it is generally the case that there are insufficient assets to pay the preferential debts in full and so the employee’s claims will be reduced proportionately. In any event, an employee’s claim for arrears of wages is limited to €3,174.00 under the legislation. Ultimately, an employee might only receive part of their pay related entitlements from an insolvent employer.
In Ireland, there is also a Social Insurance Fund which provides for payment of certain outstanding entitlements due to an employee arising from their employer’s insolvency. The fund provides protection in the form of an Insolvency Payments Scheme (the “Scheme”) which was set up under the Protection of Employees (Employers’ Insolvency) Acts, 1984 – 2004. The Scheme covers arrears of pay, holiday pay, pay in lieu of statutory notice, awards made under specified employment legislation and a range of other entitlements that might be owed to employees by the employer.
The employee can claim from the Scheme, normally through the liquidator, receiver or official assignee as relevant. The Scheme applies to employees employed in the State by an employer who is insolvent for the purpose of the 1984 Act. The employees must be in employment that is fully insurable for social insurance purposes, or in employment that would be insurable but for the fact that they have reached 66 years of age. It is important to note that the employer must be legally insolvent before an employee can claim under the Scheme. An employer is legally insolvent if it is due to bankruptcy, liquidation or receivership. If an employer simply ceases trading without going into official liquidation, they do not fall within the ambit of the Scheme and the employer remains responsible for the payment of employees’ entitlements.
Of course, there are limitations and conditions applicable to payments made under the Scheme. The Scheme limits the amount recoverable for arrears for pay, sick pay, holiday pay and pay in lieu of statutory notice to a period of 8 weeks. There is also a maximum weekly limit of €600.00 in respect of all entitlements based on pay. If an employee receives a payment from the Social Insurance Fund, the employee’s claim against the insolvent employer for that entitlement is transferred to the Minister for Jobs, Enterprise and Innovation. Therefore, any part of that claim subsequently recovered in the final winding up of the employer’s business is paid back into the Social Insurance Fund.
On first glance, it could appear that the preferential status given to certain employee debts together with the Insolvency Payments Scheme would ensure that employees are adequately protected on their employer’s insolvency. However, in circumstances where secured creditors and the costs of the liquidation/bankruptcy have to be discharged before employees’ preferential claims, clearly there may be very little assets remaining to deal with those claims. Furthermore, employees on higher levels of pay will be capped at the limit of €600.00 in the event that it is necessary to make a claim to the Insolvency Payments Scheme. There is also a risk that if no formal insolvency takes place, an employee will not be in a position to even lodge a claim with the Insolvency Payments Scheme. In truth, “the protections” for employees on insolvency are probably stronger in theory than in reality.
-Caitríona Healy