Collective consultation – the competing demands of insolvency and employment law

An employer making large-scale redundancies has a legal duty to consult with its employees through either their trade union or elected staff representatives. Whilst that, in itself, can be an arduous, and often contentious process, compliance becomes even more challenging when the employer is on the brink of insolvency.

Last year, the government launched a consultation seeking views on how this delicate situation operates in practice. The responses, published in November, highlighted the challenges which insolvency practitioners and directors face arising from the requirement for collective redundancy consultation.

The law

The rules on collective redundancy consultation state that where an employer proposes to make 20 or more redundancies at a particular establishment within a period of 90 days, it must inform and consult with the representatives of those employees. The consultation period must last for at least 30 days for 20–99 redundancies, or at least 45 days for 100 or more redundancies.

Where the employer is insolvent, there is the added challenge of balancing this duty with creditor demands and the requirement to preserve value for stakeholders. In administration cases, insolvency practitioners are bound to adopt employees’ contracts after 14 days.  As a result, deferring dismissals to comply with the collective redundancy timescales would inevitably result in the insolvency practitioner adopting all the employment contracts and the associated liabilities. These competing priorities often make it highly impractical to delay redundancies.

The consultation responses

The government received responses from 28 different parties, including law firms, insolvency practitioners and trade unions. Most felt that there is an inherent tension between employment law and insolvency law. The key themes included:

• The lack of meaningful consultation – meaningful consultation is simply not possible in an insolvency context. This is mainly because, by the time insolvency proceedings have commenced, it is too late to consider alternatives to redundancy;
• Conflicts of Interest – there is potentially a conflict of interest between consulting with employees to minimise redundancies, and protecting creditor interests;
• Concerns over confidentiality – practitioners worry that disclosing the employer’s financial difficulties could cause problems in attempting to rescue the business.
• Time pressures – there is often insufficient time to elect employee representatives (if none have been previously elected);
• Ineffective sanctions – if employers fail to consult with employees, affected employees are entitled to a protective award of up to 90 days’ gross pay. If the business cannot pay, this burden then falls on unsecured creditors and tax payers to discharge.

Although the government has acknowledged the perceived tensions between insolvency law and employment law which may prevent effective consultation, it maintains that there is no conflict. It seems that, for now, consultation will remain an important part of the redundancy process, even when an employer is facing insolvency.

Advice for employers and practitioners

Given this difficult balancing act, directors and insolvency practitioners should take legal advice early on, and should consider the following key points:

• The time periods set out in legislation are minimum requirements, and the overriding duty is that consultation should begin ‘in good time’. It is best to be conservative in your approach to the trigger points in employment legislation and comply with notification and consultation requirements as soon as redundancies are proposed;
• As well as the duty to consult with staff, directors also have a duty to notify BIS of proposed collective redundancies. Failure to do so is a criminal offence. This was highlighted by the highly publicised prosecutions of 3 former directors of City Link last year. You can read more about this here.
• Decisions taken at each stage should be clearly recorded in writing, as BIS can scrutinise them as part of any subsequent investigation;
• In each case, consider the time you have available, and take advice on what can realistically be done by way of consultation. Protective awards are punitive in nature, and may well be reduced if it can be demonstrated that some steps have been taken to comply with the collective consultation requirements.

For more information please contact a member of our Employment team –  Rachael Lloyd, Solicitor on rachael.lloyd@michelmores.com.