UK government reviewing employee consultation and information sharing by businesses facing insolvency

Business minister Jo Swinson is leading a 12-week call for evidence from businesses and individuals about the challenges faced by employers under the current system and the effectiveness of the rules. The consultation follows a meeting between Swinson and the industry last month, and was also recommended by two House of Commons select committees in a joint report on the impact of the closure of parcel distribution firm City Link just before Christmas.

“Constructive engagement with employees is important for business at all times, but especially when facing situations such as insolvency,” said Swinson. “The purpose of this call for evidence is to look at consultation with employees where a business is facing insolvency or has moved into an insolvency process.”

“Whilst our current system generally work well and is effectively complied with and its benefits agreed upon, we want to explore in more detail how consultation operates in these situations and what are the challenges and best approaches,” she said.

The call for evidence will close on 12 June. Respondents have been asked for their understanding of the current requirements, their purpose and benefits; how best to ensure timely notification and effective consultation; and for details of factors that facilitate or inhibit effective consultation when a business is facing insolvency.

Rules governing collective redundancy require employers that are proposing to make more than 20 employees redundant within a 90-day period to consult them for at least 30 days, or 45 days if more than 100 redundancies are proposed. They must also inform the UK government about their proposals. The purpose of this consultation period is to minimise the impact of any redundancy proposals and to avoid any unnecessary redundancies.

Where employers do not adequately consult affected staff, the employment tribunal can make protective awards against that employer. If the employer is insolvent, some of or the full award can be claimed from the government. This means that inadequate consultation in particularly high profile cases can lead to significant costs that must be met by the taxpayer.

According to a joint report published by the UK parliament’s Scottish Affairs Committee and Business, Innovation and Skills Committee last week, City Link took the “deliberate decision” not to inform employees and contractors that it was struggling before calling in the administrators on Christmas Eve 2014. The committees said that it was “clearly in the financial interest of a company” to ignore the statutory consultation period if the fine for doing so was less than the cost of continuing to trade, particularly if this fine would be paid by the taxpayer in any event.

The committees said that although somebody would always lose out if a company went into administration and could not cover all its debts, the current system did not strike an “appropriate balance” between the interests of, for example, secured creditors, and contractors, suppliers and self-employed workers. The former were cushioned by law from the full impact of an insolvency, while the latter had to bear the losses of the insolvency event, they said.

The committees recommended that the government “review and clarify” consultation requirements and information-sharing arrangements during an administration. The government should also work with employers, insolvency professionals and trade unions to develop “best practice guidance” on information-sharing, they said.