What happens to the employees if a care home is insolvent?

31/10/2011

By Ben Stepney, Solicitor in Employment. Article first published in Caring UK.

The care home industry is having a tough time.  The majority of local authorities have either frozen or reduced the amount that they pay for care home placements.  This will lead to increased pressure on care home’s profit margins and has led to concern that some care homes may end up going insolvent. It is not all doom and gloom though and there are buyers out there who will see care homes as attractive businesses if they can be purchased as a going concern.

If a care home is insolvent then an administrator may be appointed to try and rescue the business or, worse case scenario, a liquidator would be appointed to wind up the business. 

If a care home is put into administration then the administrator takes control of the business and the employees continue to be employed and paid by the company, albeit under the direction of the administrator.

Where an administrator is able to sell the business as a going concern then the employee’s employment will automatically transfer to the buyer under the Transfer of Undertakings (Protection from Employment) Regulations 2006 (TUPE).  Once the business is sold the seller company has no further liability towards the employees.  The buyer will inherit any liabilities for unpaid wages that the seller or administrator failed to pay to the employees, although it will not take on liability for the amounts guaranteed by the NIF described above.

When a care home is put into liquidation, a liquidator will be appointed to distribute the assets to the creditors and close down the business.  Depending upon the exact type of liquidation, the employee’s contracts will either automatically terminate when the liquidator is appointed or be terminated by the liquidator shortly afterwards. 

Unfortunately for employees any money owed to them, including wages and statutory redundancy payments, are unsecured debts and rank low in the order by which the liquidator must distribute the assets of the company to its various creditors.  In practice this is likely to yield, at best, a few pence of every pound that the company owes them. 

The exception to this is that any unpaid wages prior to insolvency, up to £800 per employee, will rank as preferential debts, meaning that employees are far more likely to receive these amounts.

Also, the Government, through the National Insurance Fund (NIF), will guarantee up to eight weeks pay, statutory notice pay and holiday pay for each employee, each capped at £400 per week. 

Not surprisingly there are few winners in a liquidation scenario and employees are likely to find themselves out of a job and with money owed to them.  If an administrator can rescue the business and sell it as a going concern then the liability for amounts due to the employees will be spread amongst the outgoing employer, the buyer and the NIF, according to what items are due, and the employees should not find themselves out of pocket.

This article assumes that the insolvent employer is a company, not an individual, partnership or LLP.