Employment and insolvency make uneasy bedfellows. Often in insolvency situations, financial constraints are such that insolvency practitioners must act quickly to try to protect the assets of a business. This may include a need to make staff redundant on short or no notice.
Section 193(2) of Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) states that an employer proposing to dismiss as redundant 20 or more employees at one establishment within a 90-day period shall notify the Secretary of State, in writing, of his proposal at least 30 days before the first of those dismissals takes effect. Where an employer proposes to make 100 or more redundancies, the notification period is 45 days.
Section 194(1) of TULCRA states that an employer who fails to give notice to the Secretary of State commits an offence and is liable on summary conviction to a fine not exceeding level 5 on the standard scale.
Where the offence is committed by a company and is proved to have done so with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or other similar officer, or any person purporting to act in any such capacity, both the company and the individual concerned are equally liable.
There is a ‘special circumstances’ defence in section 193 (7) of TULCRA. If there are special circumstances rendering it not reasonably practicable for the employer to comply with the notification requirements, then it shall take all such steps towards compliance with that requirement as are reasonably practicable.
The notification is done by filing form HR1 – a copy can be found here.
The purpose behind filing the form is to allow the Secretary of State opportunity to take steps to minimise the impact of large-scale redundancies. The requirement to file form HR1 is also linked to the obligations to collectively consult with employees. Failure to inform and consult can lead to a ‘protective award’ being made of up to 90 days gross pay per affected employee. Often, where a protective award is made, there are no funds left in the business to pay the employees and so some of that liability then falls back on the State.
The effect of the above is that a director, manager, secretary, or other officer of the company can have personal liability where there has been a failure to notify the Secretary of State.
Until relatively recently, it is fair to say that the above requirements were largely ignored. However, following a series of high-profile cases where notification was not given, authorities have been more willing to press the point.
In Palmer vs Northern Derbyshire Magistrates’ Court, Mr F was the sole director of USC, a company ultimately owned by Sports Direct.
On 13 January, administrators were appointed. P’s remit as joint administrator included dealing with the employees. On 14 January, employees were given notices of the proposed redundancies, and minutes later they were handed a dismissal letter.
F had not completed the HR1 notification to the Secretary of State. On appointment, P did not file the form either and only submitted it after being prompted by the Redundancy Payments Service. It was received on 4 February and was dated 14 January. P’s account was that finalising and sending it had been overlooked.
In this case, notice had been sent after the redundancies had taken effect, defeating the purpose of filing the form HR1. The Court was therefore satisfied that an offence had been committed. It then had to decide where the liability fell.
It was satisfied that, as an administrator, P could be equally liable with the Company’s director, as the duties he undertook on appointment were similar.
The Court then considered whether the ‘special circumstances’ defence was relevant. It was noted that Courts had previously taken the view that insolvency was not in itself ‘special circumstances’.
This case is perplexing. In most cases where redundancies are required, it is not practical to give employees the full notice period because the administrator will then ‘adopt’ the employees’ contracts after 14 days, which may conflict with the administrator’s duties to other creditors. Adoption of employment contracts means that the employees gain preferential status ahead of other creditors.
The matter was originally heard in the Magistrates Court, but the proceedings were adjourned in part to allow the administrator to seek judicial review as to whether he could be liable for the offence. The criminal proceedings will now go ahead. A level 5 fine on the standard scale means that the potential fine is unlimited. Whatever a fine might be, there are obviously professional implications for an administrator who has been subjected to criminal liabilities.
It is a difficult issue to resolve – plainly an administrator should give as much notification of form HR1 as they can in the circumstances. However, whether a Court will recognise the tension between an administrator’s larger duties and employment law is another matter.
If you have any queries regarding this or any other employment matter, please do not hesitate to contact a member of the team.
