Claiming redundancy for directors - Important changes to the processPosted: Jul 17, 2023

It often still comes as a surprise to directors when they learn that they can claim redundancy. If you meet the criteria, as an employee, as well as a director means you should be able to claim. However, the process has recently been updated so the answer to the question ‘can I claim redundancy if I am a company director’ is not quite as simple as it used to be.

Is redundancy still a right for all employees if the business is insolvent?

First, let’s set the standard so we know where we stand. Yes, redundancy is a right for all employees, (including any directors) that meet the basic criteria. So, if your business is insolvent and has entered into a formal insolvency process then the Redundancy Payments Service (RPS) will cover the redundancy payments (as well as other payments should as outstanding wages, holiday pay and payment in lieu of notice) for employees that meet the right benchmarks.

These are around the following:

• Employee Status – You must be employed in the legal sense of having a contract and be under the direct control of the employer as an employee.
• Length of service – As of writing you must have been employed directly by the employer for at least two years.
• Circumstances of redundancy – The reason for being made redundant must be valid. In this case, insolvency, and liquidation of the business.
• Consultation – Suitable consultation and arrangements must have been made. Again, with an insolvency situation, this will usually be cut and dried

As always, you should take advice to confirm all the above, but if you do meet the benchmarks, and most employees clearly will, then the RPS will apply.

In theory, this will include directors…but things have become a little more complex recently.

What has changed for directors using the RPS?

If you are a director of a company, you will, in many cases hit the same criteria as an employee. In fact, your accountant or other advisors may well have told you that it’s sensible to have employment contracts and so on to ensure that you are entitled to employee rights. If this is the case, you will be entitled to RPS just as you always have been. However, in May 2023 the Insolvency service that oversees the RPS, made the process a little more prescriptive and difficult.

What is happening now is that RPS claims for directors may be rejected at the initial stages if the circumstances that confirm a contract of employment are not clear. In fairness to the Insolvency Service, this is not so much a change in principle (evidence of employment was always a statutory requirement for RPS) as it is a change in what is needed as evidence. They are asking for more information to confirm that you had employment status.

What is needed to prove employment for a director?

Initially, a primary application will be made if your employer (i.e. your business) cannot pay you because of insolvency. In the first stage, you do not need to supply additional information. The Insolvency Service will contact you if they need more information. Now it seems like they are doing this quite a lot. You will also need to submit for a loss of notice pay if applicable. Again, you will probably be asked for more information.

The information they will need will be some or all of the following list (these are taken directly from the .gov site).

• the structure of the company in terms of directorships and shareholders
• the last 3 years’ P60s
• the last 3 months’ wage slips
• employer’s bank statements for the last 12 months to review regularity of payments
• a comparison of the contracted hours being claimed in relation to the work being undertaken
• whether the national minimum wage was paid
• a copy of the contract of employment and whether the terms of the contract were enacted
• dividends received in the last 3 years
• holiday pay arrangements
• workplace pension arrangements
• sick leave procedures
• grievance and disciplinary procedures

That is quite a list and that is just for the redundancy element. There are more requirements for the loss of notice pay.

What does all this mean practically and why has it been introduced?

Well, in practical terms it means that:

• Your claim is likely to take considerably longer to complete
• The process is now much more difficult
• The evidence required could be much harder to gather. Some items on the list above could be problematic. ‘Sick leave procedures’ and ‘comparison of hours claimed’ for example may not be easy to demonstrate clearly
• Directors of many companies tend to take variable salaries and may, at times, have dipped below minimum wage or taken dividends not salary
• There is a higher chance of rejection

If your claim is eventually fully rejected, you can potentially make a claim to an employment tribunal. To be frank, this will a very long time to process, but the option is there. 

As to why this has been introduced. Well, I think if you don’t mind, we will refrain from second guessing the motivations of the Insolvency Service and government policy. What is most important is that whatever the reason for this new approach, it is applicable now, and it needs to be dealt with appropriately.

If you think your business could be insolvent, then we have a wealth of information on our website here. 

Full details of the changes to RPS can be found on the .gov site here