8 February 2006

Protection for employees in the event of their employer’s insolvency

IN PRACTICE CHANGES TO THE INSOLVENCY DIRECTIVE ELA - Briefing Volume 12 Number 9 November 2005 132

On 8 October 2005 substantial amendments to the directive (80/987/EEC) that guarantees minimum protection for employees in the event of their employer's insolvency comes into force. Ashley Serr considers these changes and whether they will affect employees in the UK Directive 80/987/EEC requires member states to establish 'guarantee institutions' that will guarantee outstanding claims resulting from contracts of employment relating to pay in the event of employers' insolvency. The directive allows member states to strike a balance between the rights of the employee and the obvious limits on social welfare budgets by allowing them to define what constitutes pay, and by limiting it to pay corresponding to a particular period. In the UK, the directive is implemented through part XII of the Employment Rights Act 1996 (ERA) s.182-190. It is administered by the redundancy payments directorate of the Insolvency Service, an agency of the Department of Trade and Industry. The act guarantees various payments including notice, up to eight weeks' arrears of pay, up to six weeks' holiday pay and the basic award for unfair dismissal - all subject to the statutory weekly maximum. Structural changes in the labour market along with the requirement for consistency with subsequent EU directives and ECJ jurisprudence led to a proposal from the European Commission in 2001 to amend the directive. The amendment was brought about through Directive 2002/74. The original directive has been amended in three key areas:

  • a change in the definition of insolvency
  • changes to the reference period over which payments are guaranteed
  • new provisions for cases involving a cross-border dimension.

Defining insolvency

The original definition of insolvency in article 2 required the "opening of proceedings involving the employer's assets ... to satisfy collectively the claims of creditors". This has been interpreted narrowly both by the ECJ and the domestic courts (see Mann & ors v Secretary of State for Employment). The new definition refers to "the opening of collective proceedings based on insolvency of the employer ... and involving the partial or total divestment of the employer's assets, and the appointment of a liquidator or a person performing a similar task."

The new definition would seem to be broad enough to cover situations other than liquidation proceedings such as those that allow the organisation to continue trading. The reference period The core requirements for the guarantee institutions are set out in articles 3 and 4. The commission's proposal to amend the directive noted that the arrangement, whereby the member states were given a choice of three alternative dates marking the beginning of the reference period within which the minimum period of guaranteed remuneration must fall, was an unnecessarily complicated approach.

The new articles 3 and 4 are more flexible, allowing the member states to fix the reference period subject to it being not less than three months but with the eight-week limit for those states with a greater than 18 months reference period (such as the UK) retained. Unlike the original directive, claims may now also be covered for a period after a given date, although the ECJ ruled in Valero v FOGASA that even under the old wording claims for loss beyond the reference date could also be covered. Cross-border cases The amendment provides a new provision for transnational situations under articles 8a and 8b.

The purpose of this new provision is to safeguard those employees whose employer has a presence in more than one member state and who is the subject of insolvency proceedings in a state other that the one they normally work in. The member state within which the employee now works or habitually works is charged with the responsibility of meeting the claim.

This amendment largely codifies the decision of the ECJ in Everson v Secretary of State for Trade and Industry. In order to assist administering claims, the directive requires the guarantee institutions of the various member states to share information between themselves.


the UK response The UK government does not at present consider that any immediate changes to domestic legislation is warranted and no consultation exercise has been entered into regarding possible changes to part XII of ERA. In many respects the rights provided under domestic legislation go further than that formally required under the original directive - for example, the broad definition of insolvency contained in s.183. In spite of this, there may well be some change to domestic legislation in the future. For example, while the practice of the DTI may be to meet claims for insolvencies occurring in other member states, the statutory basis for such a practice is unclear and may require clarification.

More speculatively, the one-year service requirement for a basic award for unfair dismissal could arguably be inconsistent with the prohibition in article 2 (3) against member states setting a minimum duration for the employment relationship in order for workers to qualify for claims under the directive. It is worth considering that in Caballero v FOGASA the ECJ held that in certain circumstances where domestic law is not in conformity with the directive, national courts are obligated to set it aside without recourse to the legislator.

Ashley Serr, Park Lane Chambers Cases referred to: Mann & ors v Secretary of State for Employment [1999] IRLR 566 HL Jose Valero v Fondo De Garantia Salarial C-520/03 ECJ Everson v Secretary of State for Trade and Industry [2000] IRLR 202 Rodriguez Caballero v Fondo De Garantia Salarial [2003] IRLR 115