New employment rights ‘will reduce value of and distributions from insolvent businesses’
01 November 2024
The value of going-concern business sales and distributions to non-preferential creditors may be reduced if the new employment rights bill passes, it has been predicted.
The Government published its employment rights bill at the beginning of October.
Among the proposed changes are the abolition of the two-year qualifying period for employees to claim unfair dismissal, guaranteed hours for zero-hour contract workers and strengthened sick pay, parental leave and leave rights.
Suzanne Brooker, partner at law firm Spencer West, said that the increased protections for workers in conjunction with TUPE rules could also lead to greater liabilities for buyers of going concern businesses and thus reduce the price likely to be paid.
“The right to protection from unfair dismissal from day one of employment means that a greater number of employees will have the ability to bring unfair dismissal claims against a buyer if they are dismissed around the time of sale. Additionally, more employees transferring will have non-zero-rated contracts offering them guaranteed hours and pay,” she said.
Zero-rated or zero-hours contracts are common in hospitality, retail and leisure. Brooker said that these already struggling sectors will be most affected, and that going-concern sales of businesses will become much more difficult.
“The level of preferential claims will also increase due to the increase in the rights of employees. The amounts payable by the Government for redundancy, holiday pay, wages, overtime and commission and notice pay will increase as a direct result of the new employment protections for more employees. The overall effect of this will be to reduce distributions to other classes of creditors overall.”
The Government pays employees according to statutory limits but will then stand for employees in the insolvency and prove for the total of the monies paid to employees as a creditor.
A ban on ‘fire and rehire’ is also included in the bill, a process where employees are dismissed and rehired on less favourable terms.
There is a proposed exemption to the ban where the business is in or likely to be in immediate financial difficulties, the contract changes were made to mitigate or prevent the difficulties and were not reasonably avoidable.
Carl De Cicco, partner at Reed Smith, said the ban appears to explicitly address employers in financial distress without using the term ‘insolvency’.
De Cicco said: “Quite how the exemption will apply, how the various terms will be interpreted by a tribunal and how high a threshold it proves to be remains to be seen. However, to the extent that it does provide an option for businesses to trim their workforce to make it leaner ahead of a restructuring or otherwise an entry into a trading administration with a view to a sale, then it would appear to be an option that the market will be keen to explore further.”
The proposals under the bill also include a removal of the ‘one establishment’ requirement for collective redundancies. Currently, where 20 employees are dismissed at ‘one site’ it triggers the need for collective consultation and a notification to the secretary of state.
If the bill passes, any time 20 or more employees are made redundant across a business, collective consultation and notification will be triggered.
Stephen Goderski, partner at PKF Littlejohn Advisory, said: “The primary focus of the bill does not centre specifically on insolvency work, with the notable exception of the collective redundancy provision. Currently, collective consultation is mandated only when there is a proposal to make 20 or more employees redundant at a single establishment. Additionally, the secretary of state must be informed of such proposed redundancies.
“However, the bill aims to eliminate the ‘one establishment’ requirement. Consequently, any redundancy scenario involving the dismissal of 20 or more employees within a 90-day period will now necessitate collective consultation and notification to the secretary of state. This amendment will significantly impact larger organisations facing substantial redundancies.”
The bill is currently at the committee stage in the House of Commons and may be amended before receiving royal assent. The Government has said that many of the reforms will take effect from autumn 2026.
