Why Are Director Employee And Redundancy Claims Rejected On Liquidation?

Overview Of Why Director Employee And Redundancy Claims Rejected On Liquidation

Director employee and redundancy claims rejected is a topic of some current interest with so many claims lodged by Directors of SMEs being rejected by the Redundancy Payments Service in Liquidations. 

What Is A Director Employee And Redundancy Claim?

A Director employee and redundancy claim is a claim a Director can make in respect of their employment by a company that has gone into Liquidation. If a Director is owed money under their employment contract they are entitled to lodge a claim in the Liquidation as with any other creditor.

When a company goes into insolvent Liquidation any employee that is owed money can lodge a claim in the hope they may obtain some contribution from the Redundancy Payments Service which is part of the Insolvency Service. It is here that such claims are notably at risk of being rejected.

Certain elements of an employee’s claim in a Liquidation are deemed to be preferential, ranking ahead of claims lodged by other creditors and even HMRC’s VAT and PAYE claims.

Details of the amounts that the Redundancy Payments Service will pay employees is set out in our article Employees and Redundancy Help.

This can be a useful lifeline for many employees who otherwise might receive nothing from the Liquidator in the form of a dividend to creditors.

However, for many Directors, rejection of their employee and redundancy claims means they might not receive any payment from the Redundancy Payments Service. For some, this might be an issue difficult to reconcile after having worked for a company for many years and perhaps in the run up to Liquidation going unpaid as well.

Status As An Employee

In order for a Director’s employee and redundancy claim to avoid being rejected on Liquidation by the Redundancy Payments Service the Director will need to satisfy a core requirement ie. that they were indeed an ‘employee’ of the company. This is hardly surprising given the nature of the claim.

An employee will typically have an employment contract that sets out their hours of work, rights and obligations, be registered on the company’s payroll and feature in such payroll’s Real Time Information submissions to HMRC. 

Employees should be paid the National Minimum Wage. This is considered to be a key ingredient for demonstrating that a Director was indeed an employee.

Simply being a Director of a company and doing some work for it does not provide such a person with the status of employment. Directors who take a wage as and when the company can afford to pay them something may well not be considered an employee. Why? Well, because what employee works for a company on such a basis? Most presumably would go and find another job. Directors, however, are in a unique position so they may make sacrifices and waive wages accordingly. Does this mean it is fair to say they were not employed by the company if, in the run-up to insolvency, they stopped paying themselves to help offer the company a further opportunity to survive?

The writer has had contact with Justin Dionne on the matter of assessment of Director’s redundancy claims in the context of employment status who in his capacity as the Chief Technical Officer at the Insolvency Service, commented by email on 20 October 2023 as follows:

When RPS determines employment status, it takes an holistic view, weighing up all the factors to understand if there is sufficient evidence to support employee status. … However, if there is evidence that this has been a consistent practice over a extended period it may be more persuasive of employee status.

I appreciate that this is not a definitive answer but as I mentioned, RPS will look at the whole picture, i.e., existence of an employment contract, control, sick leave / pension arrangements etc.

Rejected Director Claims Freedom Of Information Act Request

The writer issued a Freedom of Information Act request to research information on rejected claims of Directors submitted to the Redundancy Payments Service. The data on reasons for rejected claims concentrates on the core issue of employment.

For the year 2021/2022 there were 5,007 claims of which 1,893 (37.8%) were rejected. 

The rejection rate shot up in the year 2022/2023 to 57.9% when out of 6,359 claims 3,683 were rejected.

Why Director Employee Claims Are Rejected?

Director employee claims can be rejected on multiple grounds. However, it is notable that the top reason for a claim to be rejected is “Not an employee”. In the year 2021/2022 out of 3,443 rejected grounds, 25.7% (886) cases arose where a Director was not considered to be an employee. 

In the year 2022/2023 the “Not an employee” ground was again comfortably at the top of the list however featured 55.3% of cases (5,183 out of 9,370).

For a Director to be able to demonstrate they were employee it is anticipated they will need to be able to provide all the documents consistent with what would be processed for any employee such as providing payslips, P60s, employment contract, bank statements showing payment of wages, payment of PAYE/NIC and so on.

Employment Tribunal Proceedings To Appeal Rejected Claims

If a Director does not accept the rejection of their claim they can look to appeal this by taking the matter to an Employment Tribunal. 

Between 14 February 2023 to October 2023, there were 49 such claims received by the Insolvency Service of which during a similar period there appear to have been 5 Directors who were successful at Tribunal.

These statistics highlight clearly two points:

• A Director who wants to claim on a purely numerical analysis (without consideration of the facts of a person’s case) has a high likelihood of their claim being rejected.
• For a Director to successfully claim they will need to be able to demonstrate and provide evidence that they satisfy the test of ‘employment’.