If you're a founder whose business is going under, your staff are probably your biggest worry. You hired these people. You made them promises — explicitly or implicitly — about building something together. They trusted you with their careers, and now you're about to tell them that the thing they trusted you with has failed.
This guide explains what happens to employees when a company becomes insolvent, what they're entitled to, and how the system works to protect them. It's written for you — the founder — so you can answer their questions honestly and help them navigate what comes next.
Important note: Employment law in insolvency is complex. This is general guidance. Specific situations may vary.
What happens to employment contracts
When a company enters insolvency, employees' contracts don't automatically terminate. What happens depends on the type of insolvency process:
Administration: Employees remain employed by the company, with the administrator effectively stepping into the employer's shoes. The administrator may continue to employ staff (particularly if the business is still trading), make some or all staff redundant, or transfer staff to a purchaser if the business is sold.
During the first fourteen days of administration, existing employee contracts continue on existing terms. After fourteen days, if the administrator retains employees, the employment costs become an "expense of the administration" — meaning they take priority for payment. This incentivises administrators to make quick decisions about staffing.
Creditors' Voluntary Liquidation (CVL): Employment typically terminates when the liquidator is appointed. Employees are made redundant as part of the wind-down process. In some cases, the liquidator may retain a small number of staff temporarily to assist with the liquidation.
Compulsory liquidation: Employment terminates on the making of the winding-up order. The Official Receiver or appointed liquidator manages the redundancy process.
Employee entitlements
Employees of insolvent companies are entitled to several statutory protections, regardless of which insolvency process applies.
Unpaid wages
Any wages earned but not yet paid at the date of insolvency. This includes salary, commission, overtime, and any other contractual payments. Unpaid wages are a preferential debt in insolvency up to a certain limit, meaning employees rank ahead of most unsecured creditors.
Holiday pay
Accrued but untaken holiday. Employees are entitled to payment for any statutory or contractual holiday they've earned but not yet taken. This catches many employers by surprise — particularly if employees have been too busy (or too worried) to take holiday in the final months.
Notice pay
Employees are entitled to their contractual notice period (or statutory minimum if the contract doesn't specify a longer period). Statutory minimum notice is one week per year of continuous employment, up to a maximum of twelve weeks.
If the company can't afford to pay notice, employees may be dismissed without proper notice — but they retain a claim for notice pay as an unsecured debt.
Statutory redundancy pay
Employees with two or more years of continuous service are entitled to statutory redundancy pay, calculated as: half a week's pay for each full year of service under age 22, one week's pay for each full year aged 22-40, and one and a half weeks' pay for each full year aged 41 or over. Weekly pay is capped (currently £643 as of April 2024), and the maximum service counted is twenty years.
Pension contributions
Any outstanding employer pension contributions that haven't been paid are a debt of the company. The Pension Protection Fund provides protection for members of defined benefit pension schemes of insolvent employers. For defined contribution schemes, any contributions already paid are safe in the pension fund, but outstanding contributions become a creditor claim.
The Redundancy Payments Service
This is the safety net that makes the system work for employees of insolvent companies. If the company can't afford to pay what it owes employees, the Redundancy Payments Service (RPS) — part of the Insolvency Service — can pay certain amounts from the National Insurance Fund.
What the RPS covers: up to eight weeks' unpaid wages (capped at the statutory weekly limit), up to six weeks' accrued holiday pay, statutory notice pay (based on the statutory minimum, not contractual notice), statutory redundancy pay, and a basic award for unfair dismissal if applicable.
What the RPS doesn't cover: contractual notice pay above the statutory minimum, contractual redundancy pay above the statutory amount, bonuses, commission above eight weeks, pension contributions, or any enhanced terms your employment contracts may have offered.
How it works: The insolvency practitioner (or Official Receiver) will provide employees with the forms and information needed to make a claim. Employees submit their claims to the RPS, who process them and make payments directly. Processing typically takes four to six weeks from receipt of a valid claim, though complex cases can take longer.
Your role as director: Ensure employees know about the RPS and how to claim. Provide accurate employment records — start dates, salary details, holiday records — to the insolvency practitioner. The better your records, the faster your employees' claims will be processed. Poor record-keeping doesn't just create administrative headaches — it delays payments to people who need them.
TUPE transfers
If the business (or part of it) is sold as a going concern, employees may transfer to the new owner under the Transfer of Undertakings (Protection of Employment) Regulations 2006 — known as TUPE.
Under TUPE: employees transfer automatically to the new employer, their existing terms and conditions are preserved, continuity of service is maintained, and the new employer cannot dismiss employees solely because of the transfer.
There are some modifications to TUPE in insolvency situations. If the company is in administration or liquidation, the new employer may be able to negotiate changes to terms and conditions if they're necessary for the survival of the business. Certain liabilities (like redundancy pay) may also transfer differently. But the basic principle — employees' jobs are protected — applies.
TUPE can be genuinely good news for employees. If your business is being sold and staff are transferring, make sure they understand that their jobs, terms, and length of service are being preserved. This is often the best possible outcome in a bad situation.
However, be careful about making promises. Until a sale is completed, nothing is certain. TUPE only applies if the business actually transfers. If the sale falls through, employees are back to facing redundancy. Communicate the possibility without overstating the certainty.
Collective consultation requirements
If you're making 20 or more employees redundant within a 90-day period, there's a legal obligation to collectively consult. This means: notifying the Secretary of State (using form HR1) at least 30 days before the first dismissal (45 days if 100+ redundancies), consulting with appropriate employee representatives about ways to avoid or reduce redundancies, and following a structured consultation process.
Failure to collectively consult can result in a "protective award" — up to 90 days' pay per affected employee. In an insolvency situation, this becomes a claim against the company, and if the company can't pay, employees can claim the protective award from the RPS.
This obligation catches many founders off guard. When the business is collapsing quickly, structured consultation feels impossible. But the legal requirement exists, and ignoring it creates additional liability. If you're facing large-scale redundancies, get the insolvency practitioner involved early — they can manage the consultation process.
What to tell your staff
When communicating with employees about insolvency, they need clear answers to practical questions:
Am I losing my job? Be honest. If redundancies are certain, say so. If there's a possibility of the business being sold with jobs preserved, say that too — but don't overstate the likelihood. False hope is worse than honest bad news.
When? Give them a timeline. Even an approximate one is better than "we don't know yet." People can plan around a date. They can't plan around uncertainty.
What am I owed? Explain their rights: redundancy pay, notice pay, holiday pay, unpaid wages. Point them to the RPS. If possible, give them an estimate of what they'll receive (your payroll records should allow this).
How do I claim? The insolvency practitioner will manage the claims process. Make sure employees have the IP's contact details and know what paperwork they'll need.
Will you give me a reference? Yes. Offer proactively. Write references before you're asked — you may not be in a position to write thoughtful ones later.
Can you help me find another job? Do what you can. Make introductions to your network. Share job listings. Recommend them on LinkedIn. This is where your professional network becomes genuinely valuable to people other than yourself.
For a complete guide on how to have this conversation, read: What to tell your team when the business is going under.
Protecting yourself as a director
From an employment law perspective, the main risks to you as a director are:
Failure to collectively consult. As discussed above — the protective award can be significant, and while it's primarily a company liability, it can create personal exposure in certain circumstances.
Unpaid wages becoming personal liability. In general, unpaid wages are the company's liability, not yours personally. But there are exceptions — particularly if wages went unpaid because you diverted company funds to yourself or other connected parties. If you paid yourself while staff went unpaid, that's a preference that a liquidator will investigate.
Discrimination claims. Redundancy selection must be fair and non-discriminatory. If employees believe they were selected on discriminatory grounds (age, gender, disability, pregnancy, ethnicity), they can bring an employment tribunal claim. Even in insolvency, you need to ensure selection criteria are objective and documented. "Last in, first out" is simple but can be indirectly discriminatory. Consult the IP or an employment lawyer.
Wrongful dismissal. Dismissing employees without proper notice (or payment in lieu) is technically wrongful dismissal. In insolvency, this is often unavoidable — the company simply can't pay. But employees retain their claim for notice pay, which they can pursue through the RPS.
The human reality
Behind all the legal terminology and procedural requirements are real people facing real uncertainty. Your receptionist who's been with you since day one. The developer who turned down a better offer to join your startup. The sales manager who relocated her family to work for you.
You can't fix their situation. You can't undo the failure. But you can treat them with dignity throughout the process. That means honest communication (not vague reassurances), practical support (references, introductions, help with claims), emotional acknowledgment (recognising that this is a loss for them too, not just for you), and taking responsibility (not blaming external factors or hiding behind process).
Some of your employees will be angry. Some will be understanding. Some will surprise you with their generosity. Some will never speak to you again. All of these responses are legitimate.
The founder who handles redundancy with honesty and compassion doesn't erase the failure. But they preserve something important: their integrity, their reputation, and the knowledge that they did right by the people who trusted them. That matters — both practically (your reputation in your industry will follow you) and personally (you have to live with how you handled this for a long time).
For more on navigating these conversations, read: What to tell your family when your business fails. And for the emotional weight of letting people down, read: The shame spiral after business failure.
After they've gone
The office is empty. The Slack channels are silent. The team that built your product, answered your customers, and sat through your Monday morning meetings has scattered to other jobs, other lives, other things.
This is one of the loneliest moments of business failure. The financial crisis has practical solutions — insolvency processes, creditor negotiations, legal procedures. The loss of a team has no procedure. It's just absence.
Some founders find it helpful to write a personal note to each team member — not immediately, but after the dust has settled. Acknowledging their contribution, thanking them for their trust, expressing genuine care about their next chapter. Not as a PR exercise or a LinkedIn post, but as a private act of recognition.
You built something together. It didn't survive. But the people who helped you build it deserve to know that their work mattered, that their trust wasn't misplaced, and that you're grateful. That's not paperwork. That's humanity.