Redundancy pay for directors
It is well known that staff can claim redundancy when a company fails. Less well known is that a director who is also an employee may be able to claim too.
By NTF Corporate Solutions · Published · Updated
When a company is insolvent it is well known that the staff are entitled to redundancy payments. These are paid from the assets of the company, but in the first instance the government pays staff through the Redundancy Payments Service, and where the company's assets allow, that money is repaid. There is a strict set of criteria for the amount payable, and provided an individual meets the criteria the payment is guaranteed.
Can a company director claim redundancy pay?
What is less well known is that a director of a company can also have a right to a redundancy payment. In many cases where a company is struggling, the directors lower their own pay, or take nothing at all, to try to keep the business afloat. Where a director also acts as an employee of the business, they may be entitled to redundancy on the same statutory basis as any other employee.
Which directors are eligible to claim redundancy pay?
To consider eligibility as a director, you generally need to look at the following.
- The director has worked for the company continuously for at least two years, the qualifying period for statutory redundancy pay.
- The director worked under a contract of employment. A written contract is not essential, but the working relationship needs to look like employment.
- The director was paid a salary through the company's payroll and worked regularly in the business, rather than taking dividends alone.
- The director did more than a purely advisory role, and was needed for the day-to-day running of the company.
How is a director's redundancy payment calculated?
If the company cannot pay the redundancy itself, a claim is made to the Redundancy Payments Service. The amount is worked out from your age, your gross weekly pay at the time of redundancy, and your length of service, using the standard statutory formula.
- Aged 18 to 21: half a week's pay for each full year of service.
- Aged 22 to 40: one week's pay for each full year of service.
- Aged 41 and over: one and a half weeks' pay for each full year of service.
Length of service counts up to a maximum of 20 years, and the weekly pay used in the calculation is capped. The weekly cap and the overall maximum are set by the government and reviewed each April, so check the current figures on the GOV.UK statutory redundancy pay pages, or ask us, before you rely on a number.
What else can a director claim when the company is liquidated?
A claim is not limited to redundancy. Directors who qualify as employees can often also claim unpaid wages, unpaid holiday pay and notice pay, along with unpaid pension contributions and statutory maternity, paternity, adoption or sick pay. Together, these claims can add up to a meaningful amount at a difficult time.
How does a liquidation help the director of a failing company?
There is help out there, then, even for directors of an insolvent company. While it can feel right to fight on with a struggling company, it may in fact be in both the creditors' and the director's best interest to liquidate the business. Doing so draws a line under a failing company and can release some funds to the director. A director's redundancy claim can also be set against an overdrawn director's loan account to reduce what is owed.
If you are experiencing difficulties and would like to discuss this, or any aspect of your business, contact us at info@ntffs.co.uk or call us on 01625 540 744.