Can directors be made redundant?
It is not a widely known fact, but company directors can receive statutory redundancy pay from their limited company under certain circumstances. If your company becomes insolvent and has to be liquidated, whether this happens on a voluntary basis or forcibly via a creditor’s winding-up petition, you may be eligible to make a claim.
Initially, you have to be regarded as an employee of the company in addition to being a director. This involves speaking to the liquidator, completing their questionnaire, and providing documentary evidence of your employee status where necessary.
Are directors entitled to redundancy?
You need a contract of employment to prove you are an employee of your company. Although a written employment contract is the ideal, an oral or implied contract may be sufficient proof when the liquidator makes their inquiries.
You will be issued with a questionnaire that helps the liquidator establish your status as an employee. The questions asked include whether you have been working under a contract of employment if the company owes you money, how many hours you worked per week, and whether this was in a practical role that was more than non-executive.
These questions cover the basic criteria for claiming redundancy as a director/employee.
Can my company make me redundant?
- Your company must have been incorporated for at least two years
- You need to have worked under an employment contract for a minimum of 16 hours per week
- You must have fulfilled a practical role within the company that is more than just advisory
- You must have been paid a regular salary via PAYE
- Your company needs to have traded during the last 12 months
- You must be owed money by your company. This could be wage arrears, for example, or the money you originally invested.
Do companies have to pay redundancy?
When an insolvent company owes money to you and your employees, you become preferential creditors in the payment ‘hierarchy.’ This means that you rank higher than unsecured creditors when money is paid out, but even so, there may be insufficient funds to make redundancy payments from the company under the financial circumstances it is in.
If your company is being liquidated, its assets are sold, but it is very unlikely that sufficient funds will be available from the proceeds of sale to make the redundancy and other statutory payments that may be due. In cases such as these, claims can be made from the National Insurance Fund (NIF).
These are routed through the Redundancy Payments Service (RPS), a division of the Insolvency Service, using form RP1 which is available online or from the appointed liquidator. Payments are generally received approximately 3-12 weeks after making a claim.
How much redundancy will I get?
If you are eligible for redundancy pay you can receive up to £30,000 tax-free, and this includes any severance pay. The amount you receive depends on a number of factors including your age, length of continuous service, and final wage.
Statutory redundancy pay is calculated as follows:
- Aged under 22: half a week’s pay for each full year of service
- Aged 22–40: one week’s pay for each full year of service
- Aged 41 and above: one and a half week’s pay for each full year of service
There are limits placed on certain elements of the calculation, however.
- Length of service is capped at 20 years
- Weekly wage is capped at £508 (from 6thApril 2018 onwards)
- Maximum statutory redundancy pay is capped at £15,240 (from 6thApril 2018 onwards)
You may also be able to claim a number of other statutory payments, including:
- Up to eight weeks’ arrears of wages
- Up to six weeks’ unpaid holiday pay
- Pay in lieu of notice
Unpaid wages and holiday pay are not received tax-free.
Currently, the average claim for director redundancy is £12,000, but this is not available when you close a solvent business. It is only if your company enters insolvency and is liquidated as a result, that tax-free director redundancy pay may be accessible.