With so many businesses under pressure from the impact of the Covid-19 outbreak, insolvency law and protections are a key area of focus for businesses and the UK government.

Where a UK business becomes insolvent, the guarantee provided by the National Insurance Fund gives employees some protection. If particular conditions are met, employees whose employer is insolvent may claim certain types of debt from the National Insurance Fund including arrears of pay (up to eight weeks, capped at £538 per week from 6 April 2020), notice pay, holiday pay, statutory redundancy pay, and any basic award for unfair dismissal.

This guarantee is currently required by EU law. Directive 2008/94/EC (the “Insolvency Directive”) requires member states to set up and finance institutions to guarantee payment of employees’ outstanding claims against their employees on insolvency. Member states have some freedom to limit the guarantee but subject to certain minimum standards.

What this means today is that UK and EU employees working in the UK may be compensated under the National Insurance Fund. Although UK employees working in the EU are not protected by the National Insurance Fund guarantee, they are entitled under the Insolvency Directive to claim against the guarantee institution of the EU country in which they work.

Since leaving the EU on 31 January 2020, and for the transition period until 31 December 2020, the UK continues to be treated as a member state for the purposes of EU law and therefore the Insolvency Directive will continue to apply. However, the effects of the Covid-19 outbreak on business are expected to last beyond 1 January 2021, and that is causing some employers and employees to focus on the future of the existing system of guarantees once the transition period ends.

The UK and EU continue to negotiate a potential trade deal. Specific updates on insolvency protections are yet to be released, but the latest proposal drafted by the EU notably contained a non-regression clause stating that neither party would:

“adopt or maintain any measure that weakens or reduces the level of labour and social protection provided by the Party’s law and practices… below the level provided by the common standards applicable within the Union and the United Kingdom at the end of the transition period”. 

However, a similar non-regression clause was removed from the Withdrawal Agreement (Amendment) Bill by the UK government and the recently published UK government document “The Future Relationship with the EU” states that any trade deal “should recognise the right of each to party to set its labour priorities and adopt or modify its labour laws”. Although the UK government has suggested that it intends to legislate separately to protect and enhance workers’ rights, all this suggests an unwillingness to tie the UK to EU standards on employment rights.

If there is no trade deal, and/or no such non-regression clause, employees’ rights on an insolvency of their employer will depend on where they work. The European Union (Withdrawal) Act 2018 confirms that workers in the UK will continue to be entitled to the rights they have under UK law, including those derived from EU law. This means that UK and EU employees working in the UK will continue to be protected by the National Insurance Fund guarantee if their employer becomes insolvent and the other conditions for claiming are met, including that the employee looking to claim against the NIF has lost their job.

The position is different for UK employees working in the EU. If there is no trade deal, as non-EU employees, UK employees will no longer be protected by the Insolvency Directive itself. Unless there is a change of law, they would only be protected under the relevant national guarantee fund to the extent that national law has extended the protection to non-EU employers and employees.

It remains to be seen how the Covid-19 pandemic, among other things, may affect a potential trade deal between the UK and the EU and whether the transition period may be extended beyond 31 December 2020. We recommend that employers and employees keep under review the insolvency protections available to employees in each of the EU counties in which they operate and how any trade deal and/or extension to transition may affect those protections.