Protective Awards: Who Really Pays?

Protective awards are intended to be a punitive measure to ensure employers consult with employees before effecting mass redundancies. The intention is not merely to afford employee representatives the opportunity to suggest ways redundancies might be mitigated or avoided, but also to give employees sufficient time to explore alternative job opportunities. Despite the covid-19 Job Retention Scheme (CJRS), the current pandemic has resulted in numerous redundancies, many in breach of the legislation. When furlough ends, this trend is likely not only to continue, but worsen significantly.

Potential prospects?

This scenario has been entirely predictable since the CJRS was introduced. Why, then, will so many companies fall foul of the law in this area?

Part of the problem is the law itself. At one end of the scale, employers can legitimately argue the law on collective consultation is confusing. In many cases, particularly in smaller companies with limited HR expertise, the first time an employer becomes aware of their obligations is when a tribunal claim lands on their desk. At the other end of the scale, particularly in insolvency situations, employers are aware of their duties, but simply disregard them. Why? Because the commercial incentive of ignoring the law outweighs the perceived legal and financial consequences.

Why would a company act against its rational self-interest by informing employees of its financial difficulties and likely redundancies unless the consequences of not doing so were grave enough to act otherwise? As R3 states in its Response by the Association of Business Recovery Professionals to the Call for Evidence issued by the Insolvency Service in March 2015:

“In the period preceding formal insolvency, the main inhibitory factors are likely to be management’s desire to keep the fact of the company’s financial difficulties confidential in order not to prejudice its position in the market, and to preserve employee morale in order to avoid losing key staff at a crucial time.”

If a company director knows the taxpayer will pick up the bill for a successful protective award claim, it makes sense to many employers to keep employees in the dark about looming redundancies. A buyer might be found or emergency funding secured at the last minute. If the best employees have left the sinking ship by that time, the business is far less attractive to any potential buyer and less creditworthy to any would-be lender.

This disincentive to consult can be even more pronounced in circumstances where administrators have been appointed to save the business. With a fiduciary duty to act in the best interests of the creditors as a whole (not just the employees), it might make financial sense to dismiss several employees as quickly as possible. Prolonging employment to carry out collective consultation for at least 30 days (and 45 days where 100 or more dismissals are proposed) is costly, but also tempting to avoid when the taxpayer (National Insurance Fund) will cover the collateral damage anyway.

Reform required

The law in this area is undeniably in need of reform. Stronger financial disincentives and strict enforcement are essential. Although company directors can be prosecuted and fined for a failure to notify the government when consultation obligations arise, the law is a toothless paper tiger. In 2015, the CEO of Sports Direct, Dave Forsey, was charged with failure to notify the Secretary of State about redundancies. Although the maximum fine of £5,000 has now been changed to an unlimited fine, there is, as yet, no example of any director being convicted despite numerous 90-day protective awards being declared in the years since this change. 

Certain measures could, with the right political will, be introduced to address the present shortcomings in the law:

1. Generally, the reason why employees do not claim protective awards is simply a lack of knowledge they exist. Insolvency Practitioners could be required to inform employees being made redundant without consultation about the possibility of making a protective award claim. This information could easily be provided at the time when employees are given information about completing an RP1 form to claim statutory redundancy payments.
2. Part of stricter enforcement could involve the Secretary of State pursuing individual directors personally, rather than just the insolvent company, to recover protective award payments in cases where directors have wilfully or negligently failed in their obligations.
3. Removal of the statutory cap on protective award payments so that employees can claim the full 90 days rather than the current arbitrary cap of 56 days.
4. Instead of a complex array of redundancy payments where those who have very short service can claim next to nothing, all people who find themselves out of work could, as a minimum, receive a universal basic income.

Sadly, the political tide is pulling strongly in the opposite direction. In the months ahead, opportunistic employers are certain to use covid-19, coupled with the end of furlough, to justify liquidating companies without warning, safe in the knowledge that the Insolvency Service is waiting to pay redundancy pay, accrued holidays, notice pay and even the final month’s payroll.

Paul Kissen is an employment law solicitor with Thompsons Solicitors: thompsons-scotland.co.uk/other-services/employment-tribunal-law-new/employment-lawyers-protective-awards