The Redundancy Payment Service (RPS)
If a director is made redundant, they may be entitled to redundancy pay, but only if they are classed as an employee. There are 2 types of redundancy pay:
The contract will specify any additional payments the director is entitled to in addition to statutory redundancy pay. The contractual redundancy pay cannot be lower than statutory redundancy pay.
The RPS offers all employees, including directors (if they qualify), redundancy payments when the employer cannot afford to do so. These payments are made from the National Insurance Fund.
What makes a director eligible for a redundancy payment?
In order to be eligible, a director must be able to show themselves as:
Changes on how claims are made
It is common for directors who do not receive a ‘salary’ but are remunerated through other tax efficient means such as dividends to claim that they are an employee. To avoid fraudulent claims being made, the RPS has introduced additional controls.
The previously used RP3 form has now been discontinued. Instead, a new director’s questionnaire has taken its place which asks more specific questions, to establish the eligibility of the director.
The following information is required to be submitted to the RPS in support of the claim:
What happens when a claim is made?
Once a claim is made, the RPS will assess the employment status of the director in line with Section 230 of the Employment Rights Act 1996. In instances where the director is not deemed to be an employee, a formal rejection letter will be sent leaving the director to apply to the Employment Tribunal to be classed as an employee.
National minimum wage
Where a director has been paid less than the minimum wage, they will be required to sign a declaration to that effect and seek an uplift to be paid by the RPS. The declaration contains an acknowledgment that the RPS may refer the claim to HMRC and the Insolvency Service’s Investigations and Enforcement Services for breach of the National Minimum Wage Act 1988.
Director’s loans
An account must be taken of sums owed to the employer by the employee - any payments that are due from the RPS can be offset against any outstanding director’s loans.
The RPS is seeking to clamp down on fraudulent claims. However, if the claim is rejected, there are wide implications which need to be considered.
Insolvency practitioners have previously asked us to advise on how much reliance they can place on the decision of the RPS regarding director claims. Given that the RPS often does not provide an explanation for their decisions, insolvency practitioners should be undertaking their own checks, particularly as it is not known what information and documents the RPS took into account when making their decision.
Regardless of the conclusion, it is important for insolvency practitioners to keep contemporaneous records of decisions (and the reasoning for those decisions), both for the purposes of compliance with The Insolvency Practitioners Regulations 2005 and as evidence should a dispute arise.
For further information on this article, please contact our Restructuring & Insolvency or Employment teams.
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