If an employer proposes to make 20 or more employees redundant within a period of 90 days, they must notify the Secretary of State (SoS) in advance using a Form HR1. Failure to do so is a criminal offence. A minimum consultation period will then apply before any dismissals can take effect.
Liability for failing to notify the SoS rests on the employer company, but also personally on “any director, manager, secretary or similar officer of the employer company” if it takes place with their “consent or connivance”.
The requirement to notify the SoS (and certainly the minimum consultation periods) often creates a position of conflict for insolvency practitioners (IPs) and directors. What is in the best interests of the company, its shareholders and creditors in an insolvent business is often not compliant with employment law. Terminating employees quickly, frequently more than 20, is often one of the first steps taken by IPs.
The Divisional Court’s decision in R v Northern Derbyshire Magistrates’ Court will therefore cause alarm. In that case, the company’s appointed administrator delivered two letters to employees in quick succession – the first warning of potential redundancies and inviting the employees to a consultation process and the second (provided just 15 minutes later) advising them that they were dismissed with immediate effect and that there was no alternative to redundancy. Whilst an HR1 form had been prepared by the company and circulated internally, ultimately it was never completed, nor filed.
The SoS commenced a criminal prosecution against the administrators and a director of the company. The administrator argued that he did not fall within the definition of a “director, manager, secretary or other similar officer” and that his obligations to creditors conflicted with the obligation to notify the SoS and comply with minimum consultation periods.
The Court acknowledged that there was a conflict in this respect and that this might lead to individuals being forced to make difficult decisions between breaching obligations owed to creditors and committing a criminal offence. Nevertheless, the Court held that the intention behind the relevant legislation was to create personal liability for those with day to day management responsibilities who did not comply with their statutory obligations (in this case to notify the SoS in advance). That is the case for directors and also administrators.
The Claimants in this case were not helped by the failure to file an HR1 at all. If this was completed and submitted, but terminations took effect before the expiry of the minimum consultation periods, it is likely that the Claimants would have received more sympathy from both the SoS and Court.
However, this case means that in cases where administrators plan to make more than 20 people, even in cases where administrators do file a HR1, careful planning is needed to mitigate risk.
It may be possible to change the strategy of the administration, to avoid making the redundancies, put the administrators in funds to pay staff during a consultation period (while taking adequate steps to not adopt contracts of employment) or go straight to a liquidation of the company.
Further, it is possible that administrators could rely on the defence of “special circumstances” - meaning that compliance with collective redundancy obligations is not possible - though it is well established that insolvency of a company will not of itself amount to “special circumstances” within this meaning and that the employer must also have complied with those obligations with which it was reasonably practicable to comply, or which were unaffected by the special circumstances, in order to benefit.
For further information, please contact Mike Tremeer, Jeremy Whiteson or your usual Fladgate contact.