Posted on: Monday 8th April, 2019
Although director redundancy is becoming more and more widely understood by insolvency practitioners, some confusion still exists which could severely reduce the amount of redundancy you receive. This confusion occurs when company directors have been paying themselves a salary which falls below legal minimum wage levels.
As long as directors have been taking a salary through the PAYE system, regardless of the amount, they will typically be entitled to claim director redundancy. However, the problem is when it comes to your company’s liquidator submitting the claim to the Redundancy Payments Service (RPS).
When a company is experiencing financial difficulties, more often than not its directors will do everything within their power to try and improve the fortunes of the business. This means implementing cost-cutting measures wherever possible. Typically one of the first areas to be cut is the salary that directors pay themselves. This is an area that can be cut as minimum wage legislation does not apply to directors of limited companies; consequently, they are free to pay themselves as little as they choose.
If you have told your liquidator you have been paying yourself an amount which falls below the National Minimum Wage (NMW) or National Living Wage (NLW), they may simply take this information and submit your claim using these figures leaving you with a pay-out which is undervalued. However, what your liquidator may not know is that everyone (including directors of limited companies) is eligible to claim redundancy based on the NMW (or NLW for those aged over 25) regardless of the level of salary which has actually been taken.
NMW is an implied legal right for all employees (a director is an employee) regardless of what their verbal or written contracts state. If a director pays themselves below this rate, they are entitled to claim from the RPS what the company is legally entitled to pay them e.g. NMW.
If you have been running your company for five years, and you inform your liquidator that you have been taking a weekly salary of £150 which they use when making your claim, these figures would entitle you to a redundancy payment of around £750. However, if the liquidator instead uses NLW (currently £8.21 an hour) this amount would rise to £1,970 – a significant uplift. Added to similarly increased amounts for notice pay, unpaid wages, and unpaid holidays, it is financially advantageous to you on a personal level to ensure your appointed insolvency practitioner is using the highest figures possible when submitting your redundancy claim following liquidation.
These figures are based on using the current weekly NLW of £394 over a 48 hour working week. This amount will be accepted by the Redundancy Payments Service who understand that one of the first areas to take a hit in troubled times are the salaries of company directors. You will therefore not be penalised for trying to trim the company’s outgoings in this way, and will instead be eligible to submit a redundancy claim in line with the legal minimum earnings level.
In order to make sure your liquidator is maximising your redundancy claim, you first need to know exactly how much you are entitled to. You can do this by contacting Redundancy Claims UK who will assess your position and qualify the value of any potential claim. You can then use this figure to compare against what your insolvency practitioner is forecasting you will receive. For more information call our expert advisers today on 0800 063 9261, or alternatively use our claims calculator to learn how much you are legally entitled to receive.