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Can Company Directors also claim redundancy?

It isn’t just employees that can claim for redundancy when a company experiences financial distress

It’s a little known fact that under the correct circumstances, company directors may also be eligible to make a claim for the money that can help them avoid personal bankruptcy.

Redundancy pay is currently capped at £14,370 (2016/17), but it’s tax-free and can be a vital payment that helps directors deal with financial difficulty on a personal basis. If they are eligible for redundancy, it’s likely they’ll also be able to claim other monies owed, including arrears of salary and holiday pay.

So what can be done to maximise the chances of directors being able to claim redundancy pay, and how is a claim made in practice?

Eligibility requirements for claiming redundancy

One of the key elements is being regarded as an employee of the company, as well as a director, and this is made possible by its incorporation, i.e. the company is a separate legal entity from its directors.

This relationship is best established via a contract of employment laying out the director’s rights, responsibilities and duties as an employee of the company. But this is only the starting point, and there are further requirements before redundancy can be claimed.

  • The company must have been trading for a minimum of two years • A contract of employment needs to be in place continuously for this length of time.
  • Directors must work a minimum of 16 hours per week, and be owed money by their company.
  • A director will need to be paid a salary via Pay As You Earn, rather than only taking dividends.
  • They must also hold more than an advisory or non-executive position on the board.

How to claim for redundancy

Claims are made by completing form RP1 which can either be provided by the insolvency practitioner appointed to deal with the procedure, or completed online. Once submitted, payments are usually made within four to six weeks.

The National Insurance Fund, or NIF, is used to pay for state entitlements such as pension and redundancy pay, and the amount paid is calculated using various factors of employment.

A director’s age, weekly gross pay, and length of time as an employee are used together in calculating entitlement, although the government places a cap of 20 years on the length of service and £479 on weekly pay.

Gary Addison is a director at Redundancy Claim and has helped thousands of company directors at their lowest ebb with advice around redundancy and statutory entitlements.

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  1. Being an employee is crucial and having sufficient evidence to prove it.

    The RPO a few years back tried to reject directors from claiming who were also majority shareholders, but there was an Employment Tribunal case which stopped them, but occasionally they try again.

    We can’t give out RP1 forms anymore. It is all online and RPO are the ones who can give out paper RP1s when online access isn’t possible.

    You also have to prove you identity online with passport \ driving licence details. But saying that it is a good system and the RPO have become a lot more efficient over the last few years.

  2. I addition to Hugh’s comments:

    The cap on redundancy is 30 weeks not 20.

    Minimum hours worked per week is 8 not 16.

    Company does not need to have traded for a minimum of 2 years, contracts could have been transferred across from a previous employer (TUPE), the employee must have been working for a minimum of 2 years in continuous employment.

    It also ignores the fact that we are talking about insolvency, and so the company must be unable to pay its debts as and when they fall due, and/ or fails the balance sheet test. The claim is only activated on the occurrence of the insolvency event ie; the appointment of a liquidator/ administrator.

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