It is important because in a recession there are many more companies facing restructuring as they try to survive. Not only does the law make restructuring a company more costly and difficult, it imposes impossible demands on the most hard-pressed managements. What is more, it may well end up penalising creditors and the taxpayer, rather than the company itself, against which the protective award is intended as a sanction. If creditors and the taxpayer pick up the cost of the sanction, it is no sanction at all against the guilty party – the company. And companies that were already in trouble financially end up by ceasing trading altogether due to the burden of continuing to pay salaries during the required long consultation periods with the workforce.
Either company insolvency should become a ‘special circumstance’ meaning the obligation to consult with workforce could be dispensed with in this case, or perhaps reduced to a shorter and more manageable period, or the rules regarding Redundancy Payments Office safety nets could be amended so that the RPO does not pay out on protective awards. This would still leave employees able to claim their protective awards against the company but at least they would not be directly funded by the taxpayer where company insolvency is concerned.
Background: The number of company insolvencies is likely to rise by the end of 2010. Returning a business to profit in the short term generally means significant cost cutting of the kind only achieved by reducing staff numbers meaning redundancy costs have to be absorbed by a business that is already financially distressed. The trouble is that the company is damned if it does and damned if it doesn’t. Non-compliance with the consultation rule means employees can claim what is termed a ‘Protective Award’ at an Employment Tribunal, compelling the company to pay up to 90 days of salary by way of penalty for failing to consult with staff (though this may be reduced if some consultation takes place). There are few exceptions to the consultation rule and as matters stand at the moment, a company being unable to pay its debts is not one of them.