When a company closes and can no longer pay its staff, employees are usually owed four things: unpaid wages, accrued holiday pay, statutory notice pay and statutory redundancy pay. Knowing exactly what are employees owed when a company closes helps you answer their questions calmly and point them to the right support. If the business has no money to settle these amounts, most of them can still be paid by a government fund called the Redundancy Payments Service (RPS).
This guide sets out each entitlement in plain terms, who qualifies, and how staff claim when the company itself cannot pay. It is written for directors who want a clear, honest picture to share with their team.
The four main things employees are owed when a company closes
When a company enters liquidation or administration and jobs end, employees generally have four core claims:
- Unpaid wages — any salary or hourly pay earned but not yet paid, plus unpaid commission or bonuses where due.
- Accrued holiday pay — holiday earned but not taken up to the date employment ends.
- Statutory notice pay — pay for the notice period the employee should have received but did not work.
- Statutory redundancy pay — a payment based on age, weekly pay and length of service, for those with two years' service.
Some employees are also owed pension contributions that were deducted but not paid over. Each of these sits somewhere in the legal order of who gets paid, which we explain below. For a fuller picture of how the process affects your team, see What Happens to Employees in a Liquidation?
Unpaid wages and preferential creditor status
Employees are treated more favourably than most creditors when a company is insolvent. Under the preferential debts provisions of the Insolvency Act 1986, unpaid wages rank as preferential creditor claims. That means staff are paid ahead of floating charge holders and ordinary unsecured creditors from any money the insolvency practitioner recovers.
There are limits. The preferential element for wages is capped at four months' pay up to a maximum figure per employee, with accrued holiday pay on top. Anything above that cap becomes an ordinary unsecured claim, which often recovers little or nothing.
In practice, most staff do not wait for asset recovery. They claim from the RPS instead, which usually pays far faster than the liquidation itself.
Accrued holiday pay
Holiday builds up throughout the year, so if an employee has earned more holiday than they have taken, they are owed the balance in cash when they leave. This is accrued holiday pay, and it forms part of the group of staff entitlements protected in insolvency.
Holiday pay is also a preferential claim, and the RPS can cover it up to a statutory limit when the company cannot pay. The amount depends on the employee's contract, their working pattern, and how much untaken holiday remains at their leaving date.
Statutory notice pay
Employees are entitled to a minimum notice period, or pay in place of it if their employment ends without proper notice. Statutory notice is one week for each complete year of service, up to a maximum of 12 weeks. Contractual notice may be longer, but the RPS only covers the statutory minimum.
Notice pay works differently from the other claims. The employee must try to reduce their loss, for example by claiming benefits or starting new work during the notice period, and those amounts are deducted from what the RPS pays. You can read more about how notice interacts with redundancy in Making Staff Redundant When Closing a Company.
Statutory redundancy pay and eligibility
Redundancy pay is owed to employees who lose their jobs because the role no longer exists. To qualify for statutory redundancy pay, an employee must have at least two years' continuous service. The amount is set by a formula based on age and length of service:
- Half a week's pay for each full year worked under age 22.
- One week's pay for each full year worked between 22 and 40.
- One and a half weeks' pay for each full year worked at 41 or over.
Service is capped at 20 years, and weekly pay is capped at a statutory figure that the government reviews each April. The official calculator and current rates are on the gov.uk redundancy pay guidance. For how this plays out when the company is being wound up, see Redundancy Pay When a Company Is Liquidated.
Directors sometimes qualify too, if they work under a genuine contract of employment. That is covered separately in Can Directors Claim Redundancy Pay? and How Much Redundancy Can a Director Claim?
How the RPS steps in when the company can't pay
If the company has no money, employees do not simply lose out. The Redundancy Payments Service, part of the Insolvency Service, pays statutory entitlements from the National Insurance Fund. The RPS can cover redundancy pay, statutory notice pay, up to eight weeks' unpaid wages, and up to six weeks' holiday pay, each subject to the weekly pay cap.
Staff can only claim from the RPS once the company is formally insolvent and an insolvency practitioner is appointed. The practitioner gives employees the reference number they need to apply online. The government's overview, your rights if your employer is insolvent, explains the process and what each claim covers.
Payments are not instant. Most claims are processed within a few weeks of the correct information reaching the RPS, though timing varies. We cover realistic timeframes in RPS Redundancy Claim: How Long It Takes.
What employees should do and what you should tell them
Clear communication reduces worry. Here is what usually helps your team most:
- Explain that their unpaid wages, holiday, notice and redundancy pay are protected, and that the RPS exists for exactly this situation.
- Tell them a claim can only start once an insolvency practitioner is appointed, and that the practitioner will provide the case reference.
- Ask them to keep payslips, contracts and P60s, which make claims quicker.
- Point them to the official gov.uk guidance rather than informal advice.
If the business is being sold rather than closed, employee contracts may transfer to the buyer instead of ending. That situation is governed by TUPE, explained in TUPE When You Sell a Struggling Business.
Frequently asked questions
Do staff get paid first when a company closes?
Employees rank ahead of most creditors. Their unpaid wages and holiday pay are preferential claims, so they are paid before floating charge holders and ordinary unsecured creditors from recovered assets. In practice, most staff receive statutory amounts faster through the RPS.
What if an employee had short service?
Employees with under two years' continuous service do not qualify for statutory redundancy pay. They can still claim unpaid wages, accrued holiday pay and statutory notice pay, all of which do not depend on length of service.
Are directors entitled to anything when the company closes?
A director employed under a genuine contract of employment may claim the same statutory entitlements as other staff, including redundancy pay. Eligibility depends on the working relationship, not just the job title.
Does the RPS pay the full amount owed?
The RPS pays statutory entitlements subject to a weekly pay cap and time limits on each claim. Anything above those limits becomes an unsecured claim in the insolvency, which may recover little.
This article is general information, not legal, financial or insolvency advice. Every situation is different, so directors should speak to a regulated specialist about their own circumstances.
If you would like to talk it through, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor who can guide you and your staff through what comes next. Harbourfirst is an introducer and does not advise or act for you itself.