Insolvency: Temporary Scheme for Compensatory Payment in Lieu of Statutory Period of Notice on Termination of Employment

STATES OF JERSEY

INSOLVENCY: TEMPORARY SCHEME FOR COMPENSATORY PAYMENT IN LIEU OF STATUTORY PERIOD OF NOTICE ON TERMINATION OF EMPLOYMENT – REVISED REPORT

Presented to the States on 27th January 2011 by the Minister for Social Security

STATES GREFFE

2011   Price code: B  R.5

REPORT

This  Report  (previously  published  as  R.44/2009)  has  been  updated  to  reflect  the changes to the statutory minimum periods of notice required by the Employment (Jersey) Law 2003 as a result of the enactment of the Employment (Amendment No. 5) (Jersey) Law 2010 on 1st January 2011. Appendix 1 provides further details.

Background and context

This temporary insolvency scheme is designed to pay compensatory statutory notice pay to employees where their employer is insolvent.

The  scheme's  rationale is  to  make  compensatory  notice  payments  in  the  case  of insolvency based on the number of weeks' statutory notice an employee was entitled to receive in accordance with the Employment (Jersey) Law 2003 ("the Employment Law"). The scheme does not cover any other types of payment in an insolvency situation, such as unpaid wages, and it does not cover statutory notice pay or any other payment when the employer is not insolvent.

This temporary scheme is designed to operate until the formal insolvency scheme, backed by legislation, is put in place. It is important to recognise that this temporary scheme is effectively operating in isolation and, as such, its provisions will differ from the formal statutory insolvency scheme.

As well as avoiding unnecessary delay, another priority has been to design a scheme that is easily accessible to those submitting a claim and that pays out relatively quickly to those who qualify.

In a written answer to the States on 31st March 2009, the Minister for Social Security said –

As I stated during the debate of P.34/2009, the system will be very closely based on the UK insolvency scheme, and to that effect, the payments in lieu of notice will be calculated based on the employee's actual losses suffered. Any income  received  from  employment  and  some  benefits  received  during  the period of notice will be offset against statutory notice payments, therefore reducing the period remaining to be paid in lieu by the States. Employees will be expected to attempt to minimise their losses by actively seeking employment during any period of notice in which they are not working. In particular, employees turning down the offer of employment, by either the employer or administrator  of  the  insolvent  business,  without  good  reason,  will  not  be entitled to any payments under the scheme.'

To incentivise people to return to work as swiftly as possible, all those who qualify will receive up to 4 weeks of any compensatory notice pay entitlement – with no reductions. This removes any disincentive to find work quickly.

Prompt payment is another key aspect of this scheme. In the U.K., any payment in lieu of notice is only made after the end of the notice period (up to 12 weeks) when any earnings  during  that period  have  been  established. Under this  temporary  scheme, eligible employees will not have to wait unduly for their notice payment (or part of it).

When an employee's entitlement to statutory notice has been established based on their rights under the Employment Law (see Appendix 1), a payment will be made to cover up to the first 4 weeks of statutory notice that the employee was entitled to receive (where the employee had not already worked their notice or received payment in lieu). The payment in respect of the first one to 4 weeks' notice would not be reduced  by  any  earnings  from  employment,  Short-Term  Incapacity  Allowance, Maternity Allowance or additional Income Support payments to the individual or their household as a result of their unemployment.

However, beyond this 4 week period, any such income received in respect of the remaining notice period would be deducted from the compensatory notice pay, on a pound-for-pound  basis.  For  example,  an  employee  with  9 years'  service  who  is entitled to 9 weeks' notice must declare any income in respect of weeks 5 to 9 of the notice period. That employee would receive a payment in respect of the first 4 weeks, and then a further payment in respect of the remaining 5 weeks' notice on the expiry of that period.

If it became apparent at a later date (from contributions records, for example) that a claimant had failed to declare any income, then the Department would take action to reclaim any monies that had been falsely claimed.

THE SCHEME IN DETAIL

The following sets out the criteria that the Social Security Department will apply where an employer has become insolvent and has not given employees their statutory period  of  notice  on  termination  of  employment,  as  required  by  the  Employment (Jersey) Law 2003.

The terms of the temporary scheme will reflect the requirement for the scheme to come into effect as soon as possible in the absence of statutory redundancy provisions. These terms may not necessarily mirror those of the formal scheme, but will operate until  the  planned  statutory  insolvency  scheme  comes  into  operation.  It  has  been proposed  that  the  formal  scheme  will  broadly  follow  the  U.K.  and  Isle  of  Man insolvency  schemes,  as  Jersey  is  comparable  to  these  jurisdictions  in  terms  of legislation and practice relating to employment rights and insolvency.

Application criteria

All of the following criteria must apply to allow an employee to submit a claim to the Social Security Department for a compensatory payment in lieu of their statutory period of notice –

• The employer became the subject of a formal insolvency process having effect in Jersey on or after 4th February 2009. These processes include désastre, court and creditors' winding up. The temporary scheme will therefore have application in Jersey in the case of external foreign insolvency proceedings, such as administration, as well as in domestic scenarios.

The  temporary  scheme  only  applies  where  the  employer  has  become  formally insolvent. It does not cover cases of redundancy or termination of employment where the employer is still operating or has just closed down out of choice, or is otherwise not  the  subject  of  formal  insolvency  proceedings.  Where  the  employer  is  still

operating, former employees who feel they have a grievance can visit the Jersey Advisory and Conciliation Service and can, if necessary, pursue any claim through the Jersey Employment Tribunal. In other cases where the employer has ceased trading, employees  may  take  advice  from  a  lawyer.  The  Viscount's  Department  and  the Citizen's Advice Bureau may also be able to provide independent views.

• The  employee  must  have  been employed  by  the  employer  at  the  date of insolvency.

An employee who terminates (or gives the employer notice to terminate) their own employment during the notice period or prior to the effective date of termination of employment  is  not  entitled  to  statutory  notice  under  the  Employment  Law  and therefore is not entitled to a compensatory payment in lieu of notice.

• The employee was entitled to receive a period of notice on termination of employment subject to the provisions set out in Part 6 of the Employment Law (as amended by the Employment (Amendment No. 5) (Jersey) Law 2010, on 1st January 2011. See Appendix 1).
• The employee's employment was terminated and the employee was not given the  statutory  minimum  period  of  notice  (either  in  full  or  in  part)  by  the employer  as  required  on  termination  of  employment  by  the  Employment (Jersey) Law 2003.

Where notice has not been given to employees and the employer either has become, or is about to become, the subject of a formal insolvency process, the Minister will expect the employer to have given written notice to each employee at the earliest opportunity.

The  Minister  will  establish,  in  conjunction  with  duly  appointed  insolvency practitioners (IPs) with a local presence, what is expected of an IP in terms of best practice and intends to issue a code of practice for IPs, including the giving of notice where  that  is  possible,  and  the  information  that  needs  to  be  provided  to  each employee.

Notice of termination of employment does not need to include a specific termination date, as each end date will depend on the individual's length of service.

In the event of notice not having been given to an employee, the following dates will apply, notice having been deemed to have been given to the employee for the purpose of the temporary scheme on the earlier of –

1. The date on which the employee was notified that the employer became the subject of a formal insolvency process;
2. The date of the automatic termination of contracts, by operation of law, via the formal insolvency process (if any);
3. The last day worked by the employee; or
4. The date on which the employment ended if different from (c).

For the avoidance of doubt, any one of the dates chosen under (a), (b), (c) or (d) constitutes deemed' notice for the purposes of the temporary scheme.

• The employee did not receive a payment from their employer in place of any statutory period of notice not given by that employer.

Notice payments will be made in accordance with Article 56 of the Employment (Jersey) Law 2003, set out in Appendix 1 as amended from 1st January 2011. A week's pay is calculated in accordance with Schedule 1 of the Employment Law. Only the statutory minimum notice payments owed (or the balance thereof) will be paid to employees. Where an employee has a contractual right to a greater period of notice on termination of employment, only the statutory minimum will be paid.

• The Social Security Department receives confirmation from the employer, IP or Viscount that it has not given notice or pay in lieu.
• The employee falls within the definition of "employee" provided at Article 1A of the Employment Law (see Appendix 2). Some people, including those who are self-employed and self-employed contractors will not be entitled to claim under the scheme.
• The employee was not at any time during the year preceding the employer's insolvency – (1) a director of the company (as provided by Part XIV of the Companies (Jersey) Law 1991); or (2) the beneficial owner of one-half or more of the issued share capital of the company, or of any other company which at that time had control (directly or indirectly) of that company.
• The Social Security Department has received or was due to receive Class 1 contributions from that employer in respect of that employee in the quarter prior to insolvency.
• The employee worked wholly or mainly in Jersey.
• The employee who wishes to claim a compensatory notice payment must submit an initial claim form within 4 weeks of the employee having been given actual or deemed notice. In circumstances where there is uncertainty or delay in the commencement of insolvency proceedings and it is not clear whether  employees  will  be  entitled  to  claim  under  this  scheme,  the Department will extend the time period for the submission of claim forms accordingly.

The  application  form,  available  from  the  Department  or  the  IP,  will confirm  the employee's details, including length of service and pay, and will set out what further information is needed. Any breaks in continuous service will need to be identified.

• To qualify for the compensatory notice payment, an employee who is not employed during their period of notice must demonstrate that they are actively seeking  work  (unless  in  receipt  of  Short-Term  Incapacity  Allowance  or Maternity  Allowance)  and  they  must  not  unreasonably  refuse  appropriate employment.

Compensatory notice payments

All of the following apply in relation to any compensatory notice payment:

• The employee's entitlement to a payment must have been validated by the Social Security Department as being accurate based on the employee's period of continuous service and earnings details, as confirmed by the employee's contract of employment and wage slips.

The Department must have co-operation from employees, employers and IPs in the provision of the documents required to validate employee entitlements. Delays in validating  employee  entitlements  will  ultimately  delay  any  payments  due  to employees.

• The Department must be provided with a statement confirming that all or part of the statutory notice pay remains unpaid from a person authorised to make such a statement, namely an IP or the Viscount, as appropriate.
• So as not to penalise employees who find a new job in the first 4 weeks, all individuals will still receive up to 4 weeks' full compensatory notice pay in accordance with their rights under the Employment Law (see Appendix 1). This incentive is in line with the permitted changes to earnings under Income Support, where 4 weeks' leeway is given, in some circumstances, before new earnings are taken into account in an Income Support claim.
• Employees  must  register  with  the  Work  Zone  at  the  Social  Security Department  straightaway  and  must  attempt  to  minimise  their  losses  by actively seeking employment during any period of notice in which they are not already working. An employee must not unreasonably refuse appropriate new employment.
• Other than in respect of the first one to 4 weeks' notice, any of the following income received will be offset against compensatory notice payments –

1. Short-Term Incapacity Allowance;
2. Maternity Allowance received by the individual; and
3. Additional Income Support payments made to an individual or their household as a result of their unemployment.

• As a condition for receiving any compensatory notice pay, employees must not unreasonably refuse to stay on in continued employment after notice has been served (or is deemed to have been given) when asked to do so by an IP.

It is in everyone's interest that in an insolvency situation there is, as far as possible, an orderly rundown of the business. This condition will only be reviewed if there is demonstrably a good reason to do so for a particular individual – such as an offer of new employment which would start straightaway. This arrangement avoids people choosing  to  give  up  work,  only  to  receive  payment  from  the  taxpayer  instead. Employees who continue to be employed after the date of insolvency are paid by the IP out of the funds of the insolvent employer that the IP is entitled to use to continue necessary services.

Employees  asked  to  continue  in  employment  by  an  IP  would  still  receive  up  to 4 weeks' compensatory notice pay. In these circumstances, it is not always clear how long  such  work  will  last  and  by  allowing  employees  to  retain  their  4 weeks' compensatory notice pay, they are not being disadvantaged vis-à-vis other former colleagues who were not kept on by the IP.

• Where the employee has continued to be employed after the date on which notice  was  given  (or  is  deemed  to  have  been  given),  any  earnings  from employment after the fourth week will be offset against any compensatory notice pay, provided that the employee has been paid wages, or is due to be paid wages, by the IP in respect of that period.
• The employee must sign a legal document which will assign their right to the statutory notice payment to the States, via the Minister for Social Security.

This means that the States will take on the employee's claim to the notice payment and will pursue the claim as a creditor when the proceeds of any remaining assets of the company are distributed amongst the creditors. An individual is not obliged to assign their right but if they do not, no payment will be made under the temporary scheme. Employees are encouraged to obtain their own advice, for example from a lawyer or the Citizen's Advice Bureau, before signing the legal document. An employee who does not wish to assign their right to a statutory notice payment to the States is advised to take legal advice regarding their options for pursuing their claim through the Courts as a creditor.

Employees must make every effort to ensure that applications can be processed as quickly as possible. Any delays in providing the information that has been requested to validate claims, or in signing the legal document, will lead to delays in issuing payments. If claim forms and other documents are not submitted by any deadlines as advised by the Department in writing, employees may lose the right to claim any compensation from the scheme.

• It is the intention that any payments due to each individual will be made as soon as possible; after the first period of up to 4 weeks' notice, and then a second  payment  at  the  end  of  the  employee's  notice  period,  subject  to statutory notice entitlements (in accordance with Appendix 1) and complete submission of all paperwork.
• The Social Security Department will take action to reclaim any monies that have been falsely claimed by an employee.
• Any other amounts owed to an employee by the employer or the insolvency practitioner, such as holiday pay and wages owed, as well as other contractual amounts such as contractual notice where that is greater than the statutory notice,  can  be  claimed  by  the  employee  as  a  creditor  via  the  insolvency proceedings.
• An employee who disagrees with a decision made by the Social Security Department regarding their compensatory notice payment will have the right

to request a review by the Minister for Social Security, whose decision will be final.

• In wholly exceptional circumstances, where the employer has ceased trading, but has yet to become subject to formal insolvency proceedings, the Minister will  give  consideration,  in  consultation  with  the  Viscount,  to  making compensatory payments where he is reasonably satisfied that the employer will become subject to such proceedings, or that related proceedings have commenced. A review of this nature may be instigated by an Officer of the Social  Security  Department  at  the  request  of  one  of  the  following –  the employer,  a  former  employee  of  that  employer,  the  Viscount,  or  the prospective insolvency practitioner. The Minister's decision will be final.
• The principles and rules of the scheme have been determined by the Minister for  Social  Security,  as  set  out  in  this  Report,  and  are  not  grounds  for Ministerial review.

APPENDIX 1 Statutory period of notice under the Employment (Jersey) Law 2003

Any claims under this scheme that relate to dismissal without notice due to insolvency that occurred on or after 1st January 2011 will be paid in accordance with the statutory minimum notice periods required by the Employment (Jersey) Law 2003 (as amended by the Employment (Amendment No. 5) (Jersey) Law 2010 on 1st January 2011), as follows –

Note:  Any  valid  outstanding  claims  relating  to  dismissal  without  notice  due  to

insolvency that occurred up to 31st December 2010 will be paid in accordance with the periods required by the Employment Law at that time, as follows –

APPENDIX 2

Definition of "employee" from the Employment (Jersey) Law 2003

1A  "Employer" and "employee"

1. In this Law –
   1. "employer" means a person who employs another person; and
   2. "employee" means a person who is employed by an employer.
2. For the purposes of paragraph (1), a person is employed by another person if the first person works for the second person under a contract of service or apprenticeship with the second person.
3. For the purposes of paragraph (1), a person is also employed by another person if the first person enters into any other contract with the second person under which –

1. the first person undertakes to do, or to perform personally, work or services for the second person; and
2. the status of the second person is not that of a client or customer of any profession or trade or business undertaking that is carried on by the first person.

4. It  is  immaterial  whether  a  contract  to which  paragraph (2)  or paragraph (3) refers is express or implied.
5. If the contract is express, it is immaterial whether itis oral or in writing.