As the British High Street faces increasing pressure, news broke this morning that one of our biggest retailers, House of Fraser, has called in the administrators. This was closely followed by news that the chain is to be purchased for £90 million by Sports Direct founder, Mike Ashley . Today’s events follow months of speculation as to the company’s future and the earlier news that it was to close 31 of its 59 stores, including the long established branch in Cardiff.
However, details of the structure of the deal and Mr Ashley’s plans for the chain are yet to emerge. The company’s 17,500 staff therefore still face an uncertain future. More than 6,000 roles were already at risk as a result of the previously announced program of store closures.
So what is the position of employees in this situation?
The general rule is that a contract of employment is between the employer and the employee. Therefore, because of the personal nature of the contract, the contract should terminate if either party changes. However, the position depends on the particular circumstances, the type of insolvency and whether or not the employer is continuing to trade. Employees may also have some protection by virtue of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
Administration
An administrator acts as an insolvent company’s agent rather than stepping into the shoes of the company. The company doesn’t therefore change its identity, so employment contracts will continue unless the administrator takes steps to terminate them. The administrator may choose to carry on the business of the company whilst trying to find a buyer and may continue to employ the employees. If the administrator decides to terminate contracts of employment on behalf of the company this could amount to wrongful or unfair dismissal. However, there will be a moratorium on unfair or wrongful dismissal claims whilst the administrator is in office, and any employee wishing to bring a claim would need to apply to the court to have this lifted.
TUPE
TUPE applies where there is a “business transfer” and protects the position of employees who transfer from one business to another as part of such a transfer. This may include a situation where the assets of one company are bought by another company. However, TUPE does not usually apply where a company (rather than just its assets) is bought by another company. How the TUPE regulations apply in insolvency situations is complicated but it is important to bear in mind that there are specific provisions in TUPE which are intended to aid the rescue of insolvent businesses. The employees of an insolvent business may therefore have less protection than would normally be the case in a transfer situation.
Pensions
This is likely to be a major concern for the employees of insolvent companies. Pension schemes do not transfer under TUPE and the protection available to employees will depend on the structure of the rescue deal and also the kind of pension they have. This can be a major factor for buyers in deciding how to structure a rescue deal, particularly where companies have final salary pension schemes which are significantly in deficit.
Whilst pension schemes do not transfer under TUPE, employees may still have some statutory or contractual protection and a new employer may have to offer similar provisions to the previous employer.
In an insolvency situation the accrued pensions of employees with a final salary pension scheme may also be protected by the Pension Protection Fund (PPF), who may absorb the scheme of an insolvent employer in some circumstances. There are complicated rules on the compensation that will be paid out if the pension scheme is eligible. There is also a cap on the benefits that will be available under the Fund.
This is an evolving picture and until further details are released, the position of House of Fraser staff remains unclear. However, it is hoped that the proposed purchase by Mike Ashley will prove to be good news for most employees.
