Taxpayer-funded payouts caused by firms failing to follow redundancy rules are set to skyrocket as a result of the coronavirus crisis, lawyers have warned, prompting calls for more action to deter unscrupulous bosses. 

The UK Government already pays out tens of millions of pounds in protective awards each year, and employment experts claim the end of the furlough scheme will see the figure rise exponentially.

The awards – the equivalent of up to 90 days’ pay - are paid out to employees when businesses fail to follow collective consultation procedures. And when the redundancies are the result of insolvency, it is the taxpayer who picks up the bill for this failure, as well as any redundancy or wage payments due.

Solicitors claim that the payouts are “entirely avoidable” and are calling on the government to take action to stop directors from shirking their responsibilities.

There is already legislation in place to prosecute those who fail to follow the rules and the government’s Insolvency Service said it may take this action when it happens, however The Herald understands that criminal proceedings are rarely pursued.

David Martyn, of Thompsons Solicitors, who are on track to secure protective awards totalling £125,000 for former Watt Brothers staff, said: “This is a liability that the taxpayer would not have to incur if companies just went about the correct process.

“In almost all of these big insolvency events, big businesses know full well that there are going to be multiple redundancies and they know they have an obligation to consult and they are just not going through that process.

“The frustrating thing is that they know that the state will end up picking up the tab.”

He added: “It is possible for the Insolvency Service to take criminal proceedings against directors – they did it fairly recently in a case involving the director of one of Mike Ashley’s companies – but it’s very rare that this happens. 

“It’s not a hugely well-known provision and it may be that resourcing is an issue for the Insolvency Service.

“I think there are two ways of dealing with this problem – one, that the Insolvency Service investigates criminal prosecutions if the consultation doesn’t take place properly, or two, compulsory insurance for firms.

“This would mean businesses themselves paying into insurance during the good times, so that when the bad times come, their staff are properly looked after, rather than the state having to pick up the tab.”

Mr Martyn, an employment law specialist and partner with the law firm, added that Thompsons is preparing for a big increase in protective award claims, and has already experienced an 80 to 90 per cent increase in overall employment enquiries during the pandemic.

A freedom of information request carried out previously by The Herald revealed that the Insolvency Service paid out £77m in protective awards between 2013/14 and 2017/18 - an average of just over £15m a year.

Over the same period, all payments as a result of insolvencies reached more than £1 billion.

Paul Kissen, a specialist who deals with protective awards for Thompsons, said he expects there will be a large increase in the claims once the furlough scheme ends in Spring next year.

“I expect we’ll really start to see more of them once the furlough scheme ends and companies are forced to face up to how things look financially,” he said. “I think we’ll see a big increase in protective awards.”

He said that stiff financial penalties should be considered in cases where firms fail to consult properly, adding: “There’s definitely a problem with the fact that companies can just go into administration and leave the taxpayer on the hook for something that is entirely avoidable.”

Collective consultation should take place when 20 or more employees are at risk of redundancy and involves strict obligations such as workers being given appropriate notice and meaningful consultation taking place with a trade union or employee representative in a bid to save jobs.

When the rules are not followed, employees can lodge a protective award claim at an employment tribunal.

Companies and directors can also be prosecuted under the Trade Union and Labour Relations Act, with penalties including an unlimited fine if convicted.

However, according to the solicitors, there have been relatively few prosecutions.

A spokesman for the Insolvency Service said: “The government continues to provide an unprecedented support package to assist businesses during this challenging time. However, where there are dismissals, we are committed to helping employees receive the statutory redundancy payments they are due.

“Employers have a legal obligation to consult with employees and notify the Secretary of State of potential redundancies. 

“Where employers fail to comply with notification requirements, prosecution action may be taken.”