Basic awards and employer insolvency: tribunal determination remains essential

Background

In the case of Chaudhry v Paperchase Products Ltd, the claimant employee was dismissed by Paperchase Products Ltd in October 2018 and brought an unfair dismissal claim. The claim was defended, but before it could be determined Paperchase entered administration. As a result, the Employment Tribunal proceedings were stayed under the statutory moratorium on legal proceedings.

The employee submitted a claim in the administration for sums equivalent to the maximum basic and compensatory awards for unfair dismissal. The administrator accepted the claim and paid a small dividend. However, because the unfair dismissal claim had never been determined by a Tribunal, no formal award had been made.

The employee then sought payment of the basic award element from the government scheme that covers certain employee entitlements where an employer becomes insolvent. This request was refused on the basis that there was no Tribunal judgment awarding a basic award. The employee challenged that decision, but the Employment Judge rejected the claim, and the case was appealed to the EAT.

The EAT’s decision

The EAT dismissed the appeal. It held that the statutory scheme is clear: a basic award for unfair dismissal is not payable by the government unless an Employment Tribunal has first ruled that the dismissal was unfair and decided to make the award.

The EAT emphasised that a basic award for unfair dismissal is not merely a debt that crystallises on dismissal. It is an “award” in the true sense of the word, requiring a Tribunal decision that the dismissal was unfair and a calculation of the award in accordance with the statutory framework. That framework requires the Tribunal to consider not only the basic calculation formula but also any applicable reductions or adjustments. Without a Tribunal determination, the Secretary of State cannot know whether a basic award is payable at all, or in what amount.

The statutory concept of the “appropriate date” reinforced this conclusion. For basic awards, the appropriate date is defined as the latest of three events: the employer’s insolvency, the termination of employment, and the date on which the award is made. Until all three events have occurred, the Secretary of State’s obligation to pay cannot arise. This contrasts with other categories of debt, such as arrears of pay or holiday pay, which do not depend on a Tribunal award.

The claimant argued that this interpretation was inconsistent with retained EU law. The EAT acknowledged that the UK insolvency regime arguably treats different categories of employee debt differently, without clear justification. It also accepted that requiring Tribunal adjudication may, in practice, make recovery of a basic award very difficult where administrators refuse consent for proceedings to continue.

However, the EAT concluded that it could not reinterpret or disapply the domestic legislation. The wording of the law is clear and any alternative reading would go against the grain of the statutory scheme. 

Learning points for employers

This decision confirms that a Tribunal determination remains a necessary precondition for recovery of a basic award from the Secretary of State where an employer becomes insolvent. Employers and insolvency practitioners should be aware that accepting a proof of debt does not substitute for a Tribunal award in unfair dismissal cases. 

For more information or advice, please contact Elizabeth McTeigue in our Employment team.