Impact of the closure of City Link on Employment - Business, Innovation and Skills and Scottish Affairs Contents

Conclusions and recommendations

Could City Link have been saved?

1.  We recognise that there were differences of opinion as to whether or not City Link could be made viable and the desired level of return could be achieved. Thus we do not underestimate the difficulties of the decisions Better Capital were faced with when the final version of the turnaround plan and the investment request were presented to them. As an investment fund they clearly have a responsibility to their investors. However, it is a matter of regret that Better Capital felt that those interests could only be protected at the expense of the future of City Link and continued employment for its workers. (Paragraph 24)

Communication with staff and contractors

2.  We urge the Government to support dialogue between unions, employers and insolvency professionals to develop best practice guidance for sharing information with employees and unions when an administration order is likely. (Paragraph 33)

3.  While in the immediate aftermath of an administration order being granted, individual staff and creditors are given information on their situation and how to make a claim, there is a lack of information about the situation as a whole that allows misunderstanding and rumour to gain traction. (Paragraph 34)

4.  We recommend that the Government works with insolvency professionals to agree a format for a short initial statement, to be made publically available no later than a week after an administration order has been made, which sets out a high-level summary of the events leading up to the administration. This statement should also include the details of i) who to contact with concerns over the conduct of company directors and evidence to support those concerns, ii) when the last payment to staff and suppliers was made and the period it covered, and iii) an early assessment of whether there would be any funds available to make a payment to unsecured creditors (excepting the prescribed part). (Paragraph 35)

5.  It is clearly in the financial interest of a company to break the law and dispense with the statutory redundancy consultation period if the fine for doing so is less than the cost of continuing to trade for the consultation period and this fine is paid by the taxpayer. However, while the financial calculation is simple, ignoring the consultation period has a high human cost that appears not to have featured in the decision making process. Employees are denied a reasonable notice period in which to seek alternative employment and instead, at a time of financial uncertainty, must pursue a court claim for lack of consultation if they wish to be compensated. (Paragraph 41)

6.  We are greatly concerned that the existing system incentivises companies to break the law on consultation with employees. (Paragraph 42)

7.  Once a company has gone into administration, it is likely to be the case that they will be, or will be about to become, insolvent and the administrator will not have the option to allow the company to continue to trade for the consultation period. (Paragraph 43)

8.  When considering the consultation period in relation to a redundancy, company directors may feel they have competing duties. We recommend that the Government review and clarify the requirements for consultation on redundancies during an administration so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees. (Paragraph 44)

9.  We commend Ernst and Young for using a range of communication tools, including social media, to try and assist former City Link workers with job searches. However, we are concerned that the current practice of sending leaflets on support available (PACE, ReActII or Jobcentre Plus, depending on the location) through the post does not appear to be particularly effective. Information on support for employees and contractors should be provided through a range of methods to ensure that all those affected are aware of the help available to them. We are concerned that data protection legislation appeared to block PACE from being able to contact workers impacted by the City Link closure. We are certain that this was not the intention of the legislation and recommend this situation should be re-examined. (Paragraph 49)

10.  We recommend that the Government review the arrangements for information sharing in the event of a company going into administration to ensure that those affected receive timely advice and support. The Government should consider whether Government agencies should have a role in contacting affected workers directly to advise them of the help available. (Paragraph 50)

Payment of creditors

11.  While we welcome the fact that the UK Government ensures that employees can claim the money they are owed if their employer goes into administration, it is a matter of great concern that, under current legislation, taxpayers are left to pick up the bill, allowing private investors to recover more of their investment. (Paragraph 56)

12.  This lack of clarity over payment of money owing to employees added an element of uncertainty at an already stressful time. As with the examples above relating to the provision of information about support for employees, this added uncertainty created unnecessary worry and upset for staff. (Paragraph 58)

13.  We are dismayed that, although it was clear for some time there were serious questions over the ability of City Link to continue trading after December 2014, small businesses and self-employed drivers working for City Link were encouraged to take on additional costs despite a strong possibility that they would not receive payment for a significant part of their work in December. The additional work undertaken by these people has left some of them in serious financial difficulties, with some small firms forced into administration themselves or relying on goodwill from their own creditors to struggle on. Again, there is no doubt that contractors were deliberately deceived as to the true state of the business. City Link and Better Capital are morally, if not legally, responsible for the difficulties that many of these individuals and small business now find themselves in. (Paragraph 62)

14.  We welcome the review initiated by the Secretary of State for Business, Innovation and Skills into how to tackle the problem of bogus self-employment. The incoming Government should bring forward proposals for tackling companies who use or encourage this practice. We reiterate the call in Zero hours contracts in Scotland: Interim Report for the Government to set out what steps it is taking to prevent workers from being pushed into bogus self-employment. (Paragraph 69)

15.  We accept that there will always be those who lose out when a company goes into administration and cannot cover all of its debts. We do not agree, however, that the current system, where those who have given secure credit to a company are cushioned from the full impact of an insolvency because of the losses borne by those who work for a company on a self-employed basis, or as contractors or suppliers, represents the appropriate balance. (Paragraph 72)

16.  Any change to the priority order for creditor repayments should be carefully considered to avoid unintended consequences and balance protection for workers with the need for companies to attract credit and investors. However, the current order of payments does not reflect modern employment practices. We recommend that the Government updates the order of payments in the Insolvency Act 1986 to give preference to all of a company's workers, regardless of whether or not they are directly employed and that consideration is given as to how best to deal with employees and small sub-contractors and suppliers. (Paragraph 74)

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Prepared 23 March 2015