A joint parliamentary report conducted in the wake of the insolvency of parcel delivery firm City Link has criticised current insolvency law for being weighted against workers.

The company, which had been experiencing losses for several years, called in the administrators on 24th December last year. The 2,727 employees and approximately 1,000 contractors found out about the loss of their livelihoods on Christmas day.

Key points

The report broadly criticised the current system for protecting the interests of investors and company directors to the detriment of workers, contractors and suppliers.

It said that in general there were insufficient measures to ensure good communication between directors and workers. In addition, it recommended extra protections for self-employed workers.

Communication with staff

Insolvency law requires companies going into administration to consult with staff before making redundancies. The report claims that the fine for firms who do not do this is so low that the rule is regularly ignored.

The report was highly critical of City Link for continuing to trade as normal in the days leading up to the administration, rather than telling staff. Ian Davidson MP, chair of the Scottish Affairs committee said:

“the system provides perverse incentives to withhold information or to skip proper consultation processes in contravention of the law and at a high cost to workers struggling to cope with the loss of their livelihoods”

Recommendations include the development of best practice guidance for information sharing with staff when an administration becomes a possibility, to prevent misunderstandings and rumours.

The committee also wants the government to take measures to make sure staff affected receive good advice and support in the event of an administration, and for the requirements for consultations on redundancies to be clarified.

Better Investment, the owners of City Link, reacted to criticism by stating that they continued to trade up to Christmas Eve to prevent hundreds of thousands of deliveries not being made. This could have resulted in compensation claims to the value of millions of pounds, which would have further damaged the interests of creditors of the company.

Protection for self-employed workers

The report says that the current law does not reflect the modern workplace where the distinction between employees and contractors has been blurred.

In the case of City Link, some of the worst affected were self-employed van drivers, many of whom were owed large amounts and ended up getting very little of what they were owed.

The committee wants the government to change the order of preference in the Insolvency Act 1986 so that all of a company’s workers, regardless of their employment status, receive preferential treatment for payment in the event of insolvency.

The report claims that the current system is not only unfair but also creates incentives for firms to use a bogus self employment status where workers have the responsibilities of an employee without similar protections.