You have just discovered that one of your ex-employees still owes you £1,000. What can you do? The following is a brief overview of your options to collect money owed by ex-employees.
Firstly, the most obvious and simplest way to recover the debt would be to deduct it from any sums due (and yet to be paid) to the employee. Before deducting the money however you first need to check that you can rely on a clause in the contract that permits you to make the deduction. This is a fairly standard clause these days and it should be drafted in wide terms so that an employer can deduct any sums owing from any payments due to the employee. If your contract does not permit you to make a deduction then any deduction could potentially result in a Tribunal claim for an unlawful deduction from wages or a claim in the County Court for breach of contract.
The contract does not permit deductions or I’ve already paid them their final payment – what can I do?
All is not lost but your options may now be slightly less attractive. The 2 most common options are as follows:
1. Issue a claim in the County Court.
In order to issue a claim you must first be able to demonstrate a right to the monies owed. This could, for example, be due to a contractual right (i.e. you loaned the money on the understanding that the employee would complete some training etc). You will need to gather as much evidence as possible of the debt. A previous admission in writing from the ex-employee is certainly a big help.
You should first write to the ex-employee setting out the basis for your potential claim, requesting payment and threatening Court proceedings. If the ex-employee doesn’t cough up you don’t have to issue a claim just because you threatened to.
If you do have to issue a claim bear in mind that a claim for a debt of £10,000 and under is likely to be allocated to the Small Claims track. This is important because legal costs in the Small Claims track are not recoverable from the ex-employee even if you succeed in your claim. If you instruct solicitors to represent you all the way to trial, you could find that their fees exceed the money owed. The best option here is to see if your commercial insurance policy has ‘legal expenses cover’. If it does, your insurer may pay for solicitors to act for you, meaning that the recovery of your legal costs is not an issue.
If the debt exceeds £10,000 then costs should be recoverable if you win. Please note however that a successful party will typically only recover around 70% of their costs. If you lose you don’t recover any costs and you pay 70% of the other side’s costs. Litigation is risky.
If you don’t benefit from insurance you could consider making an offer to accept a discounted sum at an early stage before the legal costs mount up. It is likely that the discount could be significantly less than a) the costs you would incur in pursuing the claim to trial in the Small Claims track or b) your irrecoverable costs if your claim fell outside of the Small Claims track.
2. Serve a Statutory Demand.
If you are confident that the debt is undisputed you can also consider serving a formal demand for payment called a Statutory Demand. This will only work for debts of £5,000 or more however.
The demand itself is relatively straightforward and a solicitor should not charge too much to complete one. You will then need to ensure that the demand is personally served on the ex-employee. You may need to instruct what’s known as a process server to do this for you. Alternatively, you could do it yourself.
Provided that the debt is not disputed, the ex-employee will need to either pay it or reach an agreement with you within 21 days. If they fail to do either you can then proceed to petition for the ex-employee’s bankruptcy. Usually the threat of bankruptcy is enough to prompt payment. Again, you are not obliged to proceed to the bankruptcy stage if you don’t want to.
If the debt is disputed however, the ex-employee will need to apply to the court to set it aside. That will result in a mini hearing with the losing party paying the successful party’s costs. If the demand is set aside you will need to argue over the debt by issuing a claim as discussed at 1 above (which is what you should have done in the first place if the debt was genuinely disputed).
Please note however that even if you do benefit from legal expenses insurance cover, it is unlikely to fund this sort of action. It’s probably still worth checking though.
The third option – Tribunal counter claims
A third less common option is available to employers who have been taken to the Employment Tribunal by an ex-employee. Whilst employers cannot bring a standalone claim in the Tribunal against an employee, they can bring a breach of contract counter claim in response to a breach of contract claim by an ex-employee.
Essentially, provided that the debt arises from a breach of contract and relates to the termination of employment, the employer can simply provide details of its counter claim when submitting its ET3 form responding to the claim. If accepted, the counterclaim will then be heard with the claim and any sums awarded to either party will be offset against each other.
Please note however that there is a limit of £25,000 for breach of contract claims in the Tribunal. If you are unlucky enough to be owed more than £25,000 you will need to either issue your claim in the County Court or commence bankruptcy proceedings as discussed above.
Jeremy Crook works in our disputes legal team. If you have any questions about debts owed by ex-employees or any other issue get in touch by telephone 0345 450 5558 or email enquiries@stephens-scown.co.uk