Applicable Laws:
- Act No. 88/2003 on the Wage Guarantee Fund.
- Regulation No. 377/2024 on the maximum liability of the Wage Guarantee Fund.
- Act No. 21/1991 on Bankruptcy Proceedings, etc.
Purpose of the Law:
To ensure that employees and pension funds receive payment for their outstanding claims in the event of the employer’s bankruptcy or when their estate is subject to public probate proceedings and heirs do not assume liability for the obligations.
What is bankruptcy?
- Bankruptcy is when a company/individual can no longer pay debts or fulfill other obligations. If assets are available, their value is used to pay debts.
A company in financial distress does not have to be formally declared bankrupt.
- Precursor to bankruptcy – e.g. unsuccessful enforcement measures – declaration of insolvency under bankruptcy law.
- When a company is declared bankrupt, a specific process begins – bankruptcy proceedings – which aim to verify the company’s assets and distribute them among creditors according to certain rules.
Assistance for Union Members – Efling
- Efling assists its members in filing claims for outstanding wages and earned rights in the bankruptcy estate.
- It is important for members to act quickly and submit the necessary documents as soon as possible, since the deadline for filing claims is limited.
Documents needed for a claim filing:
- Payslips for the last 6–12 months.
- Employment contract.
- Bank statement for at least the past 6 months showing transfers from the company.
- Time report.
- Tax income overview from RSK.
- Letter of termination, if applicable.
- Communications with the employer.
- Other relevant documents, e.g., medical certificate.
The Bankruptcy Process
- The District Court issues a ruling on the bankruptcy of a company/individual and appoints a trustee.
- The bankruptcy estate assumes all rights and obligations of the bankrupt company, which then no longer has the right to dispose of assets, pay debts, receive payments, or incur obligations.
- The trustee has full authority over the estate and manages all related matters.
- The employment relationship ends upon the bankruptcy ruling, and the employee is entitled to a notice period.
- Usually, companies cease operations and close before a bankruptcy ruling is issued. Sometimes, operations continue after bankruptcy proceedings begin.
- The bankruptcy estate effectively assumes the employment contracts of the bankrupt company’s staff.
- The trustee calls for claims in the bankruptcy estate by publishing an announcement in the Legal Gazette – NOTICE OF CLAIMS.
- The deadline for filing claims is two months from the date of the trustee’s first announcement in the Legal Gazette.
- After the claim deadline, the trustee reviews submitted claims and prepares a claims register.
- Based on the documentation provided with the claim, the trustee decides whether to accept or reject the claim. This is why it is important to submit all requested documents.
- The trustee liquidates the estate’s assets and distributes the proceeds among creditors according to specific rules.
- Proceedings usually conclude 6–12 months after the ruling date, though they often take longer.
The Wage Guarantee Fund covers the following claims:
- Wages for the last 3 months of service with the employer.
- Compensation for loss of wages for up to 3 months due to termination of employment.
- Holiday pay that became due within the last 18 months before the ruling date.
- Pension fund contributions.
- Compensation claims for work-related accidents and claims for compensation in the event of an employee’s death, provided that the employer’s insurance does not cover the claim.
The Fund’s liability is subject to the condition that employees’ claims have been recognized as priority claims by the trustee of the bankruptcy estate. The trustee is appointed by the District Court at the request of creditors, typically tax authorities, financial institutions, or pension funds.
Wage claims are priority claims in bankruptcy, meaning they are paid first if the estate has assets. If the estate has no assets, wage claims are guaranteed by the Wage Guarantee Fund.
Maximum Liability and Other Payments
The maximum liability for unpaid wages or compensation due to termination of employment, accruing from April 1, 2024, is ISK 850,000 per month, cf. Regulation No. 377/2024.
If the employer made payments toward wage claims before the bankruptcy ruling, those payments are deducted. Likewise, unemployment benefits and earned income during the notice period are deducted from claims for compensation for wage loss during the notice period.
The Wage Guarantee Fund is obligated to calculate and withhold income tax on wage claims and claims for compensation during the notice period, and to remit it to the tax collector in accordance with laws on tax withholding. If the employee has unused personal tax credits in the year of settlement, these can be applied against the withholding.
Managers / Board Members
Claims of managing directors and board members are not covered. The same applies to owners with a significant stake in the bankrupt company.
It is also permissible to reject claims of spouses and other close relatives of managing directors, board members, or owners if their claims are deemed unjustified due to such relationships.
Holiday Pay Claims without Bankruptcy Proceedings
The Wage Guarantee Fund guarantees payment of holiday pay under the Holiday Allowance Act in cases where the employer has failed to pay it, even if their estate has not been subject to bankruptcy proceedings. The Fund’s liability extends to holiday pay accrued during the last 18 months.
Directorate of Labour
The employee must register as unemployed with the Directorate of Labour immediately when the company goes bankrupt and they lose their job. Such registration is, among other things, a prerequisite for the Wage Guarantee Fund to pay out a wage claim for the notice period with the bankrupt company. röfu vegna óunnins uppsagnarfrests hjá gjaldþrota fyrirtæki.