A total of 374 employees lost their jobs when Tullis Russell Papermakers, based at Markinch in Fife, went into administration in April 2015.
Each employee received the equivalent of eight weeks' wages in compensation for their loss.
The award follows a judgement from an employment tribunal in Dundee.
Lawyers said that despite the company directors being under an obligation to provide employees with at least 45 days' notice - as more than 100 workers were losing their jobs - this was ignored, meaning each employee was entitled to sue for compensation.
However, acting alone would have meant each affected worker lodging "an extremely complex" and expensive employment tribunal claim, so they made a joint bid.
David Martyn, a senior employment lawyer at Thompsons, the firm that represented the workers, said: "The more notice the workforce have to prepare for these devastating changes, the better they can organise their financial responsibilities to soften the blow.
"This award of compensation will be paid by UK administration service.
"That means that the taxpayer has picked up the tab because company directors have played fast and loose with the rules.
"This has to stop and I believe we need to see more criminal prosecutions of companies that behave this way."
Paul Reilly, Unite branch secretary said: "This is a great result for my members and it goes a long way towards the hurt that happened."
Former workers of a Fife paper firm have been awarded £1.5m in compensation after they were made redundant with just one day's notice.