COVID-19: Coronavirus Job Retention Scheme and administration

17 April 2020

The Government's Coronavirus Job Retention Scheme (CJRS) aims to help employers preserve jobs, but it is also available to administrators of failing companies. In the right circumstances, an administrator may use the scheme to furlough staff and keep their jobs open, whilst looking for a buyer for the business. It also opens up the possibility of mothballing the business with a view to saving the company through a company voluntary arrangement, under the protection of the administration moratorium. This may be particularly useful in the case of retail and leisure businesses, where landlords are circumventing the government's bar on possession proceedings by taking other actions to collect unpaid rents, which might prevent the survival of the company.



What is the Coronavirus Job Retention Scheme (CJRS)?

The Chancellor announced the introduction of the Coronavirus Job Retention Scheme (CJRS) on 20 March 2020 with the aim of retaining employees and protecting the UK economy. Since then, take up has been significant, and we have received four updated Scheme Guidance notes from HMRC on how it will work and the HM Treasury Direction setting out the legal framework for the CJRS.

Where the employer cannot maintain its current workforce because operations have been affected by Coronavirus, employers can 'furlough' employees/workers and apply for a grant that covers 80% of their usual wage costs as at 19 March (previously 28 February) 2020 up to £2500 a month, plus the associated Employer National Insurance contributions and pension contributions (up to the level of the minimum automatic enrolment employer pension contributions on that subsidised furlough pay). Employees remain employed, and continue to accrue service. To claim, an employer must have created and started a PAYE payroll scheme on or before 19 March 2020, have enrolled for PAYE online and have a UK bank account.

Importantly, the employer must also agree in writing with the employee changes to salary and that the employee will cease all work. The CJRS is temporary, initially in place until the end of June 2020, but the government has confirmed it may be extended if necessary.

Use by administrators

Scheme Guidance specifically states that where a company is being taken under the management of an administrator, the administrator will be able to access the CJRS. However, the Guidance also states that the government expects an administrator to access the CJRS only where there is a reasonable likelihood of rehiring the workers, such as the sale of the business which results in a TUPE transfer.

TUPE

There was an initial lack of clarity whether employees who were transferred under TUPE would be able to take advantage of the CJRS, as they would not have been on their new employer's payroll on the relevant date. The CJRS Guidance Mark 3 has now confirmed that if a TUPE transfer takes place after 19 March 2020, the transferring employees will be qualifying employees for the purposes of the CJRS, even though they were not on the transferee's (incoming employer's) payroll as at 19 March 2020.

This means that the buyer of a business from a company in administration can claim under the CJRS for a grant for as long as it is continuing.

However, all other employment law obligations continue to apply and nothing in the CJRS means that the overall TUPE risk for buyers in a sale of a business in administration will change. As we often witness in sales through an administration process, potential TUPE liabilities for a buyer can be significant, and determine the price the administrator can get for the sale of the business and assets via administration. Sometimes the significant risk of transferring TUPE liabilities can mean that a sale cannot be concluded.

Other potential inherited liabilities will include holiday entitlement, which continues to accrue while employees are 'furloughed'. Incoming and outgoing employers also still have an obligation under TUPE to inform and consult with employee representatives. A failure to do so can lead to a claim from affected employees, with maximum compensation being 13 weeks' pay, which is a quarter of the wage bill. Liability usually ends up with the solvent buyer, therefore the financial risk of a claim is often taken off the purchase price, potentially reducing the return to creditors.

There is a defence available where there are 'special circumstances' meaning that it is not reasonably practicable to inform and consult. However, insolvency in itself is not a special circumstance, and employers must, in any event, do as much as they can do in the circumstances. In addition, as wages are being covered by the CJRS, there may be less justification for administrators deciding not to conduct a process. Therefore administrators should consider whether they are able to conduct some form of consultation process and how that will work logistically for employees who are furloughed. Although there is no clear confirmation in the Guidance, it is unlikely that participating in a consultation process would be considered 'work' for the employee, which would render them ineligible for the CJRS grant.

Redundancy and consultation

Where 'furlough' is an option, decisions taken by administrators to dismiss employees immediately on appointment may be scrutinised more closely. In a recent High Court case Carluccio's Limited (in administration), it was argued by Unite that employers have a 'duty' to furlough employees rather than make them redundant. Although the court did not go so far as to agree, it did agree that a duty may arise where the employee had agreed to a reduced salary under a furlough agreement.

If it becomes clear during the course of an administration that a sale is not possible, collective redundancy obligations can be triggered. Where there are 20 or more potential redundancies at the same establishment within a period of 90 days, a minimum consultation period of 30 days (for 20-99 employees) or 45 days (100 or more employees) is triggered, requiring certain information to be provided to employee representatives and consultation to be made on the redundancy proposals. Previous high profile case law has confirmed that non-compliance can result in both significant reputational issues for administrators and high financial penalties, a proportion of which will ultimately be picked up by the tax payer.

A notification to the Secretary of State (under form HR1) must also be submitted at the appropriate time; a failure to do so is a criminal offence.

Again, the special circumstances defence is unlikely to apply in the absence of any other factors, and perhaps is even less likely where employees are being paid under the CJRS.

Recent judicial guidance

In the first reported judgment concerning the CJRS, in a decision involving the restaurant chain Carluccio's, the High Court provides some guidance on the use of the CJRS by administrators. The Judge acknowledges in the Judgment dated 13 April 2020 that he had no power to bind HMRC, or the employees, and in fact questioned whether he should make a determination at all. However, due to the urgency of the issues and despite the evolving HMRC guidance, the judge helpfully considered that the court should do what it could to give a view of legal issues to assist the Administrators.

Carluccio's (like most of the UK's pubs and restaurants) closed on 16 March, and entered administration on 30 March 2020. The Administrators intended to mothball the business and subsequently seek a sale of it. However, due to a lack of funds, they could not retain the employees and incur additional liabilities without being able to access CJRS. On their appointment, they had written to all employees to seek a variation to their contract of employment and place them on 'furlough leave' under the CJRS. The Administrators needed to determine, as a question of law, whether they were permitted to take this course of action before the employees' contracts of employment became 'adopted' on 13 April after the 14 day statutory moratorium. Adoption would mean that certain employment liabilities would have 'super priority' under Paragraph 99 of Schedule B1 of the Insolvency Act 1986 and become payable above those to other creditors and the Administrators' own expenses and remuneration. The Administrators wanted to ensure that they could not be accused of acting inappropriately in how they dealt with the employees at a later date.

The High Court has held that the Administrators are able to place the company's employees on furlough and claim for the wages under the CJRS of employees who cannot work due to the COVID-19 pandemic. The Court held that the administrators had validly varied employees' contracts so as to put in place a furlough agreement. It also held that the administrators will be taken to have 'adopted' the contracts of furloughed employees for the purposes of insolvency law when they eventually apply for funding under the CJRS, meaning that monies paid under the scheme can be paid to the employees in priority over the administrators' fees and expenses and the distribution of assets to floating charge and unsecured creditors.

This decision is likely to lead to more administrators taking up use of the CJRS and perhaps even having a duty to consider it in certain circumstances. In view of the significant size of the predicted economic downturn, this is likely to be an increasingly considered issue.

Key points to note

  • As the government expects administrators to only access the scheme where there is a 'likelihood of rehiring the workers', this suggests that where there is no option for a sale the CJRS should not be used.
  • The CJRS is not suitable for everyone. One of the conditions of the Scheme is that the employees cannot provide work or services to the employer. Therefore the wages of any employee who is needed by an administrator to help maintain the mothballed business, recover debts or maintain the premises/equipment cannot be recovered and will need to be paid during the administration in the usual way.
  • The employees must agree in writing to be 'furloughed', to cease all work and to the salary changes in order for it to be effective. As administrators must usually act quickly and before the deadline for adoption of employment contracts, state a deadline for return of the proposal. Ensure that the proposals are sent out together with a delivery receipt (by email) or recorded delivery (by post), so there is clarity whether it has been received by each employee. Ensure you get written agreement from the employees being furloughed and keep the records for five years. In this case, the agreements were not effective for employees who had not responded.
  • The furlough agreement can be used to agree additional aspects as well as a reduction in salary. In the context of an administration, as was carried out here, the agreement provided that the employees would only receive pay once the Administrators had received the grant from the government, protecting the administration from these potential additional employment liabilities.
  • Keep the situation under review. If it becomes clear that no sale is likely and redundancies are likely at the end of the CJRS, consider whether a collective redundancy process should be started and whether a HR1 form should be submitted. The fact of insolvency in itself does not constitute a 'special circumstance' which excuses employers from complying, and failure to submit an HR1 is a criminal offence.

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