The Coronavirus Job Retention Scheme (CJRS) is a scheme implemented by the Government designed to enable employers to manage the impact of the COVID-19 pandemic on businesses. Under the CJRS, employees can be placed on furlough and employers can claim a grant from HMRC in respect of 80% of their wage costs of furloughed employees up to a maximum of £2,500 per month plus employer national insurance contributions and minimum pension contributions.
It has recently been announced that the CJRS in its current form will run until the end of July 2020, at which point the CJRS and support under that will not be withdrawn but will operate with certain changes until the end of October 2020. The detail of those changes is expected to be confirmed by the end of May 2020.
The guidance surrounding the CJRS has been ever-changing which has led to a significant amount of uncertainty amongst employers about what the operation of furlough and effects of this on their workforce.
CJRS and the position of employees who work for a company in administration
Unsurprisingly, the COVID-19 pandemic has created great economic uncertainty and many employers have been forced to consider redundancies and the future solvency of their business in general. Unfortunately, many companies have also been left with no option but to enter into administration, including Debenhams. The CJRS guidance confirms that administrators can access the CJRS if there is a reasonable likelihood of rehiring the employees of the business.
Where a company enters into administration, it does not follow that the contracts of the company’s employees are automatically terminated and employee are automatically dismissed. The administrators appointed have the option of adopting the contracts of employment of the employees, but are given a grace period of 14 days following their appointment to make the necessary enquiries about the business and speak to employees without being held to have adopted the contracts of employment. If after this 14-day period, the administrators are deemed to have adopted the contracts of employment, they will take on any “qualifying liabilities” relating to those adopted employment contracts and any qualifying liabilities must be paid by the administrator in priority to his own fees and expenses, floating charge holders and unsecured creditors in accordance with the Insolvency Act 1986. This means that they are paid in full ahead of the distribution of assets to holders of floating charges and unsecured creditors. Qualifying liabilities include the wages and salary of employees, including holiday pay, sick pay and payments in lieu of holiday.
In the event it is not possible to rescue the company as a going concern via an administration and the company becomes insolvent and employees’ employment is terminated, there are a number of protections available to employees. For example, employee creditors are owed their remuneration up to £800 as a preferential debt. Employees are also able to claim for certain amounts from the National Insurance Fund including statutory redundancy payments, statutory minimum notice periods, holiday of up to six weeks and unfair dismissal compensation.
During the COVID-19 pandemic, the Courts have been called upon to consider the relationship between administration and the 14-day grace period and furloughing employees under the CJRS in two high profile cases Re Carluccios Limited and more recently in Re Debenhams Retail Ltd.
Re Debenhams Retail Ltd
Facts of the Case
The key issue in Re Debenhams Retail Ltd was when administrators would be deemed to have adopted employment contracts of employees, furloughed prior to the appointment of administrators.
Debenhams is the UK’s largest department store retailer and had been experiencing severe trading difficulties for some time prior to the COVID-19 pandemic, but the pandemic exacerbated its situation when the Government announced that all shops must be shut. On 26th March 2020, the directors of Debenhams placed around 13,000 employees on furlough and told them that their pay would be limited to the amount that could be reclaimed under the CJRS going forward. The directors did this without consent of the employees. The directors then furloughed a further 867 employees between 26th March 2020 and 8th April 2020.
On 9th April 2020, the administrators were appointed. The day after their appointment, the administrators wrote to the employees asking them to confirm that they had accepted that their entitlement to pay was limited to the amounts that could be reclaimed under the CJRS. Most but not all employees agreed to that variation. The administrators were concerned that, if they were deemed to have adopted the employment contracts, the employees who had not agreed to the variation of terms would gain ‘super priority’ in respect of payment due, over and above the amounts recovered under the CJRS. Super priority would allow a claim to that additional amount by those employees, ahead of any other claim in the administration, including the administrator’s own expenses and remuneration. The amounts potentially involved were significant – around £3 million per month, subject to the number of employees who consented to the variation of terms.
The administrators made an urgent application to the High Court. They sought a declaration that they would not be deemed to have adopted the contracts of furloughed employees, provided that they took no action in relation to those employees, except make payment in accordance with the CJRS and to seek the employees’ consent to the variation to their employment terms.
The High Court held that the administrators would be taken to have adopted a furloughed employee’s contract of employment after the 14-day grace period when they made a payment to them in accordance with their employment contract, including in respect of amounts that were intended to be the subject of grants under the CJRS, or applied to the CJRS in respect of that employee.
The administrators appealed against this decision.
The Court of Appeal dismissed the appeal and held that whether the contracts of employment had been adopted was dependent on the administrators’ conduct. Their intentions, i.e. the fact that they did not want to adopt the contracts as that exposed them to potentially paying employees a significant sum of money, were irrelevant.
By the time of the appeal (7th May) , the 14 day period had expired; the Court of Appeal found that there was clear evidence that the administrators had engaged in positive conduct, elected to continue the contracts of employment and therefore adopted these because:
- The administrators continued to pay the wages of the furloughed employees;
- The furloughed employees who had accepted the new furlough terms remained bound by their contracts of employment whilst furloughed, save for the fact that they were no obliged to be available for work; and
- In continuing to pay the furloughed employees, the administrators were acting with the objective of rescuing the company as a going concern which was the purpose of the administration.
The case echoes the earlier decision in Re Carluccio’s in many respects but also provides guidance for administrators on when they will be deemed to have adopted employment contracts, where employees have been furloughed prior to the administrators’ appointment. As with the administration of any company, a decision will need to be made within 14 days as to whether and to what extent the work force are to be retained so as to achieve the purpose of the administration.
However, these are not normal times. As the Court of Appeal noted, there are good reasons for adoption of the contracts not to take place after 14 days in these circumstances.
Following this decision, it is extremely likely that any employees who do not consent to the terms of their employment being varied within a short period of time, will find that their contracts are terminated by administrators, fearful of a super priority claim.
If we consider the situation of an employee who has been in hospital or whose contact details were not updated by their employee, we can see just how unfairly this could operate in practice.
Rightly or wrongly, the fear of super priority may take precedence over concerns as to the impact of loss of the workforce on the ability to achieve the objects of the administration. If the intention is ultimately to sell the business as a going concern, this will likely be hampered if the administrators have had to lose vast swathes of the work force, because they have not consented to the variation quickly enough.
It remains to be seen whether in future the Courts will hold that other actions are capable of amounting to adoption of employment contracts in light of the COVID-19 pandemic and administrators and employees should be alert to developments in this area in this unprecedented time. In particular, a new Corporate Governance and Insolvency Bill is due to begin its emergency passage through Parliament this week and the Government is publishing new and updated guidance all the time on furlough and related measures.
How Nelsons can help
If you require any advice or assistance on the subjects discussed in this article, please do not hesitate to get in touch with a member of our Employment Law team or one of our specialist restructuring and insolvency solicitors on 0800 024 1976 or via our online enquiry form.