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Coronavirus - Beyond lockdown Part 4: dealing with the fallout - UK

  • United Kingdom
  • Coronavirus - Workforce issues

27-05-2020

Although the Government has released a “road map” for a gradual easing of lockdown, this remains conditional upon a continued decline of the pandemic. What is also clear is that any approach to a return to work will be incremental, not immediate.

The economic impact of the coronavirus is already far-reaching. Even as we approach a gradual easing of lockdown, the sad inevitability will be that some organisations will fail in its wake. Insolvency proceedings may follow, whereupon focus will switch to rescue opportunities. Litigation is also more likely, as parties aggrieved by the way in which aspects of lockdown have affected their business or personal situations become better-placed to pursue those grievances through the courts.

For example, disputes around the Government Coronavirus Job Retention Scheme (CJRS) in particular seem certain (i.e. the financial scheme via which employers can place employees on furlough and seek re-imbursement of 80% of the wage cost). We anticipate conflicts arising by way challenges to the scheme by employers or claims by employees as to how it has been applied or how they have been treated, for example, as potential whistleblowers.

To guide employers as they prepare to address the challenges ahead, we have published a four part series of briefings and webinars. In this, the fourth and final briefing in the series, we consider some of the challenges employers may face in the aftermath of the pandemic in terms of financial viability, but also legal claims associated with lockdown. For briefings one and two in the series and accompanying webinar recordings, please click links below

Also, for further information on any of the topics covered in our briefings, please do contact your usual Eversheds Sutherland advisor, or the individuals named in the relevant briefings to discuss your employer’s particular circumstances.

Part 4 dealing with the fallout from the pandemic: rescuing businesses and disputes

Rescuing businesses - employment considerations

Unfortunately, COVID-19 has already been a contributory factor leading to some high-profile corporate failures in a number of sectors, for example, retail, air transport and food. In response, on 28 March 2020, the Government announced changes aimed at supporting UK companies undergoing a rescue or restructure process, by giving them “breathing space” to continue trading while they explore options for rescue. The recent announcement of the extension, until 31 October 2020, of the CJRS will also assist struggling companies, although this could also be simply prolonging the inevitable outcome for many.

When a company is at risk of insolvency and exploring its options, employees will usually be an early consideration. Often, the aim of insolvency proceedings will be to rescue the business as a going concern, in which case key employees may be essential to the success of the rescue. Corporate liquidation and administration give rise to complex legal issues which are beyond the scope of this document and upon which legal advice should be sought. However, we highlight below some of the issues relating to the interplay between employment and insolvency law which HR professionals and In-house Counsel will wish to be aware of.

Question

Points to note

When is a company regarded as being “insolvent”?

A company is insolvent if (a) it cannot pay its debts as they fall due; and/or (b) its liabilities are greater than its assets. Insolvency procedures can be divided broadly into terminal cases (aim is to close down the company) and non-terminal cases (aim is to rescue the company). This distinction has implications for what happens to contracts of employment and how TUPE applies if there is a sale of all or part of the insolvent business.

If the aim is to rescue a company, how is this usually achieved?

Administration is the insolvency process most commonly used as the vehicle for a company rescue. An “administrator” (who must be a qualified Insolvency Practitioner) is appointed to work with the company. The administrator benefits from a statutory moratorium or “breathing space” which provides time to formulate proposals, free from the pressure of the company’s creditors. Although the administrator is required to explore whether they can preserve the insolvent company as a going concern, in most cases an administration leads to the sale of a company’s assets to a third party buyer.

What is the immediate effect of administration on employees?

The company’s employees are not automatically dismissed. There is a 14 day window for the administrator to decide whether to retain or dismiss employees, beyond which they are taken to have “adopted” the employees’ contracts of employment.

Is an administrator able to access the CJRS and what are the consequences of this?

The Government’s guidance expressly states that administrators will be able to access the CJRS where “there is a reasonable likelihood of rehiring the worker”. Recent case law confirms that the employment contracts of those employees who agree to be placed on furlough are treated as having been adopted once an administrator makes a claim under the CJRS or makes any payment to the employee in respect of their employment. When contracts are adopted, wages or salary due under them are payable in priority over the administrators’ fees and expenses and the distribution of assets to floating charge and unsecured creditors – known as “super-priority”.

For employees, what are the potential outcomes of an administration?

Although administration does not amount to an automatic dismissal, redundancies may occur as a consequence. Alternatively, if the administrator is able to sell all or part of the company as a going concern, employees may transfer with the business under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).

What are the potential employment liabilities a buyer could incur if purchasing an insolvent business?

There are exceptions to the usual TUPE rules which are intended to aid the rescue of insolvent businesses. Where the target company was in administration, employees transferring to the buyer will be paid out of the National Insurance Fund (“NIF”) for arrears of wages and holiday pay (up to specified statutory limits and for designated periods pre- insolvency). The buyer will therefore inherit only those residual employment debts not guaranteed by the NIF. In addition, there is greater scope to vary the employment terms of transferring employees than is usually permitted in relation to TUPE transfers. However, any buyer will need to be aware of the risks associated with potential claims relating to transfer-related dismissals or failure to comply with obligations to inform and consult.

Can an employee issue and pursue legal proceedings in an Employment Tribunal against an insolvent employer?

Yes, but the employer may be protected by a "stay" or moratorium on legal proceedings. In an administration, for example, Employment Tribunal (ET) proceedings cannot be continued without the consent of the Administrator or the permission of the Court. When deciding whether to lift a stay, the insolvency court must carry out a balancing exercise between the legitimate interests of the applicant and other creditors. If the claim is permitted to proceed, and an employee is successful in their employment claim, they will need to claim any award as part of the insolvency process.

 

Employment litigation post-lockdown

As the HMRC (which is the body tasked with administering the CJRS) conceded, putting together such a comprehensive salary safety net in a time-frame of weeks, rather than several months, required a balancing of speed, simplicity and fraud prevention. Inevitably, therefore, compromises had to be made, not only in terms of whom the CJRS covers but in the detail of its operation.

But, even less hurried government interventions can be the subject of challenge, in their nature and construction or how they are then applied in the workplace. Below we identify potential challenges by employers and some potential areas of dispute or claims from employees regarding the CJRS.

Question

Points to note

Can employers challenge the CJRS in terms of whether it applies or how much it pays out? 

The CJRS and/ or the way it is applied could potentially be challenged by Judicial Review i.e. the court process by which a judge reviews an act or decision by a public body to ensure the decision-making process was fair and lawful). A potential ground here would be that the application of CJRS was contrary to ‘legitimate expectation’, based on the guidance to CJRS or one of various iterations of the guidance. Critical to such claims will be a copy of the guidance wording relied upon and evidence of reliance (internal communications, dates of furlough and letter contents, etc). Court proceedings of this nature can be expensive.    

Can employees challenge the employers decision as to who is furloughed? 

The CJRS itself is unequivocal that a decision to place an employee on furlough lies exclusively with the employer. Even so, to avoid subsequent allegations that such decisions may have been made unreasonably or were discriminatory, an appropriate business case should be considered and evidenced in all cases.    

Can employees reclaim a shortfall in wages during furlough?

Most furlough exercises have required employee agreement, which may limit later challenge by the employee unless the terms were unclear, incorrectly applied or applied unlawfully (eg under duress or in an unfair or discriminatory way). If any of the latter are relevant, we could expect unlawful deduction from wages claims and other allegation of breaches of contract.

What might be the likely timescale and process for court or ET claims in the current circumstances?

A number of ETs are working at a greatly reduced capacity, with a large number of ‘back of house’ staff being absent, and those who are present only dealing with urgent applications.  Inevitably there will be some delay with claims for the foreseeable future. Hearing dates, in particular, may be delayed by many months. Claims which relate solely to unpaid wages may be heard more quickly as such claims are normally listed for a shorter duration.

Are we likely to experience any difference in the ET process?

Currently, all ET hearings due before 29 June 2020 are being dealt with by telephone or video-conferencing. That may prevail for some time - guidance is awaited at the end of this month. It has, in any event, been a long held ambition of the ET system to increase digitisation. We anticipate recent events will precipitate long term changes to the use of technology and a reduction in face-to-face hearings in appropriate cases. The Tribunals are likely to examine more closely whether disputes can be resolved by other means such as judicial mediation or judicial assessment.  In appropriate case Tribunals may also look to determine cases on the papers alone, where the parties agree.

Would challenging an employer’s application of CJRS be a protected disclosure?

HMRC has actively encouraged furloughed employees who claim that they have been made to work to inform on their employer. Reporting such concerns may well constitute legitimate whistleblowing, if it is done within the correct legal framework, and will potentially protect the individual from retaliatory treatment by their employer.

What other particular risks do employers face?

There will also be cases where employees feel they have been forced to return to an unsafe working environment. This risks health and safety claims or claims of constructive dismissal. Employers should not ignore legitimate concerns of workers, as in addition to potential litigation, there is also serious potential consequences for their reputation and/ or employment relations.

 

 

 

NB this Alert covers England, Wales and Scotland. It does not cover employment law differences that apply only in Northern Ireland.

This note is a generic briefing and is not a substitute for detailed legal advice on the specific circumstances employers are facing. Employers should therefore take legal advice.

For more information contact

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