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Coronavirus - Court decides important case on furloughing employees in administration - UK

  • United Kingdom
  • Coronavirus - Workforce issues
  • Employment law

15-04-2020

The High Court has provided some clarity on applying the government’s Coronavirus Job Retention Scheme to insolvent businesses. In particular, how the Scheme permits administrators to pay furloughed employees within the constraints of current insolvency legislation.

Background

When a business goes into administration, the administrator has a 14 day window – or “breathing space” – to decide whether to retain or dismiss employees before they are taken to have "adopted" their contracts of employment. Whether contracts are adopted is significant in that it determines how employees' claims rank against other debts of the insolvent company and who has liability to pay them.

Coronavirus Job Retention Scheme and entering administration

A restaurant chain entered administration as a result of the impact of COVID-19. Unless the administrators could take advantage of the government’s Coronavirus Job Retention Scheme (CJRS) Scheme, they would have to make the workforce redundant.

Within the 14 day window, the administrators made an offer to place the employees on furlough pursuant to the CJRS Scheme. The overwhelming majority of employees accepted that offer, a handful preferred to be made redundant, and a relatively small but significant number failed to respond. However, the administrators were unsure how the CJRS Scheme applied to their circumstances and were reluctant to incur the risk of liabilities once the 14 days elapsed. They therefore applied to the High Court for clarification on how the CJRS Scheme is supposed to work in an insolvency process. In particular, the CJRS Scheme Guidance does not explain how administrators might be entitled to pay furloughed employees consistently with the insolvency legislation.

High Court decision

In the first published judgment to consider the implications of the CJRS Scheme, the court clarified that:

  • administrators can use the CJRS Scheme where there is a reasonable likelihood that the jobs of the furloughed employees will be saved in the long term. The CJRS Guidance states that administrators can access the CJRS if “there is a reasonable likelihood of rehiring the workers. For instance, this could be as a result of an administration and pursuit of a sale of the business.” On the facts, there was evidence of expressions of interest in some or all of the restaurant business leading to a reasonable likelihood of achieving a sale, with employees transferring to the buyer and resuming work at some point in the future
  • administrators can validly vary contracts of employment with employees and agree with them that they will be furloughed and receive salary once payments have been received under the CJRS Scheme. However, given the inevitable tight timescales associated with administration and the focus on consent under the CJRS Guidance, amongst other factors, the court decided that the 77 employees who failed to respond to the variation letter within 14 days of the administration could not be taken to have given their implied consent to a variation. The usual analysis would suggest that administrators should dismiss them before the 14 days expires to avoid additional liabilities. Encouragingly however, the court held that this is not necessary on the basis that, where an employee consents to the variation after 14 days, he/she will be put in the same position as those who accepted prior to the expiry of the 14 days. This meant that the administrator would not be taken to have adopted the contract under insolvency law, on the facts of the case
  • once applications for CJRS funding have been made by the administrator and sums arising from this paid to employees who have been agreed to be furloughed, the administrator will be taken to have adopted their contracts of employment. This means that monies paid through CJRS funding can be paid to the furloughed employees in priority over the administrators' fees and expenses and the distribution of assets to floating charge and unsecured creditors

Comment

This decision will give comfort to administrators (as well as employees employed by companies subject to an administration), both in respect of use of the CJRS Scheme as well as giving a lawful basis to make payments to furloughed employees without restriction by existing insolvency law. However, it should be noted that the judgment is based on current CJRS Guidance with the judge acknowledging that the Government may act in the future to modify its approach.