The Coronavirus Job Retention Scheme was launched to enable employers whose operations had been severely affected by Coronavirus (Covid-19) to maintain their current workforces by furloughing employees and applying for grants to cover the majority of their employees’ wages.

The scheme was announced on 20th March 2020 and the government first published guidance for employers and employees on 26th March 2020. The guidance has been updated multiple times since then and on 15th April 2020, the government published the treasury direction to HMRC, the formal legislative guidelines for the scheme.

Under the Coronavirus Job Retention Scheme (CJRS), the government agreed to provide a grant for employers to cover 80% of employees’ reference salaries, up to a £2,500 (gross) per month cap. The scheme came into effect on 20th April but claims would be backdated to 1st March 2020. The scheme is tied to PAYE; meaning that employers can only claim for employees who were on the payroll on or before 28th February 2020, or 19th March 2020, depending on circumstances.

The scheme is simply a mechanism through which employers can claim money from HMRC and it does not alter existing employment law rights and obligations. A second tranche of CJRS guidance clarified that some individuals who may not be employees under employment law will also be eligible for CJRS.

It is now clear therefore that

  • officeholders (including Company Directors),
  • salaried members of limited liability partnerships,
  • agency workers
  • and limb (b) individuals (who are not employees but who satisfy the worker test and are sometimes referred to as such) are also covered by CJRS, subject to qualifying criteria being met.

This clarification was good news for many of those who faced uncertain futures otherwise, given their lack of employment status.

The government revealed last week that the CJRS scheme is currently paying out to around 7.5 million employees, which represents a quarter of Britain’s private sector workforce. It has also been used by approximately 935,000 companies.

So how are things changing?

The CJRS is being extended for another four months, to the end of October 2020 but it has a number of changes to it. Crucially, the 80% rate towards payment of workers’ income is being kept, which squashes concerns that Chancellor Rishi Sunak would cut the government contribution to 60% in the near future.

One of the more significant changes to come into force though from the start of August 2020 is that workers will be able to return to their jobs part-time. It is foreseen that this represents a move by the government towards trying to taper the feed of employees back into work in such a way that employers do not become overburdened with the cost of running their businesses. CJRS payment are treated as income in the hands of the employer and clearly reduce the cost base of the business. However, although this helps there are a number of businesses out there which will suffer significantly as a result of not being able to trade, notwithstanding that their workers are being helped and the wage bill is reduced.

So what is the significance of the above for employers?

Well, the 80% pay level will remain, but businesses will have to start contributing for staff who return part-time. There are currently no details in relation to what businesses will be asked to pay, but it could be the case that they have to contribute 20% of their furloughed employees’ salaries, during which time the government would also be paying the remaining 60%. The Chancellor’s simple line was that “we will ask employers to start sharing with the government the cost of paying salaries”.

The initiative will, in due course, pave the way for workers to begin a partial return to employment. That may have an impact on employers’ inclination to make certain people redundant in the coming weeks and months. Clearly, with the prospect of the country entering another big recession, making redundancies and cutting costs generally are going to be amongst the considerations for businesses all across the country.

Those who are self-employed will realise no immediate changes to the parallel scheme for them – which is currently offering self-employed people a taxable grant based upon their previous monthly earnings over the last three years, worth up to 80% of earnings and capped at £2,500 per month. The eligible people must also have annual self-employed earnings of less than £50,000 per year, according to HMRC.

What is the relationship with insolvency?

Many companies will be considering their options with regard to whether or not they should be continuing to trade, mindful of factors such as the requirements on Directors to make decisions about the solvency of those businesses early and the prospects of being able to sell those businesses as going concerns.

The value of a package incorporating the sale of a viable business together with all of its constituent elements, which are necessary for a purchaser to continue operating the business immediately, is tangible in most cases.

There have been some high-profile cases involving household name businesses from our high streets going into administration recently. Such cases include Re Carluccio’s Ltd (in administration) [2020] – involving the well-known Italian restaurant chain – and the case of Re Debenhams Retail Limited [2020], which went all the way to the Court of Appeal.

In cases of administration, where administrators adopt contracts of employment, wages or salary payable under the contract of employment are payable in priority to any expenses of the administration – effectively granting employees “super-priority” in relation to payment of those debts. The same is in priority to any expenses of the administration and any payments to the holder of security by way of floating charge(s).

Nothing done within the first 14 days of an administrators’ appointment is liable to constitute “adoption” of the employment contracts though, which is essentially grace given to the administrators to familiarise themselves with the undertaking and to make decisions within that period which may include dismissing employees.

The consequences of adoption in the above two cases could be financially severe and, importantly, impactful on whether administration itself can serve its ultimate purpose.

Let’s take a closer look at the Carluccio’s and Debenham’s cases…

Accordingly, in the Carluccio’s case, the administrators wanted to know the legal basis on which they could furlough a large number of employees and limit their liability to pay 80% of employees’ wages, in order not to incur any greater liabilities for the insolvent company.

Owing to insolvency legislation requiring administrators to dispose of assets in accordance with a strict order of priority, the relevance of the adoption rules for employees, is that they determine how employees’ claims rank against other debts of the insolvent company and who has liability to pay them. From an administrator’s perspective, the rules allow them to dismiss employees within the 14 day period after their appointment without incurring personal liability or creating a super-priority over other types of claims, including administrators’ fees and expenses, claims from floating charge holders and unsecured creditors (paragraph 99(5), schedule B1, Insolvency Act 1986)).

In other words, if after the 14 day period, the employment contracts are adopted by the administrators, the liabilities under those contracts, which include wages, salary, holiday pay, and payments in lieu of holiday pay, sick pay, and contributions to occupational pension schemes, take priority over other claims against the company.

In the Carluccio’s case, it was an issue that a small but not inconsiderable number of employees remained silent after an offer was made to them by the administrators that they be furloughed. A corollary of that was that an issue arose as to whether there had been consent given to the variations to those employees’ contracts. Such consent was needed to reduce salaries to 80% of the employees’ normal salaries and that consent needed to be evidenced by the administrators.

Consent to variation has significant effects, including whether:

  • (a) the company is no longer obliged to pay more than 80% of salary;
  • and (b) the company being no longer obliged to pay employees before receiving the CJRS grant itself.

On the subject of the non-responding employees, Snowdon J in the Carluccio’s case considered the case of Abrhall v Nottingham CC (2018) where employees had not expressly accepted a contractual variation, and whether they had implicitly agreed after continuing to work.

The question over whether an employee can implicitly agree to a variation of contract is guided by the general rule that variations cannot take place without the consent of the employee.  Inference of such agreement having been given will depend on the particular circumstances prevalent in each case. One cannot infer agreement to a significant diminution in contractual rights (i.e. changes to salary), unless conduct clearly evinces an intention to accept on the part of the employee. CJRS guidance states of course that furloughing should be done by consent.

Snowdon J readily dismissed an argument that because of the status of the non-consenting employees the administrators had a duty to apply to the CJRS for the non-responding employees.

Guidance was given in the Carluccio’s case that the adoption of employment contracts as varied would automatically occur on the earlier of the joint administrators making payments under the employment contracts as varied, or the joint administrators making an application under the CJRS in respect of the consenting employees. However, it was also held that administrators will not adopt contracts of employment with employees merely by virtue of not terminating the contract of employment of those employees.

What is the status of non-responding employees in such cases then?

Prior to termination of the employment contracts by administrators, the non-responding employees are regarded as unsecured creditors of the company with a right to prove for debts in the administration, or any future liquidation in respect of amounts due under the employment contract.  They are not priority creditors though.

The upshot of the above is that employees should consider their positions carefully when deciding as to whether or not to become furloughed by a business which could, potentially, wind up.

The Debenhams case was heard on 6th May 2020 in the Court of Appeal. The case further extended the ambit of judicial interpretation of the law as it stands in relation to adoption of employment contracts.

In that case, the Court of Appeal noted that despite the terms agreed with the vast majority of employees as to furloughing them, it is or may be the case that entitlements to full holiday pay will enjoy super-priority. Three months’ 20% shortfall in holiday pay not covered by CJRS could potentially amount to £1.28 million, which the administrators would clearly wish to avoid paying.

In that case, the Court of Appeal was satisfied that the administrators had clearly adopted the contracts of furloughed employees. The key question in the case was as to whether the contracts of employees who had been furloughed would be adopted if they remained furloughed and the administrators took no further action except to pay to the employees the sums that were to be reimbursed to them under the CJRS.

The Administrators sought to challenge the correctness of Snowden J’s conclusion in Re Carluccio’s; as to how the principles of adopting contracts of employment should be applied when administrators make payments to furloughed employees and applications in respect of those payments under the CJRS.

Trower J distinguished Re Carluccio’s from Re Debenhams. In Re Carluccio’s, the employees had not yet been placed on furlough and the administrators were concerned to ensure that the monies which would be received under the Scheme could be applied in the payment of wages.

It was advanced by the Administrators in Re Debenhams that payments to employees can be justified under paragraph 66 of Schedule B1 to the Insolvency Act 1986, and, as such, it was not necessary to invoke paragraph 99, thereby avoiding the super-priority afforded by paragraph 99.

The questions which arose in Re Carluccio’s were not considered in this case to be limited to whether the administrators were to be regarded as having adopted the contracts of employment. Rather, they ‘extended to the statutory source of the administrators’ ability to pay the employees ahead of the company’s other creditors’.

In the case, Trower J understood the administrators’ concerns and in his judgment he stated: “… there remains real uncertainty about the full extent of the super-priority liabilities which may continue to subsist if adoption is held to have occurred, and this is bound to have an adverse impact on the administrators’ efforts to achieve the purpose of administration (the survival of the Company as a going concern).”

Trower J agreed with Snowden J that paragraph 99 of Schedule B1 to the Insolvency Act 1986  is appropriate to rely upon in a normal case as the source of the obligation to pay wages as a super-priority administration expense and also as the statutory basis of the administrator’s power to do so.

However, the Court of Appeal agreed with the administrators that paragraph 66 of Schedule B1 was still an appropriate and perhaps the most obvious source of authority for the payment of remuneration to furloughed employees because payments under that paragraph were conditional on the administrators’ thinking that the steps they were taking were ”likely to assist achievement of the purpose of administration”, whereas paragraph 99 operates to prioritise payments to employees only where a person ceases to be the administrator altogether.

The court held that it was very clear that the administrators’ obligations to pay the CJRS grant to the employees arose under the continued contracts of employment which the Company in administration was required to honour. What also comes out of the above is that it does not matter if administrators do not want to incur super-priority liabilities because, ultimately, there is an objective element to the question over whether they have adopted the employees’ employment contracts.

Various practical difficulties arise when an administrator is seeking to agree variations of contracts with the entire workforce – particularly where the workforce is a large one.

To that extent, sympathy is had with the task that administrators have in those circumstances. It seems that some administrators remain nervous about the possible implications for them of taking on larger jobs now when having regard to their own size and administrative resources.

It may well be the case that the law will evolve in the future on this subject, but for now, it is advised that both administrators and employees proceed with caution insofar as understanding what the implications are of agreeing or rejecting variations to contract in light of the current climate and it is recommended that decisions are made, early, about whether to retain employees or adopt their employment contracts.

These uncertain times which are upon us are raising a number of important legal questions which the author is sure will result in satellite litigation being brought to decide non-mainstream esoteric points of law and the implementation of the available guidance policies.

If you have any employment or insolvency matters and would like further advice in relation to the same, please contact Fisher Jones Greenwood LLP for expert legal advice, call 01206 700113 or email [email protected].