Businesses in administration should consider continuation of furlough arrangements

Out-Law News | 17 Nov 2020 | 1:52 pm |

Gill Ross tells HRNews that if employees’ contracts of employment are adopted they will benefit from a super-priority status in the administration
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  • Transcript

    The Furlough Scheme is back but is it enough to save businesses from insolvency? That is question now being asked, some two weeks on from Rishi Sunak’s announcement that the Coronavirus Job Retention Scheme will run for another 5 months until the end of March. The week before that surprise announcement the FT was painting a bleak picture with its headline of more than half a million UK companies in financial distress as support ends – that was based on research showing that the number of firms facing the prospect of insolvency has risen at the fastest rate for three years. They report how that rise comes in spite of a backlog of court actions that have prevented legal orders being issued against companies to pay their debts, and the ban on winding up petitions for Covid-related debts. The British Chambers of Commerce and the Institute of Directors had differing opinions on the extent to which Furlough will help. The IoD’s Director-General, Jonathan Geldart, is quoted saying, essentially, that it will help bring relief to many businesses but the Director General of the British Chambers of Commerce, Adam Marshall, said that the extension of furlough would be only short-term relief and is simply delaying the inevitable and prolonging the agony. Personnel Today covers this and quotes Geldart saying how the government needs to now reinstate and extend insolvency protections to prevent company collapses. Notably, what the IoD and BCC both agree on, is that trend of business collapse will not be ending end any time soon, and will get worse before it gets better. 
    So with furlough back- and whether that scheme helps or not - the fact remains it does interact with insolvency laws in a way that is important for HR to understand. That’s because it directly affects decisions that administrators face in dealing with employees and it affects what happens to their contracts of employment. UK law around this had been unclear for a long time but  two quite recent cases have helped – what they both say, essentially – is that administrators cannot furlough staff without adopting their employment contracts, subject to a couple of conditions. Those two cases concerned the folding of  Carluccio’s and Debenhams respectively and they're helpful because they prevent a potential conflict between, on the one hand, the insolvency rules on which creditors get paid and, on the other, the terms of the Furlough Scheme which requires the employer to apply the grant money received to the costs of furloughing staff. So let's hear more about this. With the background, and what these cases mean for clients, on the line from Glasgow, Gill Ross:
    Gill Ross: “In both cases the administrators were seeking confirmation from the court about what would happen in terms of adopting employment contracts if employees were furloughed under the Job Retention Scheme and the guidance that was issued by the government has frequently changed but in terms of administrators the guidance was that they should only access the furlough scheme if there's a reasonable likelihood of re-hiring the workers. So in other words, if redundancies were going to be inevitable as part of the administration process, the scheme should not be used in administration. So really when the administrators are focusing on selling the businesses are going concern and retaining jobs that's when least have been accessing the Job Retention Scheme. So the first case the link to this was the Carluccio’s case and this was really early on in the Coronavirus Job Retention Scheme coming into being, so the restaurant chain went into administration on the 30 March and administrators wanted to avoid redundancies, they wanted to retain jobs and help save the business, and sell it as a going concern to buyer. So the administrators in those circumstances wanted to furlough the employees so they went through the process of trying to get consent to the contract variation so that the employees could be paid at the scheme rates. Some employees did consent to that, in fact the vast majority of employees agreed. Some preferred to take redundancy and then there was a group of employees who didn't respond. The High Court looked at this for Carluccio’s in administration and said that for the employees who'd agreed the contract variation, their contracts would be adopted when the administrators made a claim through the Coronavirus Job Retention Scheme or paid the wages under the varied contracts, that would amount to adoption of the contracts. For those who hadn't consented to the variation to the contract, the High Court held that in those circumstances the administrators wouldn't be held to have adopted the contracts until the made this a positive action, so either applied under the scheme for those staff to be paid under the grant under the furlough scheme or to be paid their wages separately under their contracts of employment. So that was the Carluccio's case.  The Debenhams case involved slightly different facts. So the administrators were appointed and when they went in and looked at the business Debenhams had already placed its employees on furlough and their wages were going to be covered by the scheme and there wasn't going to be any top up from the company, they were just paying the 80% capped at £2,500 but when the company had implemented that they hadn't asked for employee consent for them to be furloughed and that is actually something under the guidance - employees have to get consent to a contractual variation, so Debenhams had not implemented it properly. The administrators wanted to continue the furlough arrangements, but again, they were concerned, similar to the administrators in Carluccio’s, that they would be deemed to have adopted the employment contracts and then the employees would have this super-priority in respect to payments that were due to them in terms of wages, sick pay, holiday pay and pension contributions. The administrators wanted to sort out the furlough process and they sought express consent from employees for the furlough arrangements but they made sure that their wages entitlement was capped at the maximum they could recover under the Coronavirus Job Retention Scheme and the vast majority of employees consented as we have found with most businesses, whether in administration or not, the employees just want to retain their jobs and avoid redundancies, so they agreed to the changes that were proposed. Again, the administrators sought direction from the High Court as to whether they could continue the furlough arrangements for the employees without being deemed to have adopted employment contracts and similarly to Carluccio’s decision the court held that the administrators would be deemed to have adopted the employment contracts as soon as they made a claim under the scheme or when they paid the wages to the furloughed employees. In that case though the administrators had been quite clever because they had made sure that when they did the contract variation that the employees had consented to the cap on the entitlements and that mitigated the financial exposure that could have existed had they not put that contractual variation in place properly. So in terms of the kind of points to take away from these cases, it's important for businesses that are in administration to think about continuation of furlough arrangements because of this issue around adoption of contracts and the super-priority for employment liabilities. The administrators and the HR team should also be looking at has the scheme been implemented properly or as an additional variation or clarification required in order to ensure that the scheme is set up properly? It is also a question of is it necessary to retain staff so that going forward the business can be sold as a going concern or, sadly, in some situations where businesses are in administration, is it just a situation where redundancies should be implemented without delay, and those employees released?"

    If you would like more detail on those how the Furlough Scheme can be applied in administration then we suggest you look at Steven Cottee’s article on this called: “High Court clarifies how Coronavirus Job Retention Scheme can be applied in administration”, You can find that on the Outlaw website.