COMPLIANCE
The CJRS and insolvency
Blair Adams, partner at Winckworth Sherwood LLP , sets out the issues and effects of court judgments
T he Coronavirus Job Retention Scheme (CJRS) came into being very rapidly in late March with the purpose of preserving jobs and providing an income to millions of workers as businesses went into lockdown. Unfortunately, it may not by itself prevent businesses going into insolvency,
Although there is no statutory definition of ‘adoption’, previous cases have established that: ● an employee’s contract of employment is adopted if he or she is continued in employment for more than fourteen days after the appointment of the administrator, and ● it is not possible for an administrator to avoid this result or alter its consequences unilaterally. In the Carluccio’s Ltd case (https://bit. ly/3fPbn9Z), the High Court held that the administrators could put employees on furlough in order to take advantage of the CJRS. However, a contract of employment was adopted by the administrators when they made an application in respect of the employee under the CJRS, or when they paid the employee’s wages. In the Debenhams Retail Ltd case (https://bit.ly/3cxYnDF) the High Court took a similar view in relation to the contracts of employment of employees who had been furloughed before the start of the administration. In this case, the employees had already been furloughed when the company was placed into administration. On the day after the administrators were appointed, they wrote to employees asking them to agree that they would receive no payments beyond amounts that would be reimbursed to the company under the CJRS. The administrators were concerned that excess amounts owed to the employees would deplete the assets of the company and not leave sufficient to meet their own fees. They later estimated the sums involved to be approximately £1,280,000 per quarter, consisting mainly of: ● the difference, in respect of each employee who had not agreed a variation
to their terms of employment, between the maximum amount payable under the CJRS and the employee’s actual wages or salary, and ● the amount of any holiday pay due to employees during the administration which would not be covered by the CJRS e.g. where their holiday pay was payable at the ‘normal’ rate of pay. At first instance, the High Court held that the administrators would be taken to have adopted any contract of employment where, at any time after fourteen days from being appointed, the administrators either: ● caused the company to make payments to an employee under their employment contract, including amounts which may be reimbursed to the company under the CJRS, or ● made an application in respect of an employee under the CJRS. The administrators appealed, but the Court of Appeal dismissed the appeal. It confirmed that the furloughed employees’ contracts of employment had been adopted, the administrators having made payments of salary or wages, or applications to the CJRS for grants. Comment So whilst administrators can make use of the CJRS in order to be reimbursed for the wages of furloughed workers, doing so after the initial fourteen-day period gives those workers priority in relation to other creditors, and puts the administrators at a disadvantage in relation to payment of their own fees. Administrators will therefore want to analyse whether it is better to retain furloughed employees beyond the fourteen days, or to make them redundant instead, thus undermining the primary purpose of the CJRS. A further critical conclusion from these cases that applies to all administrations is that the payment of wages after the expiry of the fourteen-day period is clearly a point of significant risk for administrators. n
particularly those that were already struggling before the pandemic.
The interaction between the CJRS and insolvency has since been examined in two cases, with consequences that may undermine the purpose of the scheme. One of the cases concerned liability for holiday pay and, by way of reminder, the government had confirmed in the CJRS guidance that workers can take annual leave during furlough and that this should be paid in accordance with the Working Time Regulations 1998. This means that: ● holiday pay may need to be calculated at ‘normal’ pay rates, which exceed the reduced CJRS pay level, and ● in many cases employers will be obliged to pay additional amounts due to the worker, such as holiday pay, where they exceed the cap. Most businesses enter insolvency in the form of an administration, where professional administrators are appointed to take over the company with the primary purpose of rescuing it as a going concern. In the very early stage of administration, a key issue is whether the administrator has adopted the contract of employment of the employees. Adoption is important because it makes wages or salary due under the contract of employment payable in priority to any expenses of the administration (e.g. the administrators’ fees) and any payments to floating charge holders in respect of their security.
... key issue is whether the administrator has adopted the contract of employment...
| Professional in Payroll, Pensions and Reward | June 2020 | Issue 61 30
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