The Easter break has brought a degree of clarity on the operation of the Coronavirus Job Retention Scheme (CJRS). Guidance has been published by the Government on how employers may submit their claims, and the judgment of Carluccio’s Ltd handed down by Mr Justice Snowden on Easter Monday provides some useful clarification on what the CJRS means for administrators in practice.
Adoption of Contracts
As we know, the CJRS intends to cover up to 80% of a furloughed employee’s wages, capped at £2,500 per month. One of the key questions before the High Court was how the CJRS interacted with the statutory adoption of contracts under the Insolvency Act 1986. This provides administrators with a 14-day window of breathing space following their appointment in order to make decisions as to ongoing staffing requirements depending upon business needs. The importance of the adoption rules is that they determine how employees' claims rank against other debts of the insolvent company and who is liable to pay them.
The position had been settled in the case of Re Paramount Airways Ltd (No 3). The test laid down by the then House of Lords was that if, in substance, the administrators continue after the 14-day window to employ staff and pay them in accordance with their previous contracts, the contracts will be adopted (unless the contracts are re-negotiated and this is not a sham). This means that the administrators will become liable to pay certain amounts such as wages, holiday pay and pension contributions (but not amounts relating to a subsequent redundancy claim) as an expense of the administration.
In the context of the CJRS, Carluccio’s confirms that an accepted variation of the employees’ contracts delays adoption of the contracts until such time as the administrators make salary payments to employees or the administrators make an application in respect of those employees under the CJRS.
Carluccio’s operates a well-known brand of Italian restaurants, with over 70 branches and around 2,000 employees. All of the restaurants have been closed since 16 March 2020, in response to the Covid-19 outbreak, and all employees had effectively been unable to work since that date. The company was subsequently placed into administration on 30 March 2020.
The administrators, of FRP Advisory, pursued a strategy to ‘mothball’ the business pending a sale when market appetite is anticipated to improve as the pandemic begins to decline. It was deemed essential to this strategy that employees were retained.
The administrators sought to vary contracts of employment to ‘furlough’ employees , meaning that their contracts of employment continue but they were not required to undertake any work for the company. They were advised that this step was being taken in order to facilitate access to the CJRS and that they were consenting to a reduction in pay to mirror the amount that could be recovered by the administrators under the CJRS to be paid “if and when it received a grant from the Government”. The administrators stated that they were unable to indicate how long that would take, but assured employees that they were committed to making payment to the employees within 7-days of receipt of grant monies.
The vast majority of the employees expressly consented to this variation of their contract of employment.
Mr Justice Snowden held that the agreement reached with each of the furloughed employees constituted valid amendments to their employment contracts. What this meant was that the administrators would only adopt those contracts as varied.
Of greater importance, the point of adoption did not automatically take place 14-days after the administrators’ appointment. Adoption instead took place when the administrators made an application under the CJRS in respect of those employees or where the administrators made payment to the employee under the (varied) contract.
This provides administrators with greater certainty that they are able to control the timing of adoption and are not necessarily faced with a 14-day ‘ticking time bomb’ in which they would otherwise be forced to make difficult decisions in uncertain times.
It must be remembered however that a variation to an employment contract, and the operation of furlough, requires the consent of the employee. What if certain employees fail to respond to the administrators? Carluccio’s confirms that this should be of no specific concern to the administrators as these unvaried contracts would also not be automatically adopted after 14-days (if and unless the administrator makes a CJRS application or payment in respect of that relevant employee).
The case is also interesting in that the administrators took steps to align the varied employment contracts with the amount’s receivable under the CJRS. It is difficult to be absolutely certain, at least whilst the CJRS is still in the process of being finalised and implemented, whether the amounts receivable under the CJRS will be sufficient to discharge all “qualifying liabilities” in respect of those employees (which would be adopted and rank with super-priority status in the administration). If CJRS receipts do discharge all “qualifying liabilities” in full, this would appear to leave no employee ‘funding gap’ for the administrators (or the creditors as a whole) to top up. Arguably that would be at a disadvantage to the employees in question, who are essentially taking a pay cut funded by the Government. However, a holistic view might be that this is consistent with the intention of the CJRS; to preserve continuity of employment in what would otherwise be a redundancy situation.
The Government guidance had made express provision for administrators being able to make claims under the CJRS where there is a possibility of the business continuing as a going concern or through a future sale. However, without any detail on the logistics of this and the impact of it on other important principles of employment and insolvency legislation the practicalities of utilising this Government support was unclear and therefore there remains an element of risk for administrators in accessing the CJRS.
Carluccio’s provides helpful judicial guidance on the availability of the CJRS in this area and can be utilised by restructuring and employment advisors alike to guide companies and administrators in this area whilst the legislation to provide the ultimate clarity is still keenly awaited.