The Government introduced the Coronavirus Job Retention Scheme on 20 March 2020 (the “Scheme”). The Scheme is open to all UK employers which operate a PAYE scheme and which have a UK bank account. The Scheme is intending to operate for at least three months starting from 1 March 2020. Under this Scheme, employers can claim for up to 80% of an employees’ wage costs up to a £2,500 cap per month. The Government’s guidance is that the Scheme is open to all UK employers that had created and started a PAYE payroll scheme on or before 28 February 2020 and are enrolled for PAYE online. Any employer with a UK payroll can apply, including businesses, charities, recruitment agencies and public authorities. The guidance states that employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this Scheme. The Government provided additional guidance in respect of this Scheme on 4 April 2020. However, how TUPE interacts with furlough still remains unclear. This article aims to set out the issues for Insolvency Practitioners to consider as a result of the new Scheme and how it interacts with pre-pack sale administrations and the employees of a company in administration.
All employees who are employed as at 28 February 2020 are eligible. You can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until 1 March 2020 if applicable. The Government confirmed in its updated guidance that salaried company directors are eligible to be furloughed.
Employees that have been furloughed have the same rights as they did previously. That includes Statutory Sick Pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and to redundancy payments.
The updated guidance now makes a provision for administrators of a company and confirms that the administrator will be able to access the Scheme. However, the Government confirms that they expect an administrator would only access the Scheme 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. This appears to only be applicable to employees on the payroll as at 28 February 2020.
The cut-off date of 28 February 2020 is problematic for companies that 1) have furloughed its staff; 2) have been placed into administration; and 3) are subject to a pre-pack sale to a purchaser.
If an employee TUPE transfers to a new company after 28 February 2020 (but has continuity of service before then as they were under the employment of the seller), will the new employer be able to claim 80% of the salary under the Scheme? Or, does the cut-off date mean that furloughed employees cannot continue to be furloughed once they have transferred to the purchaser in the sale?
The Government’s guidance on this point is unclear. Insolvency Practitioners should therefore tread with caution.
a) Employees already on furlough who have been transferred after 28 February 2020
Where usually, TUPE operates to transfer the contracts of the employees under the same terms of the contracts with the selling company, one argument is that the employees will not be on the purchaser’s payroll as at 28 February 2020 and therefore the purchaser is not eligible to take part in the Scheme and it will not be able to furlough the transferred employees. This is because the employment with the new employer commences from the date of the transfer i.e. it will be post 28 February 2020. It appears that the Government has not yet given consideration to this.
However an alternative view is that the selling company has contractually agreed the furlough terms with each employee, and TUPE should operate to transfer those same terms across to the purchaser. It seems logical that since furlough is a contractual variation between the employee and the employer that, employees who are furloughed as at the date of the transfer should be entitled to remain in furlough post the transfer on the basis the contract terms follows through pursuant to TUPE Regulation 4 paragraph 2 (a) “all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee”. It could be argued that the transferred employees should be treated as if they were on the new employer's payroll on 28 February 2020 and therefore the employer is eligible for the Government Scheme and can obtain the funding to pay wages.
However, one view is that the contractual relationship is between the existing employer and the employee and not to third parties, whereas furlough and the Government Scheme is between the employer and HMRC. TUPE may transfer the continuity of the employment between the employer and the employee to the new employer however, the employee will have to be enrolled on a new PAYE scheme with the new company in order to be eligible and if this sale occurs after 28 February 2020, then this is after the relevant date. Furthermore, the payroll date is specific to that employer and another employer would not be entitled to that information. In light of this, it appears that furlough cannot be continued, and the new company will be faced with a workforce on 100% salary which the new company will have to pay.
b) Employees who have been transferred after 28 February 2020 – can they be placed on furlough after 28 February 2020
For employees placed into furlough for the first time following a transfer that occurred after 28 February, it does seem on current guidance that there is a right to participate in the Scheme. However, again there is an argument to say that TUPE preserves the employment of an employee and the Government’s language in the Scheme is that it applies to employees who were “hired” as at 28 February 2020. It might be arguable therefore, that following the transfer, that the hire date of the employee was on the date that the employee was “hired” under their original contracts. Though again, this is an area which requires further guidance form the Government and applying the same analysis as above, does not appear that the Scheme covers.
As it currently stands, it appears that a purchasing company has no entitlement to continue the furlough of the company’s employees if the transfer is after 28 February 2020 and enter into the Scheme.
The Government is expected to provide further guidance and/or legislation to confirm how TUPE interacts with the Scheme and to provide clarity on whether employees who TUPE transfer to a new employer after 28 February 2020 are eligible for the Scheme. Until this further guidance is produced, we cannot assume that such transferred employees are eligible to be furloughed and that the furlough would continue after the transfer. In order to understand the Government’s official stance, we would need to wait for this guidance.
One issue that Insolvency Practitioners will also need to consider in a pre-pack sale is that of accrued but untaken holiday of the seller’s employees. As set out above, TUPE will transfer the terms of a contract to the new employer including holiday provisions. Employees can accrue holidays whilst they are on furlough. Therefore, an Insolvency Practitioner might find that they have significant liabilities to pay to employees with holiday pay that has accrued during their period of furlough. The larger the workforce, the greater these sums will be.
Currently, the Government’s guidance is not clear as to how the Scheme engages with annual leave and holiday pay. It is also unclear whether holiday pay when on furlough is based on the 80% reduced salary or 100% salary. You might therefore wish to consider whether you should be requiring your employees to take their annual leave whilst on furlough in order to deplete some outstanding annual leave. If you are going to do this, you must ensure that you give the requisite notice period which is to give twice the number of days’ notice that they want the employee to take as holiday. So for example, if you require an employee to take one week's annual leave, then you will need to give the employee two weeks' notice.
On the basis that further guidance is needed from the Government you may first wish to consider the following before negotiating a pre-pack sale:
We will continue to provide you with any further updates as and when clearer guidance becomes available from the Government and/or HMRC.
On the eve of the Easter weekend, 9 April 2020, the Government published updated guidance in relation to the TUPE question. The updated guidance confirms that employees that have been transferred under TUPE will be eligible for the Coronavirus Job Retention Scheme. Read the full update here.
If you require any further assistance with this matter or wish to discuss any of the issues raised in the article or other insolvency matters, please do not hesitate to contact our Insolvency partners, who would be happy to discuss your queries.
Katie Summers ([javascript protected email address] / 01604 258018)
Deborah Nigh ([javascript protected email address] / 01604 258033)
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