Can employees be furlough during administration?

What happens when a company goes into administration?The Coronavirus Job Retention Scheme provides financial help to employers so they can still employ staff during the COVID-19 pandemic.

But can employees be furloughed if the company goes into administration? Julie Hunter of Stephensons Solicitors LLP explains

What happens when a company goes into administration?

When a company goes into administration, an administrator is appointed under Schedule B1 of the Insolvency Act 1986. The administrator has powers to manage the company’s affairs, business and property so they can rescue the company as a going concern, unless it is not reasonably practicable to do so.

One of the powers of the administrator is to employ and dismiss employees. This generally requires the administrator to determine whether employees should be dismissed or made redundant within 14 days of the appointment, so time is of the essence.

However, the Coronavirus (COVID-19) pandemic has given rise to an important question; can an administrator furlough employees and take advantage of the Coronavirus Job Retention Scheme?

What is the Coronavirus Job Retention Scheme?

The government announced the Coronavirus Job Retention Scheme in March, with the aim of providing financial assistance to employers so they can retain employees during the coronavirus outbreak. Under the scheme employers place their employees on ‘furlough’, which means putting employees on a temporary leave of absence where they do no work but are still retained on company books to be brought back to work when needed.

Employers who furlough staff can obtain a grant from the government to cover 80 per cent of furloughed employees’ wages, to a maximum of £2,500 per employee per month.

Can companies in administration furlough employees?

The latest version of the Coronavirus Job Retention Scheme published by the government confirms that where a company is in administration, the administrator will be able to access the scheme.

However, it is expected that an administrator would only do so if there is a reasonable likelihood of rehiring the workers, for instance where the business is to be sold and employees are to be transferred to the new owner, or where the administrator is restructuring the company to rescue it as a going concern.

The question of administrators furloughing staff arose in ‘Carluccio’s Ltd (In Administration) [2020] EWHC 886 (Ch.). On 13 April 2020 the High Court handed down its first judgment covering aspects of Coronavirus Job Retention Scheme and whether it applies to administrators. The court confirmed the power of the administrator to furlough staff and consequently seek the benefit of a grant under the scheme.

If your employees have been on ‘furlough’ (temporary leave) during the coronavirus (COVID-19) pandemic, you must use your full normal pay when working out redundancy pay.

Furloughed employees who are then made redundant will receive redundancy pay based on their normal wage, under new laws being brought in as of Thursday 30 July.

How do companies in administration claim under the Coronavirus Job Retention Scheme?

The process for making a claim under the Coronavirus Job Retention Scheme when a company is in administration is the same as for all employers, subject to the additional burden on the administrator to demonstrate that it is reasonably likely the worker will be re-hired once the restructure and/or sale has been completed. A step by step guide is available on GOV.UK.

There are obvious benefits to furloughing employees while in administration. The administrator will receive a grant to cover the costs of the furloughed employees, as opposed to meeting those costs from the assets of the company. The workforce is effectively ‘mothballed’ pending negotiations for the restructure or sale, allowing the company to recommence trading with a workforce in place, when the time arrives.

However, administrators will need to act promptly if they intend to adopt the option of furlough to ensure that they adopt the contracts of employment and then agree a variation to provide for furlough within the 14 days moratorium period provided for in the Insolvency Act.

About the author

Julie Hunter is Associate Solicitor at Stephensons Solicitors LLP.

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