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Job Retention Scheme- Important Updates for Insolvency Practitioners

On Saturday 4 April, HMRC issued further guidance on the Job Retention Scheme (“JRS”). Given the unprecedented economic backdrop against which the JRS is being introduced, the exact workings of it are still being developed and clarified, with each announcement in turn giving rise to further questions for employers and employees.

We have produced a note that analyses the JRS based on the various announcements made to date, which includes a series of FAQs for employers.

One of the key strategic points for IPs when either considering to take an appointment over a trading business, or assessing their current staffing needs in an existing administration, will be whether and to what extent they can take advantage of the JRS. IPs should note the following.

Reasonable likelihood of retaining the employees

The extent of the specific guidance for administrators is the following:

“Where a company is being taken under the management of an administrator, the administrator will be able to access the Job Retention Scheme. However, we would 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 (our emphasis).

This is the first time that administrators have been given any guidance on the JRS, but this makes it clear that administrators should not be using the scheme in relation to employees that they would have ordinarily made redundant.

There is no guidance on what “a reasonable likelihood” means i.e. whether it means more probable than not, or just more than a remote possibility.

There is also no clarity on how long the employees are required to be rehired for. For example, if an administrator furloughs staff in a retail business on the basis that their services aren’t required for the next 3 weeks, but expects them to be required for a month in due course to manage the shut-down of the business before then being made redundant, is that sufficient? If not, how long be sufficient?

Administrators should ensure that they fully document their rationale for furloughing employees and for believing that it is reasonably likely that the workers will be rehired. The rationale should be regularly reviewed, with the outcome of each review being documented.

Any furlough must be for a minimum period of 3 weeks. It might therefore be prudent, given the lack of clarity around what a “reasonable likelihood” is for administrators to consider furloughing any employees for periods of 3 weeks at a time. That way, the matter can be kept under regular review.

It will also be necessary for administrators to review any pre-appointment decisions taken by the directors to furlough employees, as the administrators will need to form their own view on whether it remains appropriate for those employees to be furloughed rather than made redundant.

How to Furlough

The guidance states that employers should write to their employees confirming that they have been furloughed and keep a record of that communication.

There is, currently, no suggestion that employees need to have consented to being furloughed in order for the employer to qualify for the JRS grants. However, best practice would be to obtain employee consent. If employees are furloughed without consent, then the administrator risks claims from employees claiming that the deduction of 20% of their wages is unlawful, and that the 20% should be paid as an expense of the administration.

Whilst the position on adoption of the employment contracts is a grey area, the administrator would have a reasonable argument to say that any furloughing of employees during the first 14 days of the administration would not constitute an adoption, and therefore that the 20% shortfall in wages should not be paid as an expense, if found to be an unlawful deduction of wages.

Claw-back/Auditing

The nature of the JRS is that the grant reimburses the employer for wages paid to furloughed employees. For administrators this means that they will have to ensure that the business has sufficient cash to meet 80% of any furloughed employees wages, because until the wages are paid, they cannot claim the grant. In some cases, the only way to achieve this will be for the lender to extend the company’s facility to bridge the short-term cash gap.

Administrators should take advice to ensure as far as possible that their applications under the JRS are properly made out. If not, they risk a rejection under the JRS, and will have continued to pay wages to employees that could have been avoided by way of redundancy.

The guidance states that HMRC will retain the right to “audit all aspects of your claim” and “will continue to monitor businesses after the scheme has closed”. There is an obligation on employers to retain any furlough letters for a period of 5 years, which suggests that HMRC will reserve the right to audit any claim up to five years after it has been made.

Again, this reinforces the need for administrators to take advice in relation to the appropriateness of any decision to furlough, and to document the rationale behind that decision in detail. This will assist with any audit by HMRC in due course, particularly where the “reasonable likelihood” of re-hiring has not transpired, meaning that the administrators have had to (despite their good faith belief at the time), make furloughed employees redundant after receiving the JRS grant.

Whilst we would expect that HMRC would provide some latitude to administrators, given that they are having to take key strategic decisions at a time when the JRS scheme has not been fully documented, there will be a risk that if an administrator is found to have improperly used the JRS scheme, they will be liable to repay the grant. If it was the administrators (as opposed to the directors) that made the decision to furlough, then there would be a material risk that the clawback claim would be an expense of the administration.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Jon Chesman, Squire Patton Boggs, Restructuring Lawyer, UK,
Associate

Jon Chesman is an associate in the Restructuring & Insolvency Practice Group based in our Leeds office. He provides contentious and non-contentious insolvency advice to insolvency practitioners, banks, companies and creditors. 

In particular, Jon has gained extensive contentious insolvency experience including the pursuit of Insolvency Act claims, misfeasance and asset tracing.

Jon is involved with a number of educational programs in Leeds, including mentoring A-level and undergraduate students as well as running employability workshops as part of the...

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