Job losses are expected to rise but how many businesses can afford the cost of redundancies?
As the Coronavirus Job Retention Scheme comes to end and short-term funding boosts run out, we are starting to see the inevitable – restructuring by companies as they look to downsize and align themselves to a post-Covid market.
With unemployment forecast to increase to around 9%, the question, is how many companies will actually be able to pay for redundancy termination payments? Yesterday’s government announcement, coming into force today, requires both statutory notice and statutory redundancy pay to be calculated disregarding any reduction in the amount payable as a result of an employee being furloughed, so costs will be more.
Lindsey Cooper, Restructuring Advisory LLP, RSM said: “No business wants to make redundancies and there are lots of options to explore before any decisions are made. However, the problem many companies could face is that there simply won’t be enough cash available to fund redundancy costs and borrowing for this purpose from mainstream lenders is unlikely to be a viable option.”
Carolyn Brown, employment legal partner, RSM said: “From today government has changed the law at under 24 hours’ notice. Statutory notice and statutory redundancy payments are to be calculated disregarding any reduction in the amount payable as a result of the employee being furloughed. This means that reduced pay rates agreed due to furlough do not apply to these payments. However, it is worth remembering that there is support for process costs where the redundancies have been planned for. We now have clarity from HMRC that CJRS grants can be used for wages during both collective and individual consultation as to redundancies. The CJRS scheme has also been updated so it can support either contractual or statutory notice periods which are served on furlough. It should also be possible for accrued holiday to be taken during a furlough leave period provided of course that furlough was not just for holiday. However, it cannot be used for pay in lieu of notice or to support redundancy termination payments.”
Redundancies termination payments can be expensive especially for a long serving workforce, and businesses could struggle to afford them. What other options are there?
Lindsey Cooper continued: “Businesses can consider the Company Voluntary Arrangement process which has been used extensively in the casual dining and retail sector and allows a business to restructure by effectively compromising its debts whilst enabling the directors to remain in control of the company. These debts can include the costs of redundancy which will be paid by the government. In addition, the government recently introduced new insolvency and corporate governance legislation which may assist in some circumstances. This includes a new Corporate Restructuring Plan (CRP), which has recently been used by Virgin.
“There is also the government Redundancy Payments Service (RPS) Loan for Financial Assistance (FA), in place for many years, but seldom used as cumbersome and slow. There is a strong argument for government to revisit the FA scheme for businesses which but for the costs of redundancy would be viable, as in the absence of a scheme to fund redundancy costs, then often the only alternative for companies is a formal insolvency where by default the government will pick up the redundancy costs in any event and in addition HMRC is likely to be a creditor for unpaid VAT, PAYE and NI.”
What options are available if a company cannot afford redundancy costs:
Redundancy Payments Service (RPS)
Companies can apply for financial support in the way of a loan via the RPS; however, this scheme is cumbersome in terms of information to be supplied and time consuming and will take upwards of 6 weeks for a decision. Often the only alternative is insolvency, leading HMRC to act as creditor for unpaid VAT, tax and National Insurance in addition to covering the redundancy costs.
Company Voluntary Process (CVA)
Businesses considering insolvency may opt for a Company Voluntary Process (CVA). In this case, creditor claims are compromised and, subject to the creditors’ and shareholders’ approval, the company continues to trade under the control of its directors, however, the rights of secured creditors cannot be affected without their consent.
Many in service sectors such as retail and casual dining are familiar with CVA as a means of dealing with landlords and leases. CVAs can also be a practical way to handle redundancy liabilities, as claims can be bound into the CVA, subject to 75% of creditors voting in favour of it. Whilst CVA’s can work very well, a CVA is a formal insolvency process, companies will often have to trade for up to 5 years within it. This can impact on working capital, credit rating, management and employee incentivisation. It can sometimes also prevent companies from winning new work, particularly within the public sector.
Corporate Restructuring Plan (CRP)
The government has recently enacted the Corporate Governance and Insolvency Act 2020 which includes a new Corporate Restructuring Plan (CRP). This is not an insolvency process; it is similar to the existing Companies Act Scheme of Arrangement. Under the new CRP, while 75% of creditors must vote in favour of it, the court has the power to sanction and bind creditors to it, even if they didn’t vote for it. Whilst the CRP won’t directly deal with redundancy claims of employees, by compromising its debts, it can enable the company to rebase its cost structure and therefore deal with the restructure of its employee base. This could be an attractive option for larger companies as it is not an insolvency process and the directors remain in control throughout.
This is where the business and assets are sold to a new entity, leaving the liabilities behind. However, in many cases, where there is a successful business and asset sale, the employees will transfer to this new entity under the Transfer of Undertakings Protection of Employment Regulations, or TUPE which involves their continuity of service being preserved. This can often put potential buyers off or impact on purchase prices, as they don’t want to risk incurring redundancy costs for these employees further down the line in this uncertain post-covid world. The government will not meet redundancy costs where TUPE applies.
Here the business ceases and employee are made redundant. The Liquidator will look to realise the assets of the company and the government will pay the costs of redundancy (and other employment claims) up to the statutory limits.