Last week the High Court heard an application from the administrators of the restaurant chain Carluccios, who were seeking a ruling on whether they could place their employees on furlough leave and pay them wages in priority to other creditors.
When a company enters administration, an administrator is appointed. The administrator’s task it to rescue the business as a going concern or to realise its assets. Once an administrator is appointed, existing employment contracts continue, although they are not formally “adopted” by the administrator during the first 14 days of an administration. This moratorium is designed to allow administrators to undertake a review of the business and determine appropriate staffing levels going forward. Once the 14 day period has expired, all employment contracts will be adopted and the liabilities under those contracts (for example wages, salary, holiday pay, sick pay and contributions to occupational pension schemes) take priority over other claims against the company, including an administrator’s own fees.
Carluccio’s closed all of its restaurants on 16th March 2020 in line with government guidance to combat Covid-19. The restaurant chain subsequently went in to administration on 30th March 2020. The administrators wanted to pursue a sale of the business and to “mothball” it whilst trying to find a buyer. As part of this strategy, they wanted to retain the workforce and avoid redundancies where possible. In view of this, the administrators offered to put a large number of the employees on furlough leave in accordance with the government’s coronavirus job retention scheme (“CJRS”).
The administrators wrote to the employees setting out details of the furlough scheme and asking them to respond by a stated deadline. The letter made it clear that if they did not respond the administrators would have to review the employee’s position and may have to consider making the role redundant. The majority of employees agreed, some objected and a small group did not respond.
The administrators were satisfied, based on the guidance issued by HMRC at the time that they could put employees on furlough leave. They were concerned, however, about how the scheme would interact with the insolvency legislation, on the basis the money under the CJRS would have to be paid directly to the employees and could not be spent on other things. This was an issue for the administrators given the strict order in which debts must be satisfied in an insolvency situation.
The administrators applied to the High Court for a ruling on how they could lawfully put the employees on furlough leave.
High Court decision
Variation of contract
The first issue the court dealt with was the administrators’ attempts to vary the employees’ contracts to put them on furlough leave. They were satisfied that the contracts for those employees who had expressly agreed to be furloughed had been validly varied and the contracts for those who had expressly objected had not been varied and they would be made redundant. For those who had not responded, the court had to determine whether it could be implied from their failure to respond that they had accepted the variation to their contracts of employment. The court did not accept that their contracts had been varied. The issue of potential implied acceptance has now been resolved, however, following the publication of the Treasury Direction on 15th April 2020. The Direction stipulates that an employee must agree in writing to cease all work in relation to their employment in order to be eligible for furlough leave.
Adoption of contracts of employment
The court went on to address the issue of the adoption of the employees’ contracts of employment. In terms of the employees who had agreed to be furloughed, the court concluded that any application to the CJRS after the 14 day moratorium period would be an act adopting their contract. This means those individuals would get priority under the insolvency legislation, although they had agreed to their payment being made using the grant monies from HMRC as and when received under the CJRS.
For those who objected, their contracts of employment would not be adopted and their employment would be terminated on redundancy grounds.
As regards the employees who failed to respond by the end of the 14 day moratorium, the administrators would not be taken to have adopted the contracts unless they were required to attend work or the administrator did something else to adopt the contracts.
This is a useful decision for administrators and provides some much needed clarification on the issue of adoption of employment contracts. It is clear that contracts will not be deemed to have been adopted until an employee has agreed to vary their contract and the administrator has applied to the CJRS for the grant, even if that happens after the 14 day moratorium. Where administrators are looking to secure the sale of a business in administration the option of furloughing staff to mothball the business is likely to be attractive as the costs would be met by the CJRS.