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First court case on furloughing under the Coronavirus Job Retention Scheme

15/04/2020

Employment, Legal Updates

The Government announced the Coronavirus Job Retention Scheme (“the Scheme”) on 20 March 2020, as part of the range of measures put in place to support businesses during the COVID-19 pandemic. The aim of the Scheme is to avoid redundancies by employers whose operations have been severely affected by coronavirus, by enabling employers to ‘furlough’ workers and recover up to 80% of their wages (up to £2,500 per month) from the government.

Whilst the Guidance to the Scheme confirms that it is open to companies in administration, no precise detail was provided as to how it is intended to operate in conjunction with insolvency legislation. This has resulted in the first case relating to the Scheme already having been heard in the High Court.

The case

In accordance with the Government’s strategy for combatting the outbreak, Carluccio’s closed all of its branches on 16 March 2020, following which the company went into administration on 30 March.

The administrators wished to retain as many of the company’s 2,000 employees under the Scheme as possible, whilst attempting to sell the business. The administrators therefore offered to furlough a large number of employees by way of a variation letter, which confirmed that employees would only be paid at the Scheme rates, provided that the administrators received a grant under the Scheme in respect of that employee, and limiting any payment to the employee to the sums received.

The vast majority of the employees accepted, with a few indicating that they would prefer to be made redundant and retire. A relatively small but significant number failed to respond.

The administrators were concerned that any money paid to the company under the Scheme would constitute assets of the administration and so must be disposed of in the order of priorities set out in insolvency legislation. An urgent High Court judgment was therefore sought to confirm the legal basis upon which the employees could be furloughed and paid wages in priority to other claims against the company. The reason for the urgency was the fact that the administrators had to make decisions by 13 April 2020, which was the last day of the 14-day window during which their actions would not amount to the ‘adoption’ of any contracts of employment for the purposes of insolvency law.

The outcome

The High Court confirmed that:

  1. The administrators are able to place the company’s employees on furlough;
  2. The administrators had validly amended the contracts of employment so as to put in place a furlough agreement for those employees who had agreed;
  3. The contracts of those who had not yet responded were not amended by way of implied acceptance, as only a matter of days had passed since the letter was sent and therefore no conduct indicating such implicit acceptance could be demonstrated;
  4. The administrators will be taken to have ‘adopted’ the contracts of furloughed employees for the purposes of insolvency law when they eventually apply for funding under the Scheme, but not those of the employees who did not agree to being furloughed.

What does this mean?

  1. Administrators are able to claim for furloughed employees’ wages under the Scheme;
  2. Employers should seek employees’ express agreement to being furloughed at a reduced rate of pay in order to avoid potential claims for breach of contract and/or unlawful deductions from wages;
  3. There may be scope to argue implied acceptance of furloughing by conduct, but this will be extremely fact specific (and in any event, employees who belatedly agree to being furloughed would essentially be put in the same position as consenting employees);
  4. The adoption of the contracts of furloughed employees by administrators means that monies paid under the Scheme can be paid to those employees in priority over the administrators’ fees and expenses and the distribution of assets to floating charge and unsecured creditors. Employees who do not agree to being furloughed would have no such super-priority.

Carla Gowing is a Norwich Employment Lawyer. Contact her at carlagowing@hatchbrenner.co.uk

The High Court allows administrators to furlough employees

The High Court allows administrators to furlough employees

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