Overview

Insolvency intersected with the UK government’s response to the coronavirus pandemic in an application to the High Court by the administrators of restaurant chain Carluccio’s. Considering the government’s Coronavirus Job Retention Scheme (the “Scheme”), the court held that:

• the administrators of Carluccio’s Limited (the “Company”) can place the Company’s employees on furlough and claim under the Scheme[1];
• the administrators are deemed to have adopted the contracts of employees who consented to be furloughed when they:
  • apply for a Scheme grant in respect of those contracts; or
  • make any payment to those employees under them; and
• those employees whose contracts are adopted have super priority for recovery of wages and salary.

The judgment[2] also details how employees can be taken to have consented to variations of employment contracts under English law.

This is the first published judgment to consider the implications of the Scheme. It will be of particular interest to HR professionals and business managers, as well as insolvency practitioners who are currently grappling with the uncertainty surrounding the Scheme and its application.[3]

The administration of Carluccio’s

Background

The Company, which has more than 70 restaurants and employs more than 2,000 people in the UK, initially closed all of its restaurants on 16 March 2020 to comply with governmental coronavirus guidelines, before entering administration on 30 March 2020. The administrators intended to treat the restaurants as “mothballed” and seek a sale. As part of this process, the administrators wished to retain the Company’s employees. However, given that the Company is unable to pay the employees’ wages, the administrators were only able to retain the employees if they could place them on furlough and seek a grant under the Scheme.

The administrators’ proposal to employees

On 30 March 2020, the administrators wrote a letter to all Company employees (other than senior management) (the “Variation Letter”) offering to continue their employment but to put them on furlough leave, with wages:

• capped at Scheme rates (80% of usual wages, up to £2,500 a month); and
• receipt of such wages (and the amount actually received) by employees being conditional on the administrators securing a grant under the Scheme.

The employees were asked to confirm their agreement to this variation of their employment contracts (and corresponding salary reduction) by email, and were advised that if they did not confirm their acceptance, the administrators might have to consider making them redundant. Notably, the letter did not stipulate that employees who did not respond by the deadline would be deemed to have accepted the proposed variation.

As at the judgment date, of the 1,788 employees who were sent the Variation Letter:

• 95% confirmed their acceptance (the “Consenting Employees”);
• four employees rejected the terms of the Variation Letter; and
• approximately 4% had not responded (the “Non-Responding Employees”).

The administrators’ challenge in using the Scheme

The administrators were concerned about the implementation of the Scheme in an insolvency scenario. Since announcing the Scheme on 20 March 2020, the government has issued and updated non-statutory guidance on how employers might apply (the “Guidance”),[4] but to date no draft legislation or regulations have been published. While it is clear from the Guidance that the Scheme is available to companies in administration, at the date of writing it is less clear how the Scheme is intended to operate consistently with insolvency legislation. In particular, the Guidance does not currently set out where payments to the Company made under the Scheme rank in the statutory priority regime set out in the Insolvency Act 1986 (“IA 1986”).

On 9 April 2020, the administrators sought a declaration from the court of the legal basis upon which they might place the Company’s employees on furlough and pay them wages in priority to other claims against the Company. The urgency arose because, under paragraph 99(5) of Schedule B1 to the IA 1986, administrators have a 14 day “safe period”  to decide whether to “adopt” employment contracts under insolvency law, effectively meaning that the administrators here only had until 13 April 2020 to decide whether to make an application under the Scheme.[5] The hearing was carried out remotely over several days, and the Court heard submissions made on behalf of Unite the Union, who were representing some of the employees concerned.

The court’s decision

Snowden J issued his directions on 13 April 2020 and answered two critical questions for the administrators.

Who had accepted the terms of the Variation Letter?

Snowden J held that the Variation Letter validly amended the employment contracts of the Consenting Employees. He also recognised previous case law which established that it is sometimes possible to infer employee consent by conduct where the only alternative for the employee is the prospect of redundancy. However, he rejected the notion that in this particular case the Non-Responding Employees’ contracts could be varied on the basis of conduct (here, silence and inaction) amounting to implied consent, taking into consideration that:

• the employees were currently unable to work, and would not continue to be paid unless the administrator’s grant application under the Scheme was successful, and so there was no “conduct” (e.g., continued work for reduced pay) from which the court could infer consent;
• whilst the Variation Letter warned employees that failing to respond could lead to redundancy, it did not make clear that a failure to respond would amount to deemed consent to being placed on furlough; by omission it suggested quite the opposite;
• the employees had only had a few days in which to respond to the Variation Letter; some Non-Responding Employees may not have had the opportunity to consider it; and
• although the option of furlough proposed by the variation letter was regarded as advantageous by the vast majority (95%) of the employees, a small number of employees had rejected it in favour of redundancy. Therefore it was not clear-cut that similar considerations would not apply for the Non-Responding Employees – it could not be assumed that they would be more likely than not to accept the proposal.

Whose employment contracts would the administrators be taken to have adopted?

Snowden J held that the administrators would be deemed to have adopted the contracts of the Consenting Employees when they applied for a grant in respect of such contracts under the Scheme or made any payment to the employee under the varied contract. Accordingly, under paragraph 99(5) of Schedule B1 to the IA 1986, the Consenting Employees, once their contracts have so been adopted, would have super-priority over their contractual entitlements to wages and salary ahead of administrators’ fees and expenses, floating charge holders, unsecured creditors and shareholders.

The contracts of employment of those employees who rejected the terms of the Variation Letter would not be adopted by the administrators, and the Court noted that those employees would be dismissed by way of redundancy.

The administrators would not be deemed to have adopted the contracts of the Non-Responding Employees simply by failing to dismiss those employees at the end of the initial 14-day period after their appointment. Instead, the unvaried contracts would continue in existence with the employees unable to attend work, and in the absence of any other action on the part of the administrators, super-priority would not apply to any liabilities in respect of those employees. This allowed the administrators to retain the Non-Responding Employees beyond the initial 14 days, in order to give the employees an opportunity to belatedly consent to the terms of the Variation Letter, such that they could treated in the same way as the Consenting Employees.

Commentary

The judgment will come as welcome relief to senior managers or insolvency practitioners of struggling businesses who are considering furloughing employees to entice potential buyers. However, it is crucial to bear in mind that Snowden J issued his directions in respect of a scheme that currently has no clear legal structure or statutory guidance. In issuing his judgment, Snowden J noted that he considered it “right that, wherever possible, the courts should work constructively together with the insolvency profession to implement the Government’s unprecedented response to the crisis in a similarly innovative manner”.[6] Yet the reality is that the Consenting Employees may not be eligible to access the Scheme once it is brought into law, if the legislation ultimately provides otherwise.

The judgment also addressed an important practical difficulty facing many large employers in the UK who are seeking to furlough employees: how to obtain valid employee consent in light of the difficulties with relying on implied consent in these circumstances. It is clear from the judgment that employee consent by email can amount to valid consent and, therefore, employers should aim to obtain such express consent where possible. The judgment acknowledges the challenges, particularly in the insolvency context, of affording employees a reasonable amount of time to consider proposed contractual variations – making the “silence is consent” approach more challenging.  As a starter, however, it will be helpful if employers can show evidence that the email was received by the employee – and when. The judgment also highlights the importance of clear drafting in employment contract variations. In reaching his decision on the question of implied consent, Snowden J made reference to the fact that, in this case, the administrators had expressly required employees to respond to the Variation Letter to confirm their acceptance, and that those who did not respond within the requested time frame would be considered for redundancy. In order to reduce uncertainty employers would be advised to make it clear in the furlough letter that a failure to respond within a particular time period will be considered deemed acceptance of the varied terms by the employee, although it remains to be seen whether doing so will be a valid alternative.

Finally, it should be noted that, in its updated Guidance[7], which was released on 9 April 2020, the Government confirmed that a new employer who inherits employees through a TUPE transfer will be eligible to place those transferring employees on furlough and claim in respect of the employees’ wages through the Scheme, despite the fact that employment with the transferee employer will have commenced after 28 February 2020 (the cut-off date for eligibility under the Scheme). This clarification will be good news for potential buyers who, in many cases, will inherit employees of an insolvent business under TUPE, but will have to continue to furlough those employees until business can re-open.

Matt Rodin, trainee solicitor in our London office, contributed to the writing of this alert.

[1] The Scheme provides that UK employers can reclaim 80% of a furloughed employee’s wages (excluding fees, commission and bonuses) or £2,500 per month (whichever is the less) for a period of three months from 1 March, 2020. 

[2] In the matter of Re Carluccio’s Ltd [2020] EWHC 886 (Ch) (the “Judgment”) – accessible here.

[3] Further details regarding the Scheme can be found here.

[4] https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

[5] Note that adoption of employment contracts affords employees super priority for their claims for wages and salary.

[6] Paragraph 9 of the judgment.

[7] https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

[View source.]