The High Court has confirmed that employees of a company in administration can be furloughed and provided some important guidance.
The administrators of Carluccio’s offered its employees the opportunity to be furloughed, so retaining their jobs whilst the company was in administration, with their salaries being reduced to the maximum amount payable under the Coronavirus Job Retention Scheme. The offers were made by letters sent soon after the administrators were appointed.
An application to court was made by the administrators for directions. This was with the objective of protecting payments received under the Scheme for those employees who had agreed to be furloughed. Otherwise, there was the potential for such payments to fall within Carluccio’s assets for distribution amongst all of its creditors.
The High Court confirmed that:
- Upon acceptance by the employee, the administrators’ offer to place employees into the Scheme, varied that employee’s employment contract with Carluccio’s.
- By the administrators then making an application under the Scheme, the administrators adopted the employees new varied employment contract. This meant that the payments received under the Scheme would have priority over the expenses of the administration, some secured creditors and unsecured creditors.
- Importantly for the administrators, such action did not render them personally liable for the wages.
Variation of Employment Contracts
As well as providing important guidance for administrators, the case also addressed a key employment law issue on the variation of employment contracts when seeking to furlough employees.
In the Carluccio’s case, as will be the case with many businesses, several employees were offered the option of being furloughed and a mixture of responses were received. Some employees expressly confirmed their acceptance of the offer to vary their employment contract to place them on furlough. Others expressly objected and some remained silent.
The position on those who expressly accepted or rejected the offer was clear but what of those who did not respond? In the circumstances, it was held that their silence could not be construed as acceptance of the offer to amend their employment contract by their conduct.
However, the Direction from HM Treasury issued on 15 April 2020, which was after the Carluccio’s judgment, now clarifies that an employee’s agreement to furlough must be obtained in writing in any event. If it is not an employer will not be able to obtain a grant for the employee’s wages under the Scheme.
Posted on April 20, 2020