Employment Law Cases

Carluccio’s Ltd, Re Insolvency Act 1986

Administrators can place a company’s employees on furlough and claim for their wages under the Job Retention Scheme.

Background

All branches of Carluccio’s closed on 16 March 2020 and the company went into administration on 30 March. Carluccio’s administrators hoped to retain the company's employees as part of the business for sale by taking advantage of the Job Retention Scheme (JRS). They proposed placing many of the employees on furlough. This was to be effected via a variation of those employees’ contracts of employment: the employees would only be paid at the JRS rate (i.e. 80% of their wages capped at £2,500), payment would only be made if the administrators received a JRS grant, and any payment would be limited to that grant received. The letter containing the variation requested a response via email by 3 April and warned that, absent such a response, the administrators would be forced to consider redundancies. Most of the employees accepted this variation, a few indicated they’d prefer to be made redundant and a significant minority did not respond to the variation letter.

The administrators brought the High Court action because they were unclear how the JRS interacted with insolvency law. They sought a declaration from the court of the legal basis on which they might furlough the staff – and pay them wages in priority to other claims against the company. The urgency of the case was because the administrators had to make their decisions by 13 April – the last day of the 14-day window during which an administrator’s actions would not amount to the adoption of any employment contract for the purposes of insolvency law.

High Court decision

The High Court held that the variation letter had validly amended the contracts of those who had agreed to it – so that they are entitled to wages equal to the sums paid to the company under the JRS. When the administrators applied for a JRS grant for such a consenting employee, the contracts of those employees will be ‘adopted’ by the administrators and those employees have super-priority over and above other creditors of the company (such as administrators’ fees and expenses and payments due to unsecured creditors).

This was despite the fact that the wording in the furlough letter said that the contracts had specifically not been adopted by the furlough arrangement. The court decided that this wording had been included by mistake.

For those employees who had not agreed to be furloughed, their contracts had not been adopted and so their employment ended, and they would be entitled to claim redundancy.

As regards the position of those employees who didn’t respond to the requested variation, the High Court rejected an argument that their contracts had also been amended via implied acceptance. There hadn’t been long since the letter was sent, some of them may not actually have received the letter, and there had been no positive acts (on the part of those employees) upon which to base such an inference.

The High Court urged a constructive approach to managing business and employment issues during the coronavirus outbreak, with a focus on working together to preserve jobs and livelihoods: 'The COVID-19 pandemic is a critical situation which carries serious risks to the economy and jobs in addition to the obvious dangers to health. I think that it is 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’.

Link to judgment: https://www.bailii.org/ew/cases/EWHC/Ch/2020/886.html

Comment

Administration occurs when there is hope that the business can be sold either in whole or on part and this case will be very helpful for administrators who might otherwise have been concerned about how the furloughing scheme worked in practice. The HMRC guidance does not change any existing laws and so the scheme has to be viewed through the lens of existing employment law and legislation, with no-one wanting to be the first test case. This decision may well preserve significant jobs and it was no doubt helpful that Unite the Union asked to be heard as part of the case, to try and ensure that this was the outcome.