Furlough during administration

As the coronavirus continues to impact businesses across the UK, legal developments are occurring on a regular basis. The latest development concerns a High Court ruling regarding employees being placed on furlough while their employer is in administration.

The case focused on the employees of the restaurant chain Carluccio’s. The chain closed over 70 branches on 16 March 2020 in accordance with the Government guidance relating to business closures in light of the outbreak of coronavirus. Two weeks later, on 30 March, Carluccio’s went into administration.

The administrators wished to sell the company retaining the employees under the newly enforced Coronavirus Job Retention Scheme which covers 80% of employee wages (up to £2,500 per month) for employees who cannot work during the pandemic.  The administrators were keen to make the most of the scheme and offered to place a large number of the restaurant’s employees on furlough. The administrators proposed to do this by way of a variation to the employee contracts stating they would only be paid the rates under the scheme and that they will only be paid in the event that the administrators receive a grant in respect of each employee under the scheme rules. This variation to contract was sent to the employees as a letter. The vast majority of the employees agreed to these terms. Others opted for retirement or redundancy and a small number did not respond in time.

The administrators were concerned about the vague detail in the HMRC guidance. The guidance is clear that the scheme is open to companies in administration (such as Carluccio’s) however under the scheme monies must be paid to the employer in the first instance (rather than directly to employees). This means that they constitute assets of the administration and so must be used in order of priority as stated in insolvency legislation.

In order to avoid any complications with this issue the administrators sought a High Court ruling that would establish they could pay the employees ahead of other claims against the restaurant.  Due to the current lockdown implications in place, this case was heard remotely and promptly due to approaching deadlines.

The verdict of the High Court was that the variation letter was a valid amendment to the contracts of the employees who had accepted the change to the terms presented to them. These employees were therefore entitled to receive the wages under the government job retention scheme once the money was received by the administrators. However, the judge went on to state that the varied contract would constitute ‘adoption’ under insolvency law meaning that the employees would have priority to receive their wages over other expenses, fees and creditors – including ahead of the administrator’s own expenses and fees.

On first reading this decision may seem like a good outcome for the employees of businesses in administration, as it allows them access to the government scheme, and for the administrators to release such money to them on receipt of funds from the government.  However, some commentary suggests that this may actually lead to administrators choosing not to furlough employees, as they do not wish to ‘adopt’ the contract and run the risk of sums being due to the employees, over and above the money that can be received from the government (e.g. holiday pay liabilities), taking priority over their own fees.

We wait to see the impact in practice of the ruling, but it provides a timely and welcome insight into how businesses in administration can continue to pay employees under the job retention scheme as a priority.