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Volume X, Number 194

July 10, 2020

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July 09, 2020

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Knowing your Focaccia from your Furlough – the UK Court serves up some clarification about furloughing employees where the company is in administration

The High Court has delivered the first decision on the Coronavirus Job Retention Scheme (the “Scheme”), in the context of the Carluccio’s administration.

As we have previously discussed (HERE), despite further clarification from HMRC over recent days, there remain some unanswered questions regarding the detailed operation of the Scheme, given that the Scheme’s exact legal framework has not been published.

The administrators of Carluccio’s (the “Administrators”) therefore sought declarations and directions from the Court in relation to their proposed method of furloughing, to ensure that they were not acting in an inappropriate manner or opening themselves up to unnecessary or unintended risk.

Whilst the decision is largely fact specific the decision does provide some clarity on the Scheme in the context of an insolvency. What does the decision tell us? It is helpful to know the facts before answering some of the practical questions it deals with.

The Facts

The Administrators were appointed on 30 March 2020. Their strategy was to mothball the business during the COVID-19 restrictions, whilst simultaneously seeking a sale of the business. The intention was therefore to furlough the vast majority of the employees in order to reduce employment costs whilst retaining its workforce pending any sale or recommencement of trading.

On the day of their appointment, the Administrators took the “opt in” approach to furloughing and wrote to around 1,800 of the company’s 2,000 workforce and informed them of the proposal to furlough them (the ‘furlough letter’). They asked employees to respond to confirm their agreement to this. In the absence of an affirmative response within three days, the employees were warned that their roles would be at risk of redundancy.

The furlough letter asked the employees to confirm their agreement to amending the terms of their contract via email. Over 95% of the relevant employees responded to expressly consent to the amendments (“Consenting Employees”). Four rejected them (Objecting Employees”), with the remaining (80 or so) failing to respond (“Non-Responding Employees”).

The judgment gives some clarity on the following questions:

  1. When does an administrator adopt a furloughed employees contract?

  2. How important is the furlough letter?

  3. How are grant monies treated in an administration?

  4. Are administrators under a duty to apply under the scheme?

  5. What constitutes ‘rehiring’?

  6. How does TUPE work alongside a furloughed employee’s contract?

When does an administrator adopt a furloughed employees contract?

This case confirms that:

  1. Furloughing employees within the first 14 days of appointment does not mean that the administrators adopt the employment contract; and
  2. A contract of employment will only be adopted when the administrators take some positive action that can only be consistent with a wish to adopt the contract (which in this case the Judge held was making an application to the Scheme, or making any payment to the Consenting Employees in accordance with the varied terms).

In relation to Non-Responding Employees, the Judge said that if they later accepted the terms of the proposed variation, the Administrators would be in the same position as the Consenting Employees i.e. the contracts would be adopted on their varied terms upon the Administrators making an application under the Scheme or making any payments to them in accordance with the varied terms.

What about the Non-Responding Employees who failed to respond at all?

In relation to these the judge held that the Administrators would not be deemed to have adopted the original employment contracts as a result of failing to dismiss those employees within the first 14 days.

How should payment of the grant monies be treated in an administration?

The judgment makes it clear that sums due to furloughed employees from grants received under the Scheme can be paid under paragraph 99 of Schedule B1 of the Insolvency Act 1986 on a super-priority basis i.e. ahead of administrator’s fees and other expenses.

Whilst the grant monies are paid to the company, the employees will be paid ahead of other creditors under paragraph 99 and the grant monies are not available as general funds in the administration.

The importance of the furlough letter

The decision highlights the importance of clearly detailing any proposed variation of the employment terms in the variation letter. In this case the letter confirmed (amongst other things): that the Administrators intended to vary the employees’ contractual terms, so tha

(i) the employees would not be required to attend work during the furlough period;

(ii) would only receive the lesser of 80% of their salary or £2,500 per month (being the cap under the Scheme); and

(iii) that the sum would only be paid once the company had received the grant under the Scheme.

As such, given that the employment contract had been varied on those terms (at least for those employees consenting to the variation) that it was permissible for the administrators to only pay the furlough salaries once the company received the grant under the Scheme

If employers are wishing to do this, they should ensure that their furlough letters explicitly explain when payment will be made.

Absent that amendment to the contract, we consider that employees could argue that they need to be paid their furloughed salary on their usual payment date (i.e. regardless of whether or not the employer had received the grant under the Scheme).

The furlough letter also said ‘the Administrators act as agents of the Company and will not be adopting, and will not at any future date adopt, your contract of employment’. This wording (akin to a Specialised Moulding letter) caused the judge some concern.

Whilst on balance this did not impact on his decision regarding adoption, it would be wise to avoid such wording given that since the case of Paramount Holding, Courts have held that such wording is of no effect when sought to be imposed unilaterally on an employee.

The wording should therefore not be included in such letters, given that it could prevent the contracts being adopted and the employees being given super-priority (which is what the Administrators and the employees were expressly wanting to achieve).

What will employees who do not respond to a proposal that they be furloughed be taken to have agreed to?

The case does not tread any new ground in this area – the existing law remains as it was.

Where employers have offered their employees the option to be furloughed and have “sweetened” that with the offer of some inducement, for example a top-up of salary to some extent, it may be inferred that employees who accept the inducement have also agreed to be furloughed.

The same is true even without such consideration when becoming furloughed requires a positive act on the part of an employee and the employee has done that act – e.g. ceasing to work.

The difficulty for the Administrators was that there was no inducement and many of the employees had not been working since Carluccio’s restaurants closed on 16 March.  As: (i) the only consequence of failing to respond to the offer of furlough was the prospect of redundancy (there was no mention in the letter of the employees’ agreement being inferred); (ii) it was only a matter of days since the offer of furlough was made; and (iii) there was no means of proving that the furlough letters had even been received by the individual employees, there was no conduct on their part from which the judge could infer their agreement to be furloughed.

The “opt-in” approach is clearly the safest course but, when faced with commercial and time pressures, many employers have chosen to request an “opt-out” instead (in other words, where you are taken to have agreed unless you state otherwise).  What is clear from this case is that consent from the 80 Non-Responding Employees would have been more readily inferred had the “opt-out” approach been taken (provided, of course, that the furlough letter was clear that this would be the consequence of silence).  This will be particularly so where, in response to a furlough letter, employees cease to work.  If it is possible to email the furlough letters with a “read receipt” or gather other evidence that they have been received and read by employees, then all the better.

There is a separate question, however, as to whether the “opt-out” approach (and inferred consent) will be sufficient for the employer to successfully reclaim employment costs under the Scheme.  In this case, the Court noted that the “opt-in” approach taken by the Administrators reflects the Scheme guidance that employers should “make any changes to the employment contract by agreement”.  There is nothing in the guidance to suggest that this should be taken to mean that only express agreement to be furloughed will suffice (and the Judge did not go so far as to say that).  However, since this judgment, the Treasury has issued a Direction stating that an employee will only have been effectively furloughed if the employer and employee have “agreed in writing that the employee will cease all work”.  This does appear to suggest that express agreement is necessary. It seems unlikely to us that the Government would now insist upon express agreement when many employers have already, in reliance on the guidance, acted on the basis of inferred consent. This is certainly an area in which some clarification from the Government would be welcome. Unless and until that clarification is received, there will be risk involved in relying on inferred consent

Are administrators’ obligated to make an application under the Scheme?

The answer remains unclear because the Judge did not have to determine the point given that the Administrators’ had confirmed that it was their intention to make an applicationbut it is worth noting the Judge’s comments that any such obligation (implied or otherwise) will be subject to the legal framework of the Scheme and the Administrators’ overriding obligations regarding achieving the purposes of the administration.

In respect to any Non-Responding Employees, the Administrators were under no obligation to make an application. The Judge said that the Administrators should not be put in a position where they may face an argument that they have adopted the unvaried contracts by doing so.

What constitutes “re-hiring”?

The Scheme guidance states that administrators should only use the Scheme where they believe that there is a reasonable likelihood that the employees will be “re-hired”.

The Scheme guidance is unhelpful, because it gives no indication of what ‘reasonable likelihood’ is, but this case gives some insight into what may constitute this.

In this case, the Administrators had received several expressions of interest in respect of some or all of the company’s business and had concluded that there was therefore a reasonable likelihood of achieving a sale of the business and that the employees would transfer to a buyer as part of that process.

In light of this, the judge stated that this is what he understood “re-hired” to mean.

However, it remains unclear what else, if anything, could constitute being “re-hired” e.g. returning to work for a period of weeks to assist in the shut-down of the business in the event that no buyer is found?

Would employees whose contracts have been varied in order to furlough them, transfer to a buyer on their varied terms?

Yes, if the business is sold by means of a share sale then the employees will transfer subject to their amended employment contracts.  The same would be true on a business sale (subject to the usual rules concerning transfer-related changes to terms and conditions being potentially void on a TUPE transfer).

To claim under the Scheme, employers need to have varied their employees’ employment contracts in order to furlough them.  The variations (typically set out in a side letter to the employment contract – referred to here as a “furlough letter”) should include a removal of the requirement for the employees to work and (unless the employer intends to top-up the subsidy available under the Scheme) a reduction to the employees’ pay.  As the Scheme is only intended to operate for a limited period and an employer will want the right to call employees back to work as and when it needs them, it is common for the variations to be temporary.  Typically, they are drafted to end on the earlier of: (i) the Scheme ceasing to operate; and (ii) the employer notifying employees that it requires them to return to work (presumably on their full salaries).

If a business is sold whilst employees are furloughed then they will continue to be furloughed after they transfer to the buyer.  It will then be for the buyer to call them back to work or wait for the Scheme to cease to operate and the furlough arrangement to expire.  It is very probable that even if the furlough letter did not say so in terms, the residual salary levels under the pre-furlough contract would also form part of the rights and obligations transferred under TUPE.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 107

TRENDING LEGAL ANALYSIS


About this Author

Jon Chesman Restructuring & Insolvency Attorney Squire Patton Boggs Leeds, UK
Associate

Jon Chesman is an associate in the Restructuring & Insolvency Practice Group based in our Leeds office. He provides contentious and non-contentious insolvency advice to insolvency practitioners, banks, companies and creditors. 

In particular, Jon has gained extensive contentious insolvency experience including the pursuit of Insolvency Act claims, misfeasance and asset tracing.

Jon is involved with a number of educational programs in Leeds, including mentoring A-level and undergraduate students as well as running employability workshops as part of the...

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Professional Support Lawyer

Rachael is the professional support lawyer for the Restructuring & Insolvency team, based in Leeds and responsible for providing training, support and updates to all UK offices and working with international colleagues to deliver legal knowledge and know-how to clients and contacts.

Rachael has over 10 years’ experience working as a senior associate in the corporate recovery market and has a wealth of experience working with accountants, insolvency practitioners, banks and directors in the region and nationally on transactional and restructuring matters.

Named as a “rising star” and “easy to work with” in Chambers UK, Rachael has a strong presence in the market.

Rachael has previously held the position of chair on the R3 Ladies Committee and vice-chair on the R3 Regional Committee.

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