In the first litigation involving the Furlough scheme, the court in Re Carluccio's (in administration) ruled on how the administrators can lawfully give effect to furlough arrangements with the employees who have agreed to the variation of their employment contract.

Read on for our analysis of the case which gives an interesting insight into how the courts in the future might interpret the furlough scheme. 

1. Background 

Carluccio’s in administration

• Administrators took over the business by an administration order on 30 March 2020. 
• The strategy was to mothball the company’s business and seek a sale rather than apply for a winding up order as this would better serve the creditors. 
• Crucial to this strategy was to retain the employees (rather than make them redundant). 
• They were willing to do this if the costs of doing so can be covered by the furlough scheme. 
• No issue as to eligibility as the guidance made specific reference to administrators being able to claim from the scheme “if there is a reasonable likelihood of rehiring the workers”. 

Variation letter

• Company would only be able to pay employees if and when it receives the grant from the government. 
• It sought consent from employees and asked to respond by email by 3 April (the letter was dated 30 March). 
• If they did not respond by the deadline, then they may be made redundant.  

Three groups of employees identified 

• Consenting employees: those who responded with consent. 
• Non-consenting employees: those who had not provided any response.
• Objecting employees: those who rejected furlough and wished to be made redundant instead. 

2. Issues 

• How the administrators can lawfully give effect to furlough arrangements with the employees who have agreed to the variation of their employment contracts; and 
• Whether the administrators can avoid incurring liabilities by adoption of the unvaried contracts of non-consenting employees so that they are not forced to make all of them redundant before the end of the first 14 days of administration. 

3. Judgment

Insolvency law

The purpose of the application was to make sure that the grant money can go to the employees directly because the furlough scheme provides no guidance as to how the scheme grant operates for companies under an administration: 

• The mechanism that achieves this is not stated in the furlough guidance. 
• They wanted to avoid the situation where the money received forms part of the insolvent estate of the company because if this happens then they cannot legally pay the grant money to the furloughed employees.
• Usually the mechanism that achieves this is a trust: money received is held on trust for making specific payments, rather than forming part of the insolvent estate. 

What provision of the Insolvency Act 1986 can assist? 

The only way to make this happen was through para. 99 of Schedule B1 to the Insolvency Act 1986:

• Once an administrator “adopts” an employment contract then any wages or salary arising out of those adopted contracts can be paid out by the administrator in priority to other debts. 
• Adoption cannot happen within the first 14 days of the administrator being appointed.  
• They have 14 days to decide whether to adopt the contracts. Once adopted any qualifying liabilities under those contracts (such as wages and salary, among others) are payable in priority to other debts of the company such as floating charges and unsecured creditors.  

Adoption analysis

The leading case on adoption is Paramount Airways[1] where Lord Browne-Wilkinson gave the leading judgment which was subsequently re-stated by Laddie J in Re Antal International[2]:

• Failure to terminate the contract by the administrators does not mean it’s been adopted i.e. if you do nothing for the first 14 days it doesn’t mean that the administrators have taken over the responsibility for those contracts. 
• Adoption requires some conduct by the administrator that amounts to an election to give super-priority to the employee’s claims for wages and salary (which does amount to an election). 

This principle was adopted by Snowden J in this case and applied to his conclusion on variation of the contract.  

Analysis on variation of the employment contract 

• In relation to consenting employees, clearly the contract had been varied. 
• In relation to non-consenting employees, administrators argued that the contract had been varied by their silent conduct. This argument was rejected. 
• Inference of consent could not be drawn because: 
  • On the face of the letter, non-reply would lead to redundancy which is inconsistent with consenting. 
  • There was a chance that the non-consenting employees would respond given only a few days had passed since the date of the variation letter so too early for any inference could be drawn. 
  • There was no definitive evidence that being placed on furlough leave was more advantageous than the status quo (for, variation which is more advantageous to employees can be without more interpreted as giving consent under Attrill v Dresdner Kleinwort[3]) given that few people actually decided to reject to being furloughed.

4. Conclusion 

• In relation to consenting employees, as and when the administrators make an application under the scheme or to make any payment to the employees under the varied contracts, this would amount to an adoption of the varied contract. 
• This would enable super-priority payments to be made to the furloughed employees using the grant monies from the government. 
• In relation to non-consenting employees, if the 14-day period passes without obtaining consent this does not mean that those contracts have been adopted, applying the prior analysis. Only upon receiving consent and acting on the consent by applying under the scheme can the administrators said to have adopted the contract.

5. Practical implications 

• The analysis of implied consent turns on the precise wording of the furlough letter.
  • Abrahall v Nottingham CC[4] principle applies.
  • Elias J’s (as he then was) dicta in Solectron Scotland v Roper[5] is helpful to employers.
• Judicial decision-making of the furlough scheme will likely involve the analysis of all versions of the guidance as well as the Treasury Directions.
• Where the guidance or regulatory tool is silent on an issue, judges will be expected adopt a common sense and holistic approach to analysis, for example there is still no definitive guidance as to whether employers can require furloughed employees to take holidays. Most likely a tribunal will conclude that this is permissible.

[1] [1995] 2 AC 394
[2] [2003] 2 BCLC 406
[3] [2013] IRLR 548 
[4] [2018] ICR 1425
[5] [2004] IRLR 4