14 April, 2020
The first judgment to consider the implications of the Coronavirus Job Retention Scheme has been published after being heard in the High Court. The Court held that the administrators of Carluccio's, a well-known restaurant chain, are able to place employees on the furlough scheme irrespective of the ongoing administration. The chain is a large one, with over 70 restaurants and approximately 2,000 employees. The restaurants closed on 16 March 2020 in line with government attempts to prevent the spread of the virus. It then went into administration on 30 March 2020.
As a result of the Court's decision, the administrators will be able to claim 80% (up to £2,500 per month) of employees' wages who cannot work due to the pandemic. The strategy pursued by administrators has been to seek a sale of the business with employees on furlough and proposed these changes to employees by way of letter. The majority of employees accepted, albeit some proposed redundancy and retirement. The Court accepted that administrators had validly varied the contractual terms of employees to put them on the furlough scheme, and that the contracts of furloughed employees had been 'adopted' by administrators ensuring that under insolvency law when the funds are paid through the CJRS they can be passed to employees in priority over administrator's fees, expenses, and creditors.
Given the fact that the CJRS was introduced as an emergency measure, the government had not had the time or opportunity to consider all the detailed workings of the scheme and how it would interact with other areas of law, such as insolvency law in this case. The scheme had clarified that payment is made directly to companies as opposed to employees so could be considered a company asset and therefore subject to disposal in order of priorities set out in insolvency legislation. However, it is difficult to see how the Court could have proceeded in any way other than accepting the 'adoption' as the alternative would have been a considerable abuse of the scheme and contrary to the intentions of the Government.
Interestingly, the Court held that only the contracts of employees who had expressly agreed to the change of terms had been varied, albeit that implied acceptance by conduct was possible. Non-responders' contracts will remain unvaried and will not be treated as adopted.
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