High Court judgments on furlough and contractual variation

What is the CJRS?

The CJRS is designed to support employers whose operations have been severely affected by Covid-19, by allowing employers to place employees on “furlough” (a leave of absence) and claim 80% of their monthly wages, up to a cap of £2,500 a month, back from the government.

It is a temporary scheme: the government initially said that the CJRS would be in place for 3 months starting from 1 March 2020, but this period has been extended to the end of June and may be extended further.

There is currently no published legislation which sits behind the CJRS. All the available information about how the CJRS is designed to operate is contained instead in online guidance published by the government which is being updated relatively frequently, and in a Treasury Direction to HMRC.

The guidance makes it clear that any employer considering whether to furlough its staff and claim under the CJRS should discuss the matter with affected employees and seek their agreement to vary their contracts of employment. Once agreed, the employer should confirm to each employee in writing that they are being furloughed, and keep a record of this communication for 5 years. 

In the weeks following the announcement of the CJRS, many employers will have written to their workforces asking them to respond and indicate whether they accept or reject the variation of their contract (i.e. whether they agree to be put on furlough or, if they reject being furloughed, be made redundant). The position as to whether there has been an effective variation of the worker’s contract is usually straightforward where the worker responds to the employer, either accepting or rejecting the variation of terms.

Is written consent from employees required?

The Treasury’s Direction to HMRC, which sets out the legal framework for the CJRS, was issued on 15 April 2020. The Direction states that the employer and employee must have ‘agreed in writing’ that the employee will cease all work in relation to their employment.

However, this requirement was not set out in any versions of the HMRC guidance. The latest iteration of the HMRC guidance, issued on 20 April, specifically states that ‘the employee does not have to provide a written response’.

Technically, the Direction should take precedence over the guidance – however, the guidance shows the way that HMRC intends to apply the Direction, and the latest version of the guidance (which makes clear that written consent is not required) was published after the Direction was issued, suggesting that this is the position HMRC will adopt.

Employers should consider whether it is logistically possible to obtain written consent from employees they put on furlough, in line with the Direction. Administrators are also likely to want evidence of consent given super priority issues, as discussed below. However, on the basis of HMRC’s guidance, employers should not be excessively concerned about retrospectively obtaining employees’ written consent, as it does not appear to be required to successfully claim under the CJRS. 

Companies in administration

When a company goes into administration, often the business is sold and the employees TUPE to the buyer. Otherwise, administrators generally have two options when it comes to the employees – (i) retain them while trading the business, or (ii) make them redundant. Most administrators will make decisions on retention in the first two weeks of the administration, as after 14 days, the employment contracts are deemed to be adopted by the administrators. The consequence of this is that the employees’ wages have a ‘super priority’, meaning they are paid in priority to the administrators’ own remuneration and expenses and other creditors.

The law on adoption of employment contracts makes it clear that nothing done within the first 14 days of administration can amount to adoption of employment contracts, and afterwards, the mere fact that an administrator does not terminate an employee’s contract of employment does not necessarily mean that the contract is adopted. Typically some positive step on the part of the administrator is required for adoption to occur. The mere continued existence of the employment contract after 14 days does not necessarily incur the super-priority status, each instance will turn on its own facts and circumstances.

The CJRS guidance confirms that it is available to companies in administration, although on the expectation that the scheme would only be accessed “if there is a reasonable likelihood of rehiring the workers.” In addition, one of the clarifying amendments to the CJRS guidance on 9  April 2020 was the confirmation that employees who transfer under TUPE after 28 February 2020 may be placed, or continue, on furlough.

In the context of administration, the retention of employees usually occurs either by the administrators trading the business, or where the administrators sell the business to a buyer. In circumstances where many retail and restaurant businesses have suspended their operations due to the current pandemic, neither trading by administrators or a sale to a buyer is likely during the lockdown, which has already lasted longer than the 14 day period before the ‘super priority’ is effective.

In the Carluccio’s administration, the strategy is to try and sell the business as a going concern in due course to try and achieve a better realisation for creditors than would otherwise be possible. In the case of Debenhams, the administrators are approaching the administration on a ‘light touch’ basis.

For both companies, utilising the furlough scheme is appealing because it will avoid redundancies. However, both applications arose due to concerns about how the CJRS will operate in the context of administrations and particularly whether use of the scheme will impose greater liabilities by this ‘super priority’ which may affect the proposed strategy of the administration.

The Carluccio’s facts

Carluccio’s went into administration on 30 March 2020, its chain of restaurants having been closed since the government’s announcement that such businesses should close due to the Covid-19 pandemic. The administrators wanted to take advantage of the CJRS and wrote to the employees on the date of their appointment, inviting them to consent to a variation to their contracts of employment on terms that employees would only be paid by the company once it had received funds from the government from the CJRS.

Employees then fell into three categories:

1. Those who accepted the proposed variation, approximately 95%
2. Those who objected
3. Those who did not respond

The administrators sought directions on the application of the CJRS in the context of this administration.

The Carluccio’s Judgment – contractual variation

In the Carluccio’s judgment, the Court considered whether there had been an effective variation of contract in relation to employees who had not actively responded to a letter proposing to vary their contracts by putting them on furlough, and it also considered the circumstances in which there will be an implied variation of contract.

Whilst this case involved the decision by administrators to furlough staff and the process followed, the judgment will nevertheless be of significant interest to many employers, as it is likely that most employers with large workforces will have employees who do not respond to the written proposal to furlough them, leaving uncertainty as to whether they have obtained an employee’s agreement and therefore whether there has been an effective variation of their employment contract.

The Court found in this case that the absence of a response from the employees did not give rise to the clear inference that they had consented to the proposed variation to their employment contract, and therefore there was no effective variation.

Each situation will need to be looked at on a fact-specific basis; however, in this case, the Court took the following factors into account in making its decision:

• The letter required employees to respond positively in order to agree the variation and warned that a failure to respond could lead to them being considered for redundancy – the letter did not suggest that a failure to respond would be taken as consent to being furloughed.
• Only a matter of days had passed since the deadline for a response, so there may have been other explanations for an employee’s failure to respond, e.g. that they had not received the letter, or had not yet had the opportunity to consider it.
• Although the majority of employees accepted the proposal to furlough them, there were several who rejected the proposal, which suggests there were legitimate reasons for individuals to reject the proposal (which may also apply to the employees who did not respond).

The Carluccio’s Judgment – impact in administrations

The Judge considered the issue of adoption of the contracts in each of the three categories.

For consenting employees, it was noted that the variation was agreed within the 14 days and therefore could not result in adoption of the contracts. However, the Court considered that the administrators’ application to the government for payment and/or the making of any payment to the employees under their contracts as varied would cause the contracts to be adopted, and any sums received from the government would be required to be passed onto the employees.

The contracts of the objecting employees would not be adopted.

The non-responding employees’ employment contracts would not be adopted unless they at some point accepted the variation terms, at which point they would be treated as if they had always been in the category of consenting employees.

The Debenhams Administration

Administrators were appointed on 9 April 2020, at a time when the majority of the 15,000 employees were already furloughed pursuant to the CJRS. A majority of employees had, as with Carluccio’s, consented to a variation of their employment contracts.

The administrators sought directions on the implications of the CJRS continuing to apply, and in particular whether the contracts of employment of furloughed employees are adopted and will then enjoy the ‘super priority’ status. The administrators were concerned that adoption could result in an approximate monthly shortfall between the ‘super priority’ liability of up to £3million per month.

Because of the very large sum potentially enjoying ‘super priority status’, the issue of adoption has a very significant impact on the proposed strategy of the administration, which is to retain the workforce to assist with continued trading at some stage in the future. If adoption was the position, then the administrators indicated they would need to consider redundancies.

The Debenhams Judgment

Consistent with the decision in Carluccio’s, the Judge determined that the contracts of employment would be adopted if the administrators either cause the company to pay the employees in accordance with the employment contracts including any payments which may be reimbursed by the CJRS or if the administrators make an application in respect of such employee.

Implication for other insolvent companies

The prospect of adoption of employment contracts makes the use of administration in conjunction with the CJRS much more challenging for administrators. The consent of employees to a variation of their contracts of employment so that only the CJRS reimbursements have the ‘super priority’ status is likely to be essential to strategies aimed at a mothball and/or future rescue of the business, and the absence of this could impede a rescue plan. The logistics of arranging such consents in the short space of time available to administrators will not be easy, especially for companies with a large workforce, such as national retailers.

It is possible that further guidance will consider the issues arising from these decisions.

The full Carluccio’s judgment can be found here.

The full Debenhams judgement can be found here.

For more advice on the issues raised in this article,  please contact a member of the Employment or Insolvency Team.