This is the second litigation involving the furlough scheme in the insolvency context, following on from Re Carluccio's (in administration). Please refer to our note on Carluccio's for background reading on how the furlough scheme weaves into insolvency law.
The administrators sought urgent directions from the court as to whether, after 14 days of administrators being appointed the employment contracts of furloughed employees will be taken to be adopted by the administrators if they pay out the sums reimbursed under the Job Retention Scheme ("Scheme") to those employees.
The court ruled that in the following circumstances the administrators, after 14 days of their appointment, will be taken to have adopted the employment contracts of the company's employees:
- The administrators cause the company to make payments to employees under their employment contracts including those payments reimbursed under the Scheme or
- The administrators apply for grant monies under the Scheme.
Trower J reasoned that:
- If he were to follow the reasoning in Carluccio's (which he did), the circumstances for which the administrators are seeking directions would lead to the adoption of the employment contracts, namely participation in the Scheme and payment to employees with grant monies received under the Scheme.
- Snowden J's analysis in Carluccio's derives from Lord Browne-Wilkinson's judgment in Paramount in which the latter stated that "by continuing to cause the company to treat a person as an employee by any action taken subsequent to the expiry of the 14 days period, the contract of employment will have been adopted for the purposes of paragraph 99 of Schedule B1."
- Applying the principle, by causing the company to make an application under the Scheme and in making payment to the furloughed employees, the administrators will be engaging in positive conduct which presupposes that the contracts of the furloughed employees continue to exist and treats that as being the case.
Notable observations and practical implications
- The court rejected the argument by the administrators that adoption cannot happen when the furloughed employees are not providing any service under their employment contracts. Retention of employees underpins the way in which the administration of the company is being conducted and the ultimate achievement of its objective i.e. employee retention is one of the necessary incidents to achievement of the purpose of administration.
- The only factual difference of relevance was that here the administrators were appointed after the employees were furloughed whereas in Carluccio's the administrators were appointed before taking the steps to furlough employees. Regardless of this difference, however, according to Trower J's analysis any steps the administrators take, after 14 days of being appointed, in causing the company to continue the employment contracts would be taken to be adopting those employment contracts under paragraph 99 Schedule B1.
- Paragraph 99 Schedule B1 is not just the source of the obligation to pay wages as a super-priority administration expense but also the statutory basis for the administrator's ability to do so, point which was made by Snowden J in Carluccio's.