On Monday 13 April 2020, the High Court released its judgment in the United Kingdom’s first case relating to the government’s recently announced Coronavirus Job Retention Scheme (“CJRS”).

The case considered the use of the CJRS by the Administrators of Carluccio’s Limited (“Carluccio’s”). Due to Carluccio’s being in administration, it was heard by the High Court as a matter of urgency.

The case raised several important points because the government had only outlined the CJRS in broad terms, nor has it detailed the way the CJRS interacts with existing insolvency legislation.

This blog deals with the administration and insolvency issues as well as the employment law implications regarding employees impliedly consenting to changes to their terms of employment.

Facts

  • Carluccio’s entered administration subsequent to the imposition of the government’s ‘lockdown’ measures aimed at reducing the spread of COVID-19.
  • The Administrators’ current strategy is to “mothball” Carluccio’s whilst it seeks a buyer. As part of this strategy the Administrators wish to retain its employees and claim for their wages through the CJRS.
  • Carluccio’s has no money with which to pay the continuing wages of its employees. If Carluccio’s cannot take advantage of the CJRS and in turn limit its liability for wages to the amount it would be able to obtain under the scheme, the Administrators would be forced to make the workforce redundant.
  • The Administrators made an offer to place the employees on furlough under the CJRS. The “overwhelming majority of employees” accepted the offer, a “handful” indicated that they would prefer to be made redundant and retire, and a “relatively small but significant number” did not respond to the letter in advance of the hearing.
  • The Administrators’ application sought the Court’s determination and directions on a number of questions in order to give the Administrators assurances as to the appropriateness of their actions.

The Variation Letter

The Administrators wrote to all Carluccio’s employees on 30 March 2020 with an offer to continue to employ them on varied terms that enabled Carluccio’s to utilise the CJRS. The letter explained the scheme and asked employees for their consent to vary their terms of employment. In their letter, the Administrators made it clear that employees would receive 80% of their salary, pursuant to the general principles of the CJRS, and that the figure would not be supplemented by Carluccio’s. The Administrators’ letter also made clear that employees would only be paid if and when Carluccio’s received the money from the government.

The letter sought the express consent of the employees to the terms set out and asked employees to respond by email in the following terms:

“I agree to the variation of my terms and conditions of employment, including that I have been placed on furlough leave and my contractual remuneration has been reduced as described in the letter from [Carluccio’s] dated 30 March 2020.”

As of 7 April 2020, 1788 employees had received the letter and the following responses had been received:

  • 1,707 employees had accepted the terms;
  • 4 employees had rejected the terms, stating they wished to be made redundant; and
  • 77 employees had not responded to the letter.

The Court was asked to consider whether the variation letter had validly amended the employees’ contracts of employment and reached the following conclusions:

  • The letter had validly amended the contracts of employment of those who had consented to its terms;
  • Those who had responded objecting to the terms would be made redundant and their contracts of employment terminated; and
  • The position of the employees that had not responded was less clear.

The Administrators were cognisant of the risk of adopting the employees’ contracts of employment with Carluccio’s and requested directions from the Court as to what constituted adoption of those contracts.

Under usual circumstances, employee costs that arise post-appointment of administrators acquire a super-priority in the administration, where the employment contracts are adopted by the administrators (pursuant to paragraph 99 of Schedule B1 to the Insolvency Act 1986). However, nothing done within the first 14 days of the appointment of the administrators will amount to adoption of the employment contracts.

In the present case, the Court reiterated that adoption of the employment contracts requires an action to be done by the administrators and clarified that, accordingly, a failure by the Administrators to terminate the employment contracts of the employees within 14 days of their appointment as Administrators would not constitute adoption of those contracts.

The Court therefore drew the following conclusions and gave directions accordingly:

  • In relation to the employees who had accepted the terms of the variation letter, the letter and acceptance had occurred within the first 14 days of the Administrators’ appointment and the costs of the employment contracts up to that point had not acquired super-priority. Furthermore, adoption of the varied contracts would only occur upon Carluccio’s making payments to the employees in accordance with the varied contracts and/or upon Carluccio’s applying to the government under the CJRS on behalf of those employees;
  • The contracts of the employees who had rejected the terms of the variation letter would not be adopted; and
  • The contracts of the employees who had not responded to the variation letter would not be adopted merely on the basis that the Administrators had not formally terminated them within the 14 day period (and super-priority would not attach to any liability thereunder). If the terms of the variation letter were later accepted, the relevant employment contracts would be treated in the same manner as the contracts of the consenting employees (as set out above) and any liabilities incurred in the period before the late acceptance would not receive super-priority.

The non-responsive employees

The Court said that mere silence or inaction on the part of the non-responsive employees did not necessarily equate to consent or agreement to a variation of their contracts of employment. The furlough letter expressly required the employees to respond affirmatively in order to agree to the variation and the letter warned employees 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 be furloughed but suggested the opposite.

The Court also noted that in the current case it was “only a matter of days since the letter was sent and that employees “might not even have received it, still less considered it”. The Court commented that “it would … require very strong evidence to reach a conclusion that, without more, the absence of objection over such a period was to be equated to consent”.

The Court concluded after taking the above factors into account that the absence of a response from the non-responding employees could not give rise to the inference that they had consented to the variation proposed.

However, the Court did state that it does not say that “such an interference might not be capable of being drawn if the letter had been differently phrased, if it could be proven to have been received, if more time had elapsed or if the particular circumstances of the non-responding employees had been explained in more granular detail” (although the Court acknowledged that such inquiry and explanation would be virtually impossible in the limited time available).

Analysis

From an employment law perspective, this case demonstrates the difficulties in equating silence or inaction with consent in relation to letters varying an employee’s terms and conditions. As stated by the Court it would “require very strong evidence” to equate silence/inaction with consent.

However, the Court’s comments do leave the possibility of a letter being drafted in a certain manner so as to enable silence/inaction to be capable of consent. One of the primary difficulties employers will face is providing a long enough time frame to employees to indicate that their silence/inaction amounts to consent. The other factors listed by the Court above are potentially achievable through the following steps:

– Including a read receipt on the letters if sent by email and/ or posting by recorded delivery.

– Phrasing the letter to state that a lack of response will be equated to consent. This would differ from the letter sent by Carluccio’s which provided that a lack of a response will see the employees considered for redundancy. However, in practice, employers might not wish to include wording like this, as it could encourage employees not to expressly confirm consent, and express evidence of consent is very much preferable.

NOTE: Shortly after the Carluccio’s decision the UK government published a Treasury Direction setting out the detailed rules of the CJRS. Unlike the published CJRS guidance that the Court considered in Carluccio’s, the Treasury Direction says that employers must seek the written agreement of employees to going on furlough. The requirement for written agreement raises doubts going forward over the efficacy of the implied consent route discussed in the Carluccio’s case.


This article was co-written with Trainee Solicitor Peter Summerfield.