Employees of Companies in Administration Can Be Furloughed

Hardly a day seems to go by at the moment without a new development for employers to digest. We are returning from the Easter weekend to news of a landmark legal ruling yesterday, involving the restaurant chain Carluccio’s, which went into administration last month.

The big question was whether the chain’s 2,000 employees could be furloughed whilst the company was in administration – the High Court decided yesterday that they could.

Although the HMRC guidance made it clear that the Coronavirus Job Retention Scheme (CJRS) is open to companies in administration, it was not at all certain whether that money would be paid to the administrator or to the relevant employee. The administrators for Carluccio’s sought a High Court ruling to clarify this point and ensure wages claimed through the CJRS could be paid directly to employees, in priority to other claims against the company.

Mr Justice Snowden’s judgment means that employees at other companies in administration may also be eligible to access the government’s CJRS in a similar way.

Crucially, the judge offered clarification on the concept of adoption of employment contracts by administrators. He stated that adoption would normally occur “when the administrator communicates to the employee that the business remains open, and that the employee should attend for work in the usual way”. His judgment held that the variation of employment contracts in order to put in place a furlough agreement had been valid and that money paid under the CJRS would take priority over administrators’ fees and expenses and over payments due to unsecured creditors.

The ruling is likely to be welcomed by administrators, in that it will allow them to ride the current storm of uncertainty and resume their usual considerations once severely affected sectors such as retail and hospitality have been allowed to reopen. This may help to save jobs in the long term and make it easier to keep fragile businesses operating. It will also be welcomed by those working in other companies in administration, including high profile concerns such as Debenhams.

Mr Justice Snowden urged a constructive approach to managing business and employment issues during the coronavirus crisis, with a focus on working together to preserve jobs and livelihoods. He said “The COVID-19 pandemic is a critical situation which carries serious risks to the economy and jobs in addition to the obvious dangers to health. I think that it is right that, wherever possible, the courts should work constructively together with the insolvency profession to implement the Government’s unprecedented response to the crisis in a similarly innovative manner.”

The full judgement can be read here