The mechanics of placing employees on furlough and implications for companies in administration by Mathew Purchase


In the matter of Carluccio’s Limited [2020] EWHC 886 (Ch)

Headline points

A. Where the alternative may be dismissal, employers should at least consider inviting their employees to agree to be placed on furlough under the Coronavirus Job Retention Scheme (‘the Scheme’) and to agree variations to their contracts of employment accordingly.

Mathew Purchase

Mathew Purchase

B. If the employer proposes – or indeed foresees – that more than 20 employees at any one establishment would otherwise be dismissed by reason of redundancy, it would be advisable to undertake such collective consultation as is reasonably practicable and to treat the invitation to be placed on furlough as part of that consultation.

C. Employers should obtain the written agreement of employees to be placed on furlough. Employees who are forced on furlough, even pursuant to a unilateral variation clause, are not eligible under the Scheme.

D. It will also be necessary to agree specific variations to the contract of employment, particularly the terms relating to pay, unless these variations can be made pursuant to a unilateral variation clause.

E. Agreement may be implied through conduct, but this will not be straightforward.

F. If employees will not agree and there is no unilateral variation clause, the employer’s options are likely to be:

  1. to dismiss those employees (which will give rise to the risk of unfair dismissal claims and collective consultation claims);
  2. to impose furlough (which will give rise to a high risk of breach of contract claims, unlawful deductions from wages claims and unfair constructive dismissal claims); or
  3. to treat the contracts as frustrated (which would also give rise to a risk of breach of contract claims, unlawful deductions from wages claims and unfair constructive – or actual – dismissal claims).

G. If an employer imposes furlough, an employee’s options are likely to be:

  1. to accept the arrangement;
  2. to accept the arrangement under protest and make a claim for unpaid wages; or
  3. to resign and claim unfair constructive dismissal.

H. Administrators of insolvent employers can make payments to furloughed employees if they have adopted the (varied) contracts of employment, which they will be taken to have done if they make payments pursuant to them or make an application under the furlough scheme.

The Coronavirus Job Retention Scheme

  1. The Coronavirus Job Retention Scheme (‘the Scheme’) was announced on 20/03/20. The Scheme is now set out formally and officially in the Coronavirus Act 2020 Functions of Her Majesty’s Revenue and Customs (Coronavirus Job Retention Scheme) Direction made on 15/04/20 (‘the Direction’)
  1. The Scheme applies to employers who have a PAYE scheme registered on 19/03/20 [4]. It applies to employees[1] who were paid during the 2019-20 tax year as shown in a PAYE return made on or before 19/03/20, in relation to whom the employer had not reported a date of cessation of employment before that date, and who is a ‘furloughed employee’ (para 5). The Scheme enables employers to claim from the Government: (i) 80% of the regular wages of any furloughed employee up to a maximum of £2,500 per month, (ii) national insurance contributions, and (iii) the minimum required level of employer pension contributions on the reduced wages (paras 8.1 and 8.2). The Scheme applies to the three month period from 01/03/20 to 31/05/20 (para 12), but may be extended.
  1. The Scheme is unavoidably characterised by a number of complications and this note does not attempt to address all of them. It focuses principally on some of the issues which have been illuminated by the recent judgment of Snowden J in the Carluccio’s case, the first case to consider the Scheme. However, it is important to note that the Direction had not been made at the time Snowden J gave his judgment, which is based on the earlier guidance as to the terms of the Scheme.

The Carluccio’s judgment

  1. The restaurant chain Carluccio’s went into administration. The administrators wished to retain employees ‘on the books’ so as to increase the prospects of a sale of the business, but had no funds from which to pay them. Accordingly, they wrote to employees to ask them to agree to go on furlough and to vary their contractual terms so that they would be entitled to be paid only such sums as Carluccio’s received from the Government pursuant to the Scheme[2]. The letter said that, otherwise, they would be dismissed by reason of redundancy. Most employees agreed, some objected (preferring to be made redundant) and others failed to respond.
  1. The administrators were concerned that making payments to furloughed employees might be inconsistent with their duties under the Insolvency Act 1986 to act in the interests of creditors as a whole or with the priority accorded to the company’s liabilities to creditors. They accordingly sought a declaration as to whether paragraph 99(5) of schedule B1 to the Act applied: this confers so-called ‘super-priority’ on a liability to pay wages or salary under a contract of employment, provided that the administrator has – after a grace period of 14 days from the date of appointment – ‘adopted’ the contract.
  1. Snowden J held that:
  • The proposed variation to the contracts of employment was effective only in respect of those employees who had expressly agreed it [45].
  • Employees who had objected or who had failed to respond remained engaged on their existing terms [45, 54]. Accordingly, they were entitled to their usual level of remuneration, but were liable to be dismissed by reason of redundancy.
  • In some circumstances, employees who fail to respond to this sort of letter might be taken to have agreed to the variation by conduct [46-49]. However, this was not so on the facts of the present case because: (i) the letter did not say that this would be the result of a failure to respond and, indeed, suggested the contrary; (ii) insufficient time had passed; (iii) the employees were not in fact continuing to work, so there was no active conduct from which to draw an inference of consent; and (iv) there was no evidence that the letter had in fact been received by particular employees [50-54].
  • The administrators would not be taken to have ‘adopted’ the contracts of furloughed employees simply because they did not terminate those contracts [76, 87]. Further, the conclusion of the variations to those contracts could not amount to an adoption because it took place within the 14-day grace period [90]. However, if the administrators subsequently made a payment to, or made an application under the Scheme in respect of, any employees who had agreed to the variation, they would be taken to have adopted their contracts and they would be entitled to make such payments by virtue of paragraph 99(5) [78, 91-92].

Some issues

Considering placing employees on furlough

  1. The administrators of Carluccio’s did offer all employees the option to be placed on furlough. The judge rejected an argument that they were under an obligation then to apply under the Scheme in respect of employees who did not respond to that offer [106].
  1. However, this gives rise to the question whether an employer might be under a duty to offer – or at least to consider offering – this option to employees rather than dismissing them.
  1. This sort of issue would surely be a highly relevant factor in determining the reasonableness of any dismissal in an unfair dismissal claim, but the outcome would depend on the particular facts. It is certainly possible to envisage circumstances in which an employer might act reasonably in dismissing an employee without offering to place him on furlough. However, even if the employer is in such serious financial difficulties that it does not currently have funds to pay even 80% of wages and it cannot predict when it might receive such funds from the Government, it might not necessarily be reasonable simply to move directly to dismissal: as in the Carluccio’s case, it might be reasonable first to invite employees to accept a contractual variation under which their entitlement to any pay at all would be conditional on the employer actually receiving payment under the Scheme[3].
  1. Further, it is arguable that such a duty could arise contractually through a specific implied term or through the operation of the implied term of mutual trust and confidence[4].
  1. For a more detailed consideration of this issue, see Darryl Hutcheon’s article.

Collective consultation

  1. If an employer proposes to dismiss as redundant more than 20 employees at one establishment, it must undertake collective consultation under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992.
  1. This obligation would clearly arise if the employer chose to move directly to making redundancies or if a sufficient number of employees declined to be placed on furlough with the result that the employer needed to make more than 20 redundancies.
  1. It is arguable that the duty would be triggered at an earlier stage. It remains unclear precisely when an employer will reach the stage of ‘proposing’ (or, in the words of Directive 98/59/EC, ‘contemplating’) collective redundancies[5]. However, it is likely that the obligation to undertake collective consultation would arise as soon as the employer had it sufficiently clearly in mind that, if employees were not willing to be placed on furlough, the alternative would be 20 or more redundancies. This will probably be fairly common[6].
  1. Usually the consultation must take place at least 30 days[7] before the first of the dismissals takes effect, it must include consultation on certain issues such as ways of avoiding dismissals, and the employer must provide certain information to employee representatives.
  1. However, under section 188(7), if there are ‘special circumstances’ which render it not reasonably practicable to comply with those requirements, the employer need only take such steps as are reasonably practicable. The mere fact that the employer’s business has been adversely affected by the coronavirus pandemic will probably not be enough, even if there is a risk of insolvency[8]. However, if the impact in the particular case has been sufficiently sudden and serious, this may entitle the employer to limit the length or content of the consultation.

Placing employees on furlough in practice

  1. In the Carluccio’s case, Snowden J observed that the Scheme ‘appears to require’ the agreement of employees to be placed on furlough [106]. The Direction now makes this clear. Under paragraph 6.1 of the Direction, an employee is a furloughed employee if he has been ‘instructed’ by his employer to cease all work for at least 21 calendar says for a reason arising as a result of coronavirus. However, the use of the term ‘instructed’ is misleading. Paragraph 6.7 makes clear that what the Direction really means is ‘agreed in writing’:

‘An employee has been instructed by the employer to cease all work in relation to their employment only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment.’

  1. That being so, even if an employer is contractually entitled to place an employee on furlough – pursuant to a unilateral variation clause, for example – this in itself would not entitle the employer to make a claim pursuant to the Scheme. Written agreement is necessary. If any employee has already been placed on furlough in the absence of such a written agreement, this needs to be remedied as soon as possible.
  1. Either way, in practice it is important to recognise that an employee who agrees to be placed on furlough – to ‘cease all work’ – does not necessarily also agree to vary any other term of the contract of employment. This is important because, depending on the precise terms of the contract, ordinarily an employee is entitled to their contractual remuneration for so long as they remain ready, willing and able to work[9].
  1. It might be argued that an employee who agrees to be placed on furlough is impliedly also agreeing to forego any remuneration over and above that which would be payable under the Scheme. However, that is a highly risky approach. The mere fact that an employee is prepared to stay at home at his employer’s request, with a view to his employer being able to access the Scheme, is unlikely to be sufficient to dislodge his entitlement to his ordinary contractual pay.
  1. Accordingly, employers should secure express variations to relevant terms in the contract of employment, most particularly those relating to pay.
  1. What if the employee does not agree? Some contracts of employment contain unilateral variation clauses which may enable the employer to vary the contract without agreement[10]. However, such a clause would need to be particularly clear and broad to permit this sort of variation. Even then, the implied term of mutual trust and confidence might require at least some consultation and the power to vary would have to be exercised rationally, taking into account all material considerations (which may include the particular circumstances of particular employees) and putting to one side all immaterial considerations[11].
  1. Otherwise, if an employer proposes such variations and the employee does not expressly either accept or reject them, it may be possible to infer agreement by conduct. However, as the Carluccio’s case makes clear, this will be particularly difficult in this sort of context.
  1. Employers who might wish to pursue this option would be wise to avoid the mistake made by the administrators in that case: while it is likely to be sensible to make clear in any offer letter that a refusal to accept the proposals will result in a redundancy process, the letter should expressly state that a failure to respond at all will be treated as acceptance. This in itself will not be enough to infer acceptance from a failure to respond[12]. However, an employee who receives such a letter, does not respond, does not present themselves for work (assuming that this would still be a realistic possibility), and/or accepts payments of reduced wages may, after a reasonable period of time, be treated as having accepted the variations by conduct.

Other possibilities if employees decline to be placed on furlough and/or decline to accept necessary variations to their contracts of employment

  1. If employees do not wish to be placed on furlough or are not prepared to accept variations to their terms and conditions, employers may need to consider imposing dismissals.
  1. The dismissals would almost certainly be by reason of redundancy and an employment tribunal would not usually go behind an employer’s decision to reduce its staffing levels[13]. However, it does not necessarily follow that any such dismissals would be fair. In the ordinary way, the fairness of any such dismissal would depend on whether the decision fell within the range of reasonable responses open to a reasonable employer[14].
  1. Although employment tribunals are likely to have some sympathy for pressures arising from the coronavirus outbreak, employers should not assume that redundancies can be made summarily. Some consultation (whether collective or individual) and a selection process will often be required. Further, employers who move to dismissals before seriously exploring the possibility of placing employees on furlough and the terms on which they might do so will be taking a serious risk. It might be reasonable to require employees on furlough to accept a reduction in their contractual renumeration[15]; and it might then be substantively fair to dismiss employees who refuse. But this will not necessarily be so: some employers may be able to cover the remaining 20% so that its employees need not suffer a pay reduction at all, and the Scheme permits this.
  1. Another possibility would be simply to require staff to go on furlough and/or to reduce their pay accordingly. If the contract of employment contains a unilateral variation clause, this might be contractually permissible. However, employers should take care: an unreasonable imposition of a pay cut would probably amount to a breach of implied limitations on that power[16]. Further, it now seems clear that the Government would be willing to cover the wages of employees who have been forced onto furlough without their agreement[17].
  1. In the absence of a unilateral variation clause or other relevant contractual term, imposing a pay reduction would be very high risk for an employer. It would probably be a repudiatory breach of contract. An employee who refuses to accept it might take such wages as are being paid and also make a claim for breach of contract or for unlawful deductions from wages to recover the balance. Alternatively, such an employee could resign and claim unfair constructive dismissal[18].
  1. A third possibility is that the employer could argue that the contract had been frustrated by the coronavirus outbreak. A contract is frustrated when some extraneous event renders it impossible for the contract to be performed at all or at least renders its performance something radically different from what had been contemplated[19].
  1. There might be some circumstances in which a court would accept that a particular contract of employment had been frustrated. It is strongly arguable that, if a business has had to cease trading as a result of the coronavirus outbreak[20], the test would be satisfied. However, relying on frustration would be a high risk strategy in the employment context, at least at this relatively early stage of the ‘lockdown’. The employment relationship is a continuing one, and short-term disruptions will not necessarily frustrate it: it is necessary to consider the duration or likely duration for which the employee will be unable to work, set against the background circumstances (which, here, would include the availability of the Scheme)[21]. Further, courts and tribunals are reluctant to find that a contract has terminated by reason of frustration if it contains termination provisions which could be exercised by the employer[22].

Companies in administration

  1. A welcome result of the Carluccio’s judgment is that administrators are likely to be able to pay furloughed employees without acting inconsistently with their wider statutory obligations. They can do so provided that they ‘adopt’ those employees’ contracts of employment because, then, payments of wages or salary will become ‘super-priority’ liabilities in the administration.
  1. Administrators will not be taken to have adopted any employee’s contract of employment simply because they do not terminate it or because (as representatives of the employer) they continue to comply with it [66, 78].
  1. However, they are likely to be taken to have adopted the contract of employment if they require an employee to continue to attend work [79]: accordingly, provided that this continues past the 14-day grace period, any such employee who is subsequently placed on furlough can continue to be paid.
  1. Even if the administrators do not require an employee to continue to work, if they have agreed a variation to the contract pursuant to which the employee is placed on furlough, they will be taken to have adopted the (varied) contract as soon as they make payments pursuant to it or make an application for support under the Scheme[23].

[1] Broadly defined so as to include, for example, certain other workers and agency workers: see [13.1(e)].

[2] There was no reason to suppose that it was impermissible under the Scheme as it was then understood to make a claim for wages which were themselves only payable on condition that the Scheme had already provided the funds to cover them. However, the Direction leaves some room for doubt. On the one hand, the Scheme does provide for employers to be reimbursed for earnings paid and for earnings ‘reasonably expected to be paid’ [8.1(a)]. However, the employer is entitled to make a claim only in respect of ‘qualifying’ ‘costs of employment’ [5]. These are costs which relate to the earnings of an employee during a period of furlough provided that the employee ‘is being paid’ £2,500 or more or 80% of their reference salary [7.1]. Arguably this would not include sums which are not being paid and will not be paid unless and until the Scheme has funded them in the first place. However, paragraph 2.2 of the Direction again indicates that the employer may claim for sums ‘incurred or to be incurred’ (emphasis added). Further, the policy behind the Scheme appears to be to enable employers which otherwise would be financially unable to sustain their workforce costs to be able to do so. On balance, therefore, it seems likely that an employer could make a claim for sums which are payable to the employee only on condition of them being received from the Government pursuant to the Scheme. However, the position is regrettably unclear. (Note that paragraph 7.4 of the Direction defines ‘regular salary or wages’ so as to exclude any sum which is ‘conditional on any matter’. However, this does not appear to be relevant as this definition is applicable only for calculating the ‘reference salary’ to which the 80% must relate and not for calculating the amounts which the employer may claim under the Scheme.)

[3] Note, however, the observations in footnote 2 above. It is not entirely clear under the Direction whether conditional wages such as these could in fact be claimed under the Scheme at all.

[4] Such a duty is analogous to, but would go further than, the duties accepted in Aspden v Webbs Poultry & Meat Group [1996] IRLR 521 and Brompton v AOC International Ltd [1997] IRLR 521 (duty not to dismiss an employee whose right to ill-health insurance benefits is dependent on continued employment) and in Scally v Southern Health and Social Services Board [1992] 1 AC 294 (duty to inform employee of term which confers a valuable right which depends on action by the employee). Further, query whether a breach of this sort of implied term would fall within the ‘Johnson exclusion zone’ so as to prevent a claim for breach of contract, which would be particularly significant for employees with insufficient length of service to claim unfair dismissal: see Johnson v Unisys [2003] 1 AC 518 and Edwards v Chesterfield Royal Hospital [2012] 2 AC 22.

[5] See, for example, E Ivor Hughes Educational Foundation v Morris [2015] IRLR 696.

[6] It is not a condition of eligibility under the Scheme that any particular employee would otherwise have been dismissed: the relevant condition is that the employee is placed on furlough ‘by reason of circumstances arising as a result of coronavirus or coronavirus disease’ (para 6.1(c) of the Direction). However, redundancies are likely to be the foreseeable alternative in many if not most cases.

[7] Or 45 days if the employer proposes to dismiss more than 100 employees.

[8] See Clarks of Hove Ltd v Baker’s Union [1978] ICR 1076.

[9] See Miles v Wakefield MDC [1987] ICR 368 and North West Anglia NHS Foundation Trust v Gregg [2019] IRLR 570.

[10] See Bateman v ASDA Stores [2002] IRLR 370.

[11] See Braganza v BP Shipping [2015] 1 WLR 1661.

[12] Nor will it amount to an agreement in writing for the purposes of accessing the Scheme.

[13] See James W Cook & Co v Tipper [1990] IRLR 386.

[14] See Williams v Compair Maxam [1982] ICR 156 for particular considerations applicable in redundancy cases.

[15] Or even, like Carluccio’s, to agree to receipt being conditional on payment by the Government – but note the concerns expressed in footnote 2 above as to whether this sort of arrangement is permissible under the Scheme.

[16] See paragraph 22 above.

[17] See paragraphs 17 and 18 above.

[18] Provided the employer has consulted fairly and has reached a reasonable conclusion that it is necessary to place particular employees on furlough and/or reduce their pay, this latter course would be risky: even if the pay cut did give rise to a repudiatory breach of contract, an employment tribunal might well be open to an argument that it was not unreasonable in these unusual circumstances.

[19] See The Hannah Blumenthal [1983] 1 AC 854

[20] Those businesses covered by regulation 4 and Part 1 of schedule 2 to the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 and the equivalents for other parts of the UK are required to close to the extent there set out.

[21] See Hare v Murphy Brothers [1974] ICR 603.

[22] See, for example, F C Shepherd v Jerrom [1986] IRLR 358.

[23] Indeed, it seems likely that, if the variation of the contract was made after the 14-day grace period, this in itself would be sufficient to amount to adoption of the contract. However, this did not need to be decided in the Carluccio’s case because the variations had been agreed during the 14-day period [90].