Furlough and insolvency – administrators cannot furlough staff without adopting their employment contracts

Background

In light of the Government COVID-19 restrictions, Debenhams had no option but to close all its stores.  It told store-based staff that they were furloughed under the Coronavirus Job Retention Scheme (CJRS).  About two weeks later, Debenhams went into administration.  The administrators decided to seek specific agreement to the furlough arrangements from the staff concerned.  Approximately 12,700 agreed.  Four objected and about 360 did not respond. 

In normal circumstances when an administrator is appointed, he or she has 14 days to decide whether or not to “adopt” the contracts of staff.  If the administrator chooses to allow employment to continue in the normal way after those 14 days, contracts of employment are treated as “adopted”.  The significance of “adoption” of contracts is that, in practical terms, it is a guarantee of payment: wages paid to those staff for work during the administration will have a “super-priority” and be paid in advance of other creditors and, indeed, of the administrator’s own fees.  An administrator’s aims will typically be to rescue the company or to maximise the return for creditors by selling its business; those aims are furthered by adopting contracts and continuing to trade. 

In Debenhams’ case, although trying to rescue the company, the administrators were concerned about their liability for those who, having failed to respond, had not specifically agreed the furlough arrangements.  They were also concerned about lack of clarity about treatment of holiday pay and sick pay under the CJRS.  They said that if they were required to adopt contracts, they might have to dismiss those employees - or at least some of them.  This would significantly reduce their ability to retain value in the business, would undermine the purpose of the administration and would also be inconsistent with the policy of the CJRS. 

They sought a declaration from the court that, as long as they did no more than claim through the CJRS, the contracts of staff would not be adopted. 

High Court and Court of Appeal decisions

The High Court refused the application, ruling that the administrators would be taken to have adopted contracts if they paid staff wages which may be reimbursed under the CJRS or made an application to the CJRS. The Court of Appeal has now upheld the High Court’s decision, although its full decision and reasons are not yet available.

What are the implications?

The courts in this case have taken a similar approach to that taken in the recent case concerning administrators and Carluccio’s. in confirming that in making an application to the CJRS an employer adopts the employment contracts of the furloughed staff.  The decision avoids a potential conflict between the insolvency rules on which creditors get paid and the terms of the CJRS, which requires the employer to apply the grant money received to the costs of furloughing staff.  

In addition, the concerns of the administrators highlight how furloughing staff is not an entirely cost-neutral strategy, even when employees agree to be paid only at “furlough rates” without any top ups. Furloughed staff continue to be entitled to holidays and holiday pay at rates which may exceed the amount that can be claimed through the grant. It is also possible that employers will not be able to  recover the full grant in respect of employees who fall sick during furlough and who would have been entitled to SSP. These issues are explained further in our  FAQs for employers on the Coronavirus Job Retention Scheme.

In the matter of Debenhams Retail Ltd – High Court decision with reasons available here. (Court of Appeal decision not yet available).