Furloughing employees in administration

The Court of Appeal has handed down an important judgment in the Debenhams administration concerning the interaction between the Government’s Job Retention Scheme (furloughing) and the pre-existing insolvency legislation on the adoption of employment contracts.

Under the insolvency legislation, where an administrator of a company “adopts” a contract of employment between the company in administration and the employee, the wages or salary owed to the employee under the employment contract after adoption become payable out of the administration assets with a super priority, ahead even the administrator’s own remuneration. However, nothing done by the administrator in the first 14 days can be taken to have adopted the employment contract for this purpose. In effect the administrator is given a 14 day window to decide whether the employees should be kept on. Wages or salary for this purpose is defined to include things such as, holiday pay and occupational pension contributions.

Debenham’s employees had been furloughed prior to the administrators’ appointment who wished to continue the furlough. The question arose about whether the administrators would by paying the furlough sums to the employees and adopt the employment contracts for the purpose of the insolvency legislation.

The Court of Appeal upheld the decision at first instance, holding that by accessing the furlough scheme and paying employees on a furloughed basis, administrators had thereby adopted the contracts of the employees making the wages and salary of these employees after adoption by the administrators payable with super priority.

Administrators should be able to reduce this risk by agreeing a contract variation with the employee during the period of furlough.  Their entitlement during the period of furlough is reduced to the amount paid out by the government. The situation becomes more difficult when the employee does not engage or refuses furlough – in either of these scenarios paying furlough sums to the employee will risk the contract having been adopted and all of the wages or salary becoming payable with super priority

This decision is of considerable importance to administrators. Prior to the Job Retention Scheme being introduced administrators needed to decide within 14 days whether to make the employees redundant or keep them on. The furlough scheme offered the possibility of a third way in which no decision had to be made on redundancy in the 14 day period, but could be taken later.

This judgment makes clear that that possibility is only open to administrators where they have agreed a variation with the employee to reduce the wage to the amount paid by the government. If this is not done, any furlough payments made to an employee will have the effect of making the employee’s full salary payable as a super priority administration expense.

Even with employees who do consent to a variation, there may be concerns as to super priority beyond the wage or salary given the extension of the definition of these terms under the super priority provisions to include holiday pay.


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