Court Of Appeal Holds Administrators Will Be Taken To "Adopt" Furloughed Employees' Contracts If They Take Advantage Of UK Coronavirus Job Retention Scheme

• Published date: 28 May 2020
• Author: Ms Kate Stephenson
• Subject Matter: Corporate/Commercial Law, Employment and HR, Insolvency/Bankruptcy/Re-structuring, Coronavirus (COVID-19), Corporate and Company Law, Insolvency/Bankruptcy, Contract of Employment, Employee Benefits & Compensation, Employment and Workforce Wellbeing
• Law Firm: Kirkland & Ellis International LLP

In the first Court of Appeal case on the UK's Coronavirus Job Retention Scheme ("the Scheme"), the court held that Debenhams' joint administrators would be taken to adopt furloughed employees' contracts if the administrators claimed under the Scheme or continued to pay employees.

This means relevant employees' wages/salary (together with certain other amounts such as sick pay and holiday pay) for the post-adoption period will have a super-priority status in the administration.

The decision potentially has major ramifications for the conduct of administrations where employees are furloughed, given the super-priority ranking afforded to contracts adopted by administrators. The decision risks undermining the policy objectives behind the Scheme, in that it may prompt administrators to make greater numbers of employees redundant at the outset of an administration, unless employees expressly consent to reduce wages/salary to amounts covered by the Scheme.

Decision

The Court of Appeal held, in its judgment of 6 May¹, that contracts of employees furloughed prior to the appointment of administrators to Debenhams Retail Limited ("the Company") would be treated as "adopted"² in circumstances where the administrators:

• caused the Company to pay the employees; or
• made an application in respect of the employees under the Scheme,

beyond the initial "safe" period of 14 days post-appointment.

Debenhams' case quickly follows that of Carluccio's³, covered in our previous Alert ' the first English case in the context of furloughed employees. Carluccio's confirmed that the Scheme is available to a company in administration and provided related directions as to the variation and adoption of affected employment contracts.⁴ Debenhams' case differed from Carluccio's in certain important respects, including that Debenhams' employees had already been furloughed prior to the commencement of the administration.

Rationale

• Non-provision of services is not decisive: Although furloughed employees were not carrying out any work for the Company (and indeed are not permitted to do so under the terms of the Scheme), the enforced non-provision of services is not decisive for the question of adoption. Citing Carluccio's, the Court identified other relevant factors, e.g., that the company continued to benefit from covenants restricting employees undertaking other work, and that the employee would continue to be available to a prospective purchaser of the business.
• Company not merely a...