Our recent blog discussed the decision in Re Carluccio’s Limited (in administration) [2020] EWHC 88D (Ch) where the Court considered whether administrators would “adopt” the employment contracts of employees they furloughed after the 14 day grace period.  More recently, in the case of Debenhams Retail Limited the Court had to consider the position of administrators where the employees had already been furloughed prior to their appointment – the decision was appealed by the administrators but we understand that the Court of Appeal has dismissed the Appeal.

In this blog we look at that decision and discuss how the Coronavirus Job Retention Scheme (the “JRS”) interacts with insolvency and decisions that administrators face in dealing with employees.

Facts

Debenhams informed approximately 13,000 employees by writing on 25 March 2020 that they were being furloughed in accordance with the terms of the JRS until further notice.

A further 867 employees were contacted and furloughed over the next few days on identical terms (the circa 13,867 employees being the “Furloughed Employees”). Subsequently, Debenhams entered administration on 9 April 2020.

In light of the uncertainty contained in Government guidance around the requirement for express consent from employees to be validly furloughed that sets out the current position), the Administrators wrote to the Furloughed Employees on 10 April seeking their consent to be furloughed and the associated wage reduction. Roughly 12,000 consents were received in response, with only two rejections.

Issues

The Administrators wished to continue furloughing the employees under the JRS as the workforce had an important role to ensure the future viability of the business and allow the Administrators to achieve the administration objective of saving the business as a going concern.

However, if the employment contracts of the Furloughed Employees were adopted this would mean that wage and salary payments due to the employees would have super-priority status, meaning that they would be paid ahead of the Administrators’ remuneration – an obvious concern where a business is not trading and/or income is reduced.

Decision

Notwithstanding that the employees had already been furloughed the Court concluded that, the Administrators will adopt those contracts of employment if, after 14 days of appointment, the Administrators:

• cause Debenhams to make any payments under those contracts, including in respect of amounts which may be reimbursed to Debenhams under the JRS; or

• the Administrators make an application to the JRS in respect of such employees.

The JRS and administrators – responding and non-responding employees

Where do these decisions leave administrators when it comes to determining whether and when they will adopt a contract of employment, particularly where employees do not respond to correspondence requesting they agree to be furloughed or agree to vary the terms of their employment contract such that the administrators will only have to pay 80% of wages under the FRS.

Given social distancing, the fact that some employees may be self-isolating or even sick, logistically it could be impossible to expect to hear back from all employees to obtain express consent to vary an employment contract or furlough.

This leaves administrators having to consider the impact of the following in determining strategy and how to deal with employees, and unfortunately, there may not be a clear answer.

Will there be an implied variation of the contract of employment even if an employee does not respond? 

If an employee continues to work without expressly consenting to a variation, that may be sufficient to amount to a variation but in the case where employees are furloughed they are employed but not providing a service. It would be best to assume, that those contacts are not varied.

Do administrators adopt the contracts of non-responding employees? 

Both the judge in Debenhams and in Carluccios recognised that retaining employees on furlough may be sufficient to adopt where the reason for retaining employees is to ensure the future viability of the business.

Although in both cases the judges gave directions that the administrators will only adopt the contract if they make an application under the FRS in respect of those employees.

How much will administrators have to pay non-responding employees if they do adopt their contract? 

That will depend on whether the employee’s contract of employment is varied, which is unlikely if they do not consent. If applying under the FRS amounts to adoption, but the contract has not been varied, employees will be entitled to 100% of their wages not just the 80% paid to the company under the FRS.

Each case will largely depend on its facts and of course, the uncertainty about the answers to these questions make it difficult for administrators to decide on the best course of action for the company – the Judge in Debenhams made it clear that his decision was not binding, commenting that it was akin to an advisory opinion.

Perhaps the safest thing for administrators to do, is to assume that a contract of employment will be adopted if the administrators intend to claim under the FRS (whether the employee responds or not) but for non-responding employees to assume that they will be entitled to be paid 100%.

Where it is possible to contact employees it is important for the terms of the furlough letter to be clear and where possible to obtain express consent from each employees to be furloughed and to expressly agree varied terms as to payment.

The other question that makes determining strategy difficult is paying holiday pay.

Holiday pay in the context of furlough

One of the concerns highlighted in the Debenhams judgment was the lack of clarity on the treatment of holiday pay under the JRS – given that both holiday (and sick pay) qualify for super priority. Unfortunately, the most recent announcement (as of April 20), raises more concern than clarity.  The announcement explains that:

• employees will continue to accrue leave during furlough, as per their employment contract

• employees can take holiday whilst on furlough and that they should be paid their normal rate of pay while on holiday (i.e not the 80% as per the JRS rules)

• employers should either top up pay to 100% of usual pay for bank holiday or, alternatively, allow employees to have time off in lieu

The issue for insolvency practitioners, is that they may not be able to offer time in lieu to furloughed employees meaning that furloughed employees wishing to take holiday (and they are entitled to do so) are entitled to be paid holiday pay in full. If the contract is adopted by the administrators then those employees will be entitled to be paid on a super-priority basis.

How does the business source the extra cash? In a case like Debenhams (where the difference between the workforce’s 80% and 100% equated to circa £3m per month) this could pose a real problem for office-holders if a large number of the workforce takes a period of annual leave. If there are no funds will office holders simply have to make employees redundant?

One option could be to deal with this in the furlough letter by asking for employees to expressly consent not to take holiday or to agree that if they take holiday their entitlement is only for the 80% furlough payment.

The Government’s guidance states that “during this unprecedented time, we are keeping the policy on holiday pay during furlough under review” so there is hope that this potentially problematic issue could be mitigated in the future.

Final comments

Will we see a raft of redundancies in large-scale administrations during the pandemic given the uncertainty? This seems to go against the policy behind the JRS, as well as frustrating the rescue culture intended by the administration process, but we will have to see.