Administrators and the Coronavirus Job Retention Scheme
The Court of Appeal has recently considered the potential liabilities of administrators towards employees furloughed under the Coronavirus Job Retention Scheme (CJRS).
It ruled that, if an administrator has made payments under the CJRS to employees who were already furloughed by the time a company goes into administration, then the administrator should be deemed to have “adopted” the contracts of employment.
Debenhams were forced to close due to the coronavirus pandemic. On 26 March 2020 Debenhams wrote to approximately 13,000 store-based employees asking them to agree to being furloughed. The majority of the employees expressly consented to the variation of their contracts. The appointment of administrators took place on 9 April 2020.
The law on adoption of contracts of employment in relation to insolvency is contained within Paragraph 99 of Schedule B of the Insolvency Act 1986. This is an important piece of legislation.
It provides that, if an employee’s contract of employment is adopted by an administrator, the employee will enjoy ‘super-priority’ status in the administration in respect of their wages. This means that the employee will rank ahead of both the claims of creditors and the expenses of the administration.
The Court of Appeal accepted that there may be good policy reasons not to regard contracts of employment subject to the CJRS as having been adopted. However the Court found that the law, as it stood, could not accommodate this. The Court of Appeal stressed that this case had to be considered by reference to the law and not the intentions of the administrators.
The Court identified three factors which it found supported their conclusion that the administrators had adopted the contracts of employment of the furloughed employees.
Firstly, they were continuing to pay the wages of the furloughed employees up to the limits set by the CJRS.
Secondly, all the furloughed employees who had accepted the continuation of their employment on these terms would remain bound by their contracts of employment.
Thirdly, by continuing to pay the furloughed employees, the administrators were acting with the objective of rescuing Debenhams as a going concern (that being the purpose of the administration) and in the interests of the creditors as a whole.
While the requirement not to provide work under the CJRS was a relevant countervailing factor, it was not decisive. That had to be balanced against that fact that, in all other respects, both sides continued to perform the employment contracts.