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Furloughed employees and Insolvency – The Debenhams case

Jonathan Taylor - April 29th, 2020


High street retailer Debenhams notified approximately 13,000 employees in writing on 25 March 2020 that they were being furloughed in accordance with the Job Retention Scheme (JRS). This being until further notice.

An additional 867 staff were contacted and furloughed over the following few days on identical terms (the circa 13,867 employees being the “Furloughed Employees”). Debenhams subsequently entered administration on 9 April 2020.

In view of the lack of clarity in the Government guidance regarding the requirement for express consent from employees to be validly furloughed, the Administrators wrote to the Furloughed Employees on 10 April to obtain their consent to be furloughed and the associated wage reduction. Around 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 employees had a crucial role to ensure the future viability of the business. The statutory purpose of the Administration being to save the business as a going concern.

However, if the employment contracts of the Furloughed Employees were adopted, this would result in employees having super-priority status, meaning that they would be paid ahead of the Administrators’ remuneration. This is obviously a major concern particularly where the business is not trading or revenue has been reduced significantly.

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.

Source: Squire Patton Boggs