Re Debenhams Retail Ltd [2020]

  • Posted

This case provides an insight into when administrators are deemed to adopt the employment contracts of furloughed employees.

As you may have heard, Debenhams Retail Ltd was put into administration last month. When Debenhams shops were shut because of COVID-19, employees were placed on furlough and notified that their pay would be limited to amounts recoverable under the Coronavirus Job Retention Scheme (CJRS). Debenhams had not asked its employees to agree to these changes, so the administrators wrote to staff, asking them to confirm their acceptance.

If the administrators were deemed to have adopted the employees’ employment contracts, not only would payments that would be covered by the CJRS be prioritised over the administrators’ own remuneration and costs, but so would payments falling outside the scheme, such as:

  • for an employee who had not agreed to vary their employment terms, the difference between their salary and the amount payable under the CJRS; and
  • holiday pay. Even in the case of an employee who had agree to vary their contract, 20% of their holiday pay rate could fall outside of the CJRS.

The High Court held that the administrators would be taken to have adopted the employment contract of an employee in certain circumstances. The administrators appealed to the Court of Appeal. By this time, holiday pay that would need to be paid but may not be covered by the CJRS was estimated at £1.28 million per quarter.

The Court of Appeal upheld the High Court decision that a furloughed employee’s contract of employment will be deemed to have been adopted by the administrators when they:

  • paid the employee wages; or
  • applied under the CJRS for a grant in respect of the employee

The Court observed that there might be good reasons to exclude administrators who simply implement the CJRS from being deemed as adopting employment contracts under the relevant legislation, but the law as it presently stands cannot accommodate this.