Does holiday pay rank as an expense of administration for furloughed employees?

Does holiday pay rank as an expense of administration for furloughed employees?

Produced in partnership with Eleanor Stephens

The first thing to consider is what is the usual position for employees in an administration, outside of the Job Retention Scheme (JRS)?

Paragraph 99 of Schedule B1 to the Insolvency Act 1986 (IA 1986), provides that salary payments under contracts of employment ‘adopted’ by the administrators are given super-priority in an administration, ranking before expenses and secured creditors. IA 1986, Sch B1, para 99(6), defines ‘wages or salary’ as including holiday pay or sums paid in lieu of holiday pay. See Practice Note: The 14-day rule and adoption of employment contracts in administration and administrative receivership.

The decision as to whether to adopt employee contracts is ordinarily made during a 14-day grace period after appointment, after which salary and wages under adopted contracts will rank as an expense of the administration (see below). Alternatively, administrators have the ability to make such staff redundant.

If employees are made redundant, they fall under the usual administration rules ie they rank as unsecured creditors except to the extent that some of their claim is preferential. For more information see Practice Note: How a company's insolvency affects its employees. Employees may also be able to make a partial recovery from the National Insurance Fund.

The question, then, is whether administrators are deemed to be ‘adopting’ staff by applying for or making furlough payments?

There have been two key cases on this point.

The first case involved the administration of Carluccios (see Re Carluccio’s Ltd (in administration)). This case confirmed that the JRS can be used by administrators as an alternative to redundancy provided there is a reasonable likelihood of the employees returning to work for the company or for another employer who has acquired the business following a sale by the administrators. This judgment also confirms that ‘adoption’ within the meaning of paragraph 99 will occur upon a payment being made to a furloughed employee. For further information, see News Analysis: Administrators of companies can furlough employees as an alternative to redundancy (Re Carluccio’s Ltd).

That decision was followed by Re Debenhams Retail Ltd (in administration). In this case the employees had been furloughed prior to the administrators’ appointment. Trower J confirmed that the contracts of furloughed employees are adopted by administrators of companies pursuant to IA 1986, Sch 5 Pt I, para 99(5) if those employees are kept in the JRS, even where those employees were furloughed before the administration commenced. Administrators would therefore be liable to pay the shortfall between the 80% reimbursed under the JRS (subject to the statutory cap) and the sums due under the employment contract, unless agreement is reached with the employees that they will accept only such amount as the administrators receive from the government under the JRS, in consideration of being furloughed. For further information, see News Analysis: Employment contracts of employees furloughed prior to the commencement of administration are adopted by administrators if they keep the employees in the scheme (Re Debenhams Retail Limited). The Court of Appeal upheld Trower J’s decision, and confirmed that this extends to holiday as well as salary payments. As holiday payments are not covered by the JRS, these will be payable out of the administration and enjoy super-priority.

For more detail on the furlough scheme generally, see Practice Note: Coronavirus Job Retention Scheme.

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