Job Retention Scheme (furlough leave) and other options
By Catherine Addley | Paralegal
Employment / Commercial
The introduction of a new Coronavirus Job Retention Scheme (furlough leave) was announced by the government on 20 March 2020. Under the scheme, all UK employers, regardless of size or sector, can claim a grant from HMRC to cover 80% of the wages costs of employees who are not working but kept on the payroll (“furloughed”), of up to £2,500 a calendar month for each employee. Employers can choose to top up the remaining 20% if they wish.
On 20 March 2020, the Chancellor announced that the scheme will be backdated to 1 March 2020, be open for at least three months and will be extended if necessary. HMRC are urgently working to set up the new system of reimbursement, but the government hopes that the first grants should be paid within weeks.
The government has not, as yet, published much written guidance on the scheme. However, it has updated the COVID-19: support for businesses guidance and COVID-19: guidance for employees to provide basic details.
What employees are covered?
The scheme will apply in respect of all employees on PAYE, including those on zero-hours contracts. This means that it will cover many workers as well as employees.
Are the self-employed covered?
No but an amendment to the Coronavirus Bill 2019-2021 has been proposed which would give the self-employed similar rights.
What steps must employers take to put employees on furlough leave?
Employers will need to:
- Decide which employees to designate as furloughed employees.
- Notify those employees of the intended change.
- Consider whether it needs to consult with employee representatives or trade unions.
- Agree the change with the furloughed employees. Most employment contracts will not permit an employer to reduce an employee’s pay, provide them with no work, and change their employment status, without agreement. However, faced with the alternatives, which are likely to be unpaid leave, lay-off, or redundancy, the majority of affected employees are likely to agree to be placed on furlough leave.
- Confirm the employees’ new status in writing. Ideally, the employer should advise how long it expects furlough leave to continue, however, this may be difficult in the current climate. Employers may wish to put employees on furlough leave for an initial period, subject to review.
- Submit information to HMRC about the employees that have been furloughed and their earnings through the new online portal. The COVID-19: support for businesses guidance states that HMRC will set out further details on the information required.
- Ensure that the employees do not carry out any further work while they are furloughed.
What about employees who have already been given notice of redundancy or placed on unpaid leave before furlough leave was announced?
The government has advised that, once up and running, the scheme will be backdated to 1 March 2020. It would therefore be possible, in theory, for an employer to propose to employees who are still employed, but have been given notice of redundancy or placed on unpaid leave, that they be put onto furlough leave instead. However, the position is more complicated where an employee’s employment has already terminated by reason of redundancy. It would seem in keeping with the purpose of the scheme for such employees to be re-engaged (assuming the employee’s consented) and placed onto furlough leave. However, the government has not advised at this stage whether it will be possible to do this.
Can an employer move employees who are already on reduced hours onto furlough leave?
Some employers have already placed employees temporarily onto reduced hours and pay due to the downturn in work as a result of the pandemic. Little detail of the scheme has been provided. However, its purpose is intended to be for employers to retain employees who would otherwise be made redundant. There is an argument that the scheme does not apply if an employer is managing with employees working less hours and redundancies are therefore not anticipated at this stage. However, it seems unlikely that employers will have to prove to HMRC that redundancies will be made unless employees are placed on furlough leave. We will have to wait and see what information HMRC requires.
The difficulty for employers, however, is that the scheme may financially disincentivise them from keeping their business open. Keeping a business running with staff on reduced hours allows an employer to keep a revenue stream and retain customer loyalty. However, this is likely to be more expensive for the employer than putting all staff on furlough leave and have HMRC pay 80% of their wages.
Can employees who elected to take unpaid leave to be able to look after their children home from school or nursery be put on furlough leave instead?
This depends upon whether HMRC imposes specific conditions on the circumstances in which employers can claim reimbursement of wages paid during furlough leave. For example, if there is a requirement that the reimbursement will only be made where the furlough leave was agreed as an alternative to redundancy (which appears to be the intention) then this type of situation may not qualify unless they were genuinely at risk of redundancy. However, it seems unlikely that employers will have to prove to HMRC that redundancies will be made unless employees are placed on furlough leave.
If further detail clarifies that there are no specific qualifying requirements for furlough leave, employees on unpaid leave could be put on to furlough leave if they agree to a temporary contractual variation in pay.
What does the £2,500 cover?
The COVID-19: support for businesses guidance states employers will be reimbursed “80% of furloughed workers wage costs, up to a cap of £2,500 per month”. The COVID-19: guidance for employees states that the scheme will allow an “employer to claim a grant of up to 80% of your wage for all employment costs, up to a cap of £2,500 per month”.
It is unclear at this stage whether the £2,500 reimbursement is intended to cover anything other than the employee’s basic salary. However, the use of the words “all employment costs” in the guidance for employees suggests that this could include additional costs such as pension contributions or other benefits. It is also unclear whether the £2,500 is gross or net of tax and NIC. Confirmation on this point is required from HMRC.
Are employers obliged to top up the remaining 20%?
The COVID-19: guidance for employees states that “your employer could choose to fund the differences between this payment and your salary, but does not have to”. Withholding 20% of an employee’s salary, will however, amount to breach of contract and unlawful deduction of wages unless the employee gives their consent. It is expected that the majority of employees will consent since furlough leave is a better alternative than unpaid leave, lay-off, or redundancy.
How is the 80% calculated for those with irregular earnings?
It is not currently clear what wage costs HMRC will take into account when determining the level of reimbursement that can be claimed. It will be particularly difficult to identify what 80% of wages are for a zero hours employee whose wage fluctuates. The employer will need to have clarity on this point before it agrees furlough leave with the worker because they are agreeing to a contractual variation in terms of payment and will want to ensure that they do not commit to payment in excess of that which may be recovered from HMRC.
Some employers may take the view that those casual or zero hours workers and employees who are not guaranteed work from the employer do not need to be put on furlough leave at all because the employer can instead simply refrain from offering them work. However, this approach is not in the spirit of the scheme which intends to ensure that employees and workers retain a basic income during the crisis stages of the pandemic.
How is salary calculated for employees returning from or just about to go on maternity or other types of family leave?
Again, it is not yet clear how HMRC will determine an employee’s wages for the purposes of claiming the reimbursement. It is also not clear how furlough leave will interact with other forms of leave. However, there does not appear to be any indication that being on furlough leave will reduce or change any other employment rights. We expect that an employee who is due to go on family leave will retain their right to do so and be paid accordingly, although eligibility for and amount of statutory pay for that family leave may be based upon their temporarily reduced rate of pay depending on the timing.
In some circumstances, employees may refrain from exercising their rights to family leave because they will be entitled to more pay, and have time off to care for their child, on furlough leave. For example, an employee on furlough leave who is due to go on paternity leave, may decide not to assert their right to do so because they will be financially better off on 80% of pay than they would be on statutory paternity pay.
Furlough leave will not affect the two-week compulsory maternity period. In any event, most employees will prefer to take at least six weeks’ maternity leave given that the first six weeks of statutory maternity pay is paid at 90% of normal weekly earnings. Although there may be a short term financial benefit for an employee who is only entitled to statutory maternity pay in taking only six weeks’ maternity and then being on furlough leave, the Coronavirus Job Retention Scheme is currently only due to run for three months (although it may be extended). An employee who cuts their maternity leave short on this basis could be required to return to work earlier than they anticipated.
Can an employee request their employer puts them onto furlough leave?
Yes, an employee can request this, but the employer does not have to agree. It is the employer’s decision which employees to place on furlough leave, if any. It seems that it is also the employer’s decision whether to place employees on furlough leave, or make them redundant. Potentially redundant employees do not have a right to require their employer to place them on furlough leave as an alternative to redundancy. However, it is hoped that many employers will see the new scheme as preferable to business closure and making redundancies. It is unclear whether refusing to place an employee on furlough leave and making them redundant could amount to an unfair dismissal.
Is the idea of furlough leave unfair on employees who have to continue working, particularly when many are going to have childcare difficulties?
It may seem unfair that some employees will be required to continue working, potentially increasing their risk of infection if they are unable to work from home, and others will be permitted to receive a substantial proportion of salary and not be required to do so. However, provided the employer has used appropriate, non-discriminatory criteria to choose who is granted furlough leave, it is possible for an employer to lawfully choose to furlough only part of the workforce. Some employees may look at this issue the other way and prefer to continue to receive full pay so the employer may find that seeking volunteers for furlough identifies the preferences of individual employees and avoids a feeling of unfairness.
Will employers need to collectively consult if they intend to put 20 or more employees on furlough leave?
Where the employer intends to vary the contracts of 20 or more employees, and it intends to dismiss employees who do not consent to the change in their terms, for the purposes of section 188 of TULRCA, those employees will be classed as dismissed by reason of redundancy. The employer will therefore have a duty to inform and consult appropriate employee representatives and notify the Secretary of State using form HR1. It is unclear, however, at this stage, whether the government expects employers to follow this process before placing employees on furlough leave. Employers could perhaps rely on the special circumstances defence if they do not consult.
What help for struggling employers is offered by the government?
In the Spring 2020 Budget, the government announced several measures to help employers who are struggling with the economic consequences of COVID-19. employers with fewer than 250 employees to reclaim SSP paid in respect of the first 14 days of COVID-19-related sickness absence, which will have retrospective effect from 14 March 2020.
On 17 March 2020, the Chancellor set out the detail of the measures the government will introduce to support employers, including:
- Employers with fewer than 250 employees to reclaim SSP paid in respect of the first 14 days of COVID-19-related sickness absence, which will have retrospective effect from 14 March 2020.
- A 12-month business rates holiday for all retail, hospitality and leisure businesses in England.
- A Coronavirus Business Interruption Loan scheme.
- A HMRC Time to Pay scheme.
On 20 March 2020, the government announced:
- The introduction of a Coronavirus Job Retention Scheme
- The extension of the interest-free period under the Coronavirus business interruption loan scheme from 6 to 12 months, and that it will be available from 23 March 2020.
- VAT payments will be deferred in respect of the next quarter and not be due until the end of the financial year.
- Further measures for medium-sized and large business will be announced next week.
- To assist the self-employed, the government will suspend the minimum income floor so that they can access Universal Credit at a rate equivalent to the SSP received by employees. Further, self-assessment payments will be deferred until January 2021.
What steps can we take to protect our business if we are forced to temporarily close?
Many employers will be in this situation following the government’s announcement on 23 March 2020.
For most employers, this will present significant economic hardship: if the business if forced to close and cut off revenue, but also required to continue paying employees then it is easy to see how this could potentially lead to permanent closures, insolvency and redundancies. The government has announced a number of measures to help businesses survive the economic hardship caused by the pandemic as covered earlier in this document. Where an employer is not able to continue its business with employees working remotely, the Coronavirus Job retention Scheme will pay 80% of employees’ salaries of up to £2,500 a calendar month as long as they are kept on the payroll.
Other options include:
- Consulting with employees and trade unions or other representative bodies to try and agree a temporary reduction in pay and benefits for the duration of the crisis. Under normal circumstances, employees and their representatives would be unlikely to agree to such measures. However, where the alternative is closure and job losses, there may be more of an appetite to reach an agreement.
- Considering lay-off, if the employer has the contractual right to take that approach. If the employer does not have the contractual right to lay-off then it may either take the risk in doing so in breach of contract, or try to obtain consent to do so.
- Give notice to workers to take holiday. Employers are entitled to give notice to workers to take statutory annual leave, provided there is no contrary contractual right. Although this would not save the employer money in the short term, it would ensure a full workforce once the business reopens and allow full focus on rebuilding the business.
- Seek volunteers to take unpaid leave.
- Seek volunteers for voluntary redundancy.
- Consider whether there are workers and contractors whose contracts can be terminated without the risk of an unfair dismissal or redundancy payment claim.
- If the longer-term impact of the pandemic is likely to mean that a reduced headcount will be required even when the business reopens then the employer may need to consider redundancies.
In what circumstances should the employer consider lay-off and short-time working?
Laying off employees means that the employer provides employees with no work (and no pay) for a period while retaining them as employees; short-time working means providing employees with less work (and less pay) for a period while retaining them as employees. These are temporary solution to the problem of no or less work. However, if employees are laid-off or put on short-time working in circumstances where the employer does not have the contractual right to do so then the employer will be in fundamental breach of contract entitling the employee to resign and claim constructive dismissal.
A better option is likely to be the Coronavirus Job retention Scheme which will pay employees’ salaries of up to £2,500 a calendar month as long as they are kept on the payroll.
Lay-off may need to be considered in the following scenarios:
- A downturn in work due to the effect of COVID-19 on suppliers and customers means that fewer employees are required on a temporary basis.
- Temporary closure of the workplace due to insufficient employees being able to work or the effect of government restrictions.
Short-time working may need to be considered where there is:
- A downturn in work due to the effect of COVID-19 on suppliers and customers meaning that the business does not need all employees to work their contracted hours.
Employees who are already unable to work, for example due to sickness or (arguably) medically advised self-isolation, cannot be laid-off.
We want to let you know that we are here, if you require any further information our Employment Team can offer advice or guidance during this period of great uncertainty. Please call us on 01603 751926 or email [email protected]
NOTE: The above is correct as at 24 March 2020 but is very much subject to change.