All things Furlough: What your Business Needs to Know!

A few weeks ago, the Coronavirus was barely on people’s radars and the term “furloughing” unheard of. Every day we are faced with developments that are significantly impacting our businesses. The government have announced some support packages to assist businesses through this period, including the Job Retention Scheme. Although, navigating this scheme alongside existing employment law, can feel a bit like playing minesweeper. This article is to bring you up to speed as developments stand as at 6 April 2020.

Job Retention Scheme

The Chancellor announced the implementation of Job Retention Scheme on 20 March 2020. The first guidance was published on 26 March 2020 and was subsequently updated on 4 April 2020.

The scheme was back-dated to apply from 1 March 2020 and it is currently open for 3 months, although it could be extended “for longer if necessary”. The purpose of the scheme is to preserve job security in a situation where the business would otherwise be looking at either laying-off or making individuals redundant.

Eligibility – Who is the Furloughed Worker?

The individual must have been on the payroll as at 28 February 2020. The gap from this date and the announcement of the scheme, does mean there are new starters that are unfortunately not covered by the scheme. It also appears businesses who had a TUPE transfer on or after 28 February 2020 will also be excluded from the scheme. However, if you have dismissed an individual post 28 February 2020, the scheme does permit you re-hiring, if you so wish, and placing the individual on to furlough leave instead.

Furloughing applies to “workforce who remain on payroll but are temporarily not working during the coronavirus outbreak”. The recent update has clarified that extends further than just employees and does apply to “workers” so long as they are on the payroll at 28 February 2020. It also extends to company directors who have an employed element, including sole directors employed via their own umbrella company.

The new guidance also makes the position clear that furloughing can be applied to individuals shielding and those with childcare or caring obligations.

It does not apply to any workers who can continue to work either in the office or remotely, and there is sufficient work to do so. The scheme is designed to help businesses with a reduction in work and affected individuals follow the current medical advice, whilst avoiding being laid-off or made redundant. Where businesses can operate without physical interactions and employees are working remotely, the scheme does not apply.

Changing Employment Status

Unless there is a contractual term permitting the employer to change the individual’s employment status, they will need to notify the affected individual and seek their consent to the variation. It is sensible to obtain their consent in writing.

Pay

The scheme enables employers to recover 80% of the furloughed workers’ wages, to a maximum of £2,500 per calendar month. The 80% is paid gross of employee’s tax, national insurance and pension contributions. The business can also recover employer’s national insurance and pension contribution on top of the 80%.  When calculating the 80%, it includes wages, usual commissions, past overtime and fees (these have not been defined but we are assuming they relate to professional membership fees). It does not include discretionary bonuses or commission, benefits in kind (car allowance, medical cover) or tips. For individuals who have variable earnings, these can either be averaged over 2019/2020 fiscal year or the same as the month in the previous year, i.e. payment in April 2020 would be based on payment in April 2019.

It is within the employer’s discretion whether to top-up the remaining wages. However, employers need to be mindful that pay is one of the most fundamental contractual terms. Like the change in status, any variation of contract should be done with consultation and consent of the individual. One would hope when faced with the alternative of potential termination, they would be willing to agree to this temporary change. Employers should proceed with great caution if seeking to unilaterally vary the contract of employment, or if seeking to dismiss and re-engage.

The scheme is a grant for reimbursement and, as such, the employer will need to make the wage payment to the worker through PAYE and then will need to apply for the repayment though the online portal. The portal is not currently live and there is no announced date for implementation, however HMRC anticipate it to go live around the end of April 2020.

The scheme therefore does not mitigate cashflow issues. If your business is struggling now and needs short term cashflow support, then you may be eligible for the Coronavirus Business Interruption Loan Scheme. Alternatively, you will need to consult with your affected workforce and see if you can obtain their consent to defer payment until it has been recovered from HMRC.

Selection

It is for the employer to determine which individuals could be placed on furlough leave. Like redundancies it should reflect the diminished need for them to do the work they would usually do. Employers need to identify which of their workforce will be designated as “furloughed workers”. When selecting individuals for furlough, employers would be advised to have a clear rationale for individuals being selected to safe-guard them from any subsequent challenges from employees around discrimination, detriment and potential constructive dismissal claims.

It is important to note that all individuals selected for furlough leave need to be informed in writing and this needs to be retained by the employer for 5 years. This is presumably for HMRC’s anti-fraud measures.

Duration and Obligations on Furlough Leave

The minimum duration for furlough leave is 3 weeks. The guidance has been clarified to confirm that businesses can rotate furlough leave, as long as each separate period is a minimum of 3 weeks.

While on furlough leave the individual is not permitted to do any work for the business that is providing a service or revenue generating. They can however undertake training, providing the do not go below minimum wage for the period completing training.

The guidance has also made it clear that they are able to perform paid work for another employer or business during their furlough leave.  

Annual Leave and Pay

The correlation between annual leave and furlough leave remains one of the areas lacking clarity. It is recognised amongst most employment law experts, in accordance with current legal position, that individuals on furlough leave can still be required by the employer to take annual leave. The employer must give at least double the amount of notice as the leave they wish for them to take. For example, 10 days of annual leave will require 20 days’ notice.

As a result of emergency legislation, employers are also now permitted to allow individuals to carry over up to 20 days of annual leave entitlement, across 2 years, where it has not possible to take it because of the coronavirus situation. This may go some way in helping businesses manage annual leave entitlement during these times. However, it is recognised that allowing all the workforce to carry over this much leave would still cause operationally difficulties for an employer, at a time when it is (hopefully) recovering from the situation. It is therefore important to note that it does not prevent the employer from depleting some of the annual leave whilst the individual is on furlough leave. In order to protect the implied term of mutual trust and confidence, it would be sensible to adopt a balance between the preferences of the individual and the needs of the business. 

Sick pay

Employers cannot furlough individuals on sick leave. Employers must pay the individual in accordance with their usual contractual entitlement for sick pay or Statutory Sick Pay in the event there is no company sick pay, or it has been already exhausted. Statutory Sick Pay for coronavirus is payable from day 1.

Redundancies

Although it is hoped that above job retention scheme will limit the need to make redundancies, this nevertheless remains something that many businesses will still face. Any redundancies will need to fall within the current statutory provisions. There needs to be a genuine redundancy situation (a closure of business or diminished need for employees to do the work available) and a fair and reasonable procedure adopted. This would include a fair warning, a consultation process including selection process, and considering any possible options of suitable redeployment. 

If you make redundancies, employees will be entitled to wages until termination date, accrued but untaken annual leave and notice pay. Employees with 2 years’ service or more will be entitled to a redundancy payment.

If you have any questions on employment related matters, please contact Kimberley Whalen-Blake on 01242 586350 or at kwb@hughes-paddison.co.uk.