Out-Law Analysis | 27 Mar 2020 | 11:24 am | 6 min. read
Once the Coronavirus Job Retention Scheme is fully operational, employers will be able to claim a grant from HM Revenue and Customs (HMRC) to cover most of the wages of their workforce who remain on payroll but who are temporarily not working during the coronavirus outbreak.
The scheme will run until at least 31 May 2020 and payments can be backdated to 1 March 2020 provided that employees met the eligibility criteria at the time.
Any employer in the country is eligible for the scheme, provided that it had a PAYE scheme in operation on 28 February 2020.
Employers may claim 80% of the normal pay of furloughed employees up to a cap of £2,500, plus the employer's National Insurance contributions and minimum auto-enrollment employer pension contributions on that 80%.
For salaried employees, pay is their normal salary. Commissions and bonuses are excluded.
For employees whose pay varies, their pay is the higher of the pay from the equivalent pay period last year or the average pay of the past 12 months.
Employers do not need to top-up the 80% in order to qualify.
Employees earning more than £37,500 will receive less than 80% unless employers agree to top up.
The cost of benefits in kind is excluded.
Although the guidance does not explicitly state this, we believe that employers will need to continue to pay furloughed employees on their normal payroll dates, and will not be able to wait for receipt of the grant before making payments. This pay must be taxed as normal.
The scheme will apply to people who have been designated by their employers as 'furloughed employees' for at least three weeks. 'Furloughed' means still employed but not doing any work at all for the employer.
Employees who have had their hours reduced but who are still working will not be eligible. However, employees may carry out training and voluntary work provided that they do not provide services to or generate revenue for their employer. If they undertake training, they must be paid at least National Minimum Wage for the training time.
It is unclear whether employees may take on new paid work for a third party whilst furloughed if their employer permits it. This will be an important point as employers in essential industries seek to maintain staffing levels by hiring new staff.
All employees who were in employment on 28 February 2020 are potentially eligible. Those who started after that date are not. Where employers have no work for new starters to do, they will need to agree to defer the start date or pay notice to cancel the contract.
The scheme applies to all employees whether full-time, part-time or on zero-hours contracts. The self-employed will be covered by an alternative Self-employed Income Support Scheme.
An employer can only claim the grant in respect of furloughed employees. The employer must notify the employee in writing that they are furloughed, and must keep a copy of that communication.
The detailed guidance suggests that only those employees who agree to be furloughed would be covered. However, although the guidance does not expressly deal with this point, we do not anticipate that specific agreement will be required from those employees who have a lay-off clause in their employment contract.
Where there is no lay-off clause, employers may need to consider topping up pay in order to secure agreement. This would guard against the risks that employees on whom furloughing is imposed would not be eligible for the scheme and could claim a sum equivalent to the reduction in pay through an unlawful deduction from wages claim.
It appears from the guidance that people who are sick or self-isolating may only be furloughed once they would be ready to return to work.
It appears that employees who are on unpaid leave due to childcare requirements may be furloughed, provided that the employer has no work for them to do.
It is unclear how furloughed leave interacts with annual leave. Many employers are requiring employees to take annual leave to guard against future business disruption from too much holiday being banked up. Employers would need to pay full holiday pay for any such leave. There is a risk that annual leave would interrupt the minimum three week furlough period and so render the whole period of absence ineligible for the grant, so cautious employers will seek to cancel leave.
Many employers have considered this as a fair means of introducing furlough. It appears that this is permissible provided that each individual is furloughed for at least three weeks on each occasion.
Employers will need to claim via a portal which will be set up by HMRC. They will only be able to claim every three weeks.
In these circumstances, it is important not to overstate the legal risks. The practical risk of claims must be much-reduced given the wider issues people are facing and the financial cushion provided by the scheme.
In particular, if employers agree to top up to full pay, the risks ought to be negligible. Nevertheless, employers need to at least be aware of the potential claims they may face.
The scheme must be implemented in accordance with employment law. There will be no statutory right to designate an individual as furloughed.
Where there is a contractual lay-off clause, employers are in a strong position to benefit from the scheme. They must use objective criteria for deciding who should be furloughed.
Where there is no contractual lay-off clause, employers will still need an individual's consent to being furloughed. Without that consent, an individual could claim breach of contract or unlawful deduction from wages to recover the lost income if the employer does not top up to full pay; constructive dismissal; and potentially a protective award for failure to consult in the run-up to dismissal. The individual may also be ineligible for the scheme.
Given that the scheme potentially only has nine weeks left to run, imposing the change through dismissal and re-engagement is unlikely to be an attractive option save for people with very short service. It would also attract negative PR.
Therefore, employers should consider how they could obtain consent to reduce the legal risks. The most obvious route is to run a voluntary scheme and perhaps to offer some form of top up to the scheme payment. Where employers have collective bargaining, they should talk to the union first before launching the scheme.
With people increasingly nervous about leaving home, and many now facing childcare difficulties, voluntary schemes should be successful. If anything, the issue may be that they are over-subscribed.
Employers should ensure they have objective reasons for selecting who is furloughed and who is not. If the scheme permits them to alternate furloughed status between individuals, they should give serious consideration to doing that. In theory an employer could face breach of trust and confidence or discrimination claims from people who are not furloughed but who want to be, or from those that are and who miss out on pay (because the employer is not topping-up). An objective selection process should provide a strong defence to such claims.
If employers still want to implement redundancies, care should be taken to consider whether the option to furlough is a reasonable alternative to dismissal, in order to reduce the risk of unfair dismissal claims.
Employers should consider furloughing as soon as possible - the sooner they furlough, the sooner wage costs will be covered by the grant.
We strongly recommend that employers seek consent for furloughing if there is no contractual term permitting it.
If furloughing will mean selecting some people in the same role to come to work and some to stay at home, employers should devise fair criteria to select who falls into each group. Where too many people volunteer for furlough, we believe it would be lawful to give preference to those who are vulnerable.
Employers must ensure that they notify furloughed employees in writing that they are furloughed, and retain a copy of the notice.
They should also consider what position they wish to take in relation to annual leave, given the lack of clarity as to whether that might render a furloughed employee ineligible for the scheme.
Finally, employers should consider the impact of the reduction in pay on salary-related benefits. For example they should check the terms of life insurance schemes to see whether this would impact on cover.
25 Mar 2020
25 Mar 2020