March 23, 2020

COVID-19 UK: Employment update - Furloughing and support for employee pay

The Coronavirus Job Retention Scheme announced by the government on Friday 20 March is designed to support employers in paying employees' salary for those who would otherwise be laid off during this crisis.

Government guidance so far provides a short overview of the scheme but more information is expected imminently. In the meantime, this update outlines what we know so far and lists a number of issues which employers will need to address.

Covid19 - Support for Businesses

Information available so far

  • The scheme will apply to all employers in the UK, whatever the size or sector.
  • The scheme involves "furloughing" designated affected employees who would otherwise be laid off in this crisis.
  • The dictionary meaning of "furloughing" is "a leave of absence" usually "a temporary lay off from work".
  • For the scheme to apply it would appear that the employees must be kept on the payroll instead of them being dismissed by redundancy or being put on unpaid layoff.
  • The scheme will only be applicable to PAYE employees.
  • HM Revenue & Customs (HMRC) will reimburse 80% of furlough workers' wage costs up to a cap of £2500 per month but it is not clear if the cap of £2500 is net or gross; we are assuming it is gross at this time.
  • The employer will be permitted to top up the pay to 100% but does not have to.
  • It is not clear if HMRC will meet the costs of employers NICs – which could remain a cost to employers.
  • HMRC is working urgently to set up a system for reimbursement- existing systems are not set up to facilitate payments to employers.
  • The scheme will be backdated to 1 March 2020 and run until 31 May 2020, to be extended if necessary.

Key issues for employers to consider

  • In what circumstances would an employee be "otherwise laid off"?
    • Lay-off has a specific legal meaning which involves sending workers home with no pay when there is no work for them to do. Employers are only entitled to lay off an employee in this way if there is a specific right in the contract of employment, although both parties could agree to include such a right if they wished.
    • Lay off under the scheme is likely to be far wider and mean where the employer would otherwise have made the employee redundant rather than be "laid off" in the legal sense.
  • Does the employee have to consent to being furloughed?
    • The government said in its overview that "changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation".
    • Placing an employee on furlough leave with a reduction in pay without consent will be a change of status as described in the government guidance. As such, it will amount to a fundamental change to their contract of employment and would normally require employee consent.
    • Where the employer forces the employee to take a cut in wages, the employee would be entitled to make a claim for unlawful deduction of wages and constructive dismissal.
    • However, consent may not be needed if the contract already contains a provision allowing the employer to reduce or stop pay where there is no work available (albeit this would be an unusual provision, and we do not expect it to be in the vast majority of contracts).
    • Where the employee is laid off on full pay whilst receiving the grant for 80% of their wages, employee consent won't necessarily be needed.
    • However, there will be certain employees who have a right to work and therefore could make a claim for breach of contract where they are laid off on full pay. For example, this would include employees who need to work to maintain their skills, or whose pay is dependent on commission. It is likely that an employee who has a right to work in this way would need to consent to being furloughed, even on full pay. However, we do not see this as being an issue in practice as we anticipate furloughing will be used for a high volume of employees who do not need to work to maintain their skills, rather than a smaller proportion of highly skilled employees. We are keeping this under review though.
  • How can an employer select which employees to furlough when there is some work to be done?
    • Clearly if work can be done from home, those employees will not be furloughed for so long as work is available.
    • As for the other staff, or where there is insufficient work even from home, the employer should treat this as it would a redundancy process and consider calling for volunteers first.The employer will then need to consider all the usual issues of pooling and fair selection. The process will need to be handled correctly to avoid claims, particularly in relation to discrimination.
  • Where 20 or more employees are to be furloughed at the same establishment, would an employer need to follow the collective consultation redundancy rules?
    • An employer is obliged to collectively consult if it "is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less".
    • As furlough relief applies to workers who would otherwise have been laid off, it is logical that an employer must meet the first test of "proposing to dismiss" because this is an essential part of qualifying for the furlough relief. 
    • "Redundancy" has a wide meaning under the collective consultation rules and includes where an employer changes employees terms and conditions of employment through termination and re-engagement. The courts have confirmed that this could even include a resignation where an employer has unilaterally made a significant change to essential elements of an employee's employment contract such as a unilateral reduction in salary.
    • Where an employee consents to the change, the rules could still apply where there is a technical "dismissal". An employee can be dismissed where the employer brings their current contact to an end, even though they continue to be employed by the same employer under a new contract.  For example, this could occur where an employee is redeployed to suitable alternative employment. 
    • We do not see the collective redundancy consultation rules applying in cases where an employer is genuinely looking for volunteers and has no proposals to make any redundancies.  However, this will likely be a rare circumstance – because furloughing may be essential to avoiding redundancies.  Employers do therefore need to carefully consider collective consultation requirements alongside any proposals to furlough.  We can assist with this.
  • Who is eligible?  At the press conference when the scheme was announced, the Chancellor indicated that the scheme would apply to PAYE staff.  Self-employed contractors are therefore excluded from this scheme. Employment law distinguishes between "employees" and "workers" (who generally have reduced employment rights).  Zero hours workers who are paid through the payroll are presumably included in the scheme although how an employer will work out 80% of normal pay will need to be addressed in further guidance.
  • Will furloughed workers be entitled to work for other employers? It would seem unlikely for an employee to receive government funding of 80% of their pay and also work and be paid by a third party.  However, this is not known yet and we can see arguments for and against it.  
  • What about sickness and other leave entitlements during furloughing? 
    • Where an employee falls sick during furloughing it is likely that the usual statutory sick pay entitlements will apply, although this could be at a lower rate than furlough pay. Whether company sick pay will also apply will depend on the terms of the employer's sick pay policy.
    • It is likely that the employee will continue to accrue statutory and contractual annual leave.
    • All the usual rules regarding statutory maternity and family leave should apply.
    • Further guidance is awaited on this because employers will clearly want to understand all their ongoing costs if they use furloughing as compared to redundancies.
  • Other benefits –retaining other contractual benefits during furlough leave will likely encourage employees to readily consent.  However, the ongoing cost may discourage employers from opting for furloughing over redundancies.
  • NICs – it is not yet clear if employers will have to pay the employer National Insurance Contributions due in respect of the HMRC subsidy.
  • How long should furloughing last? – the initial period in which employers will  be subsidised runs to 31 May 2020 but the government has indicated that this will be extended if necessary. Employers will therefore want to make clear to employees that any period of furloughing can be extended if necessary and that employees can be recalled when necessary.
  • What are the differences to redundancy processes? Employers will now have to consider furloughing as an alternative to redundancy.  A fair redundancy process (and indeed collective redundancy consultation) requires a consideration of any ways to avoid redundancy and preserve employment.  Therefore employers will need to consider whether they can furloughed instead of making any redundancies; and if they cannot, they will need to be ready to explain why (making sure that they are not making a decision which "no reasonable employer would").
  • What if we have already dismissed staff?
    • The scheme will be backdated to 1 March 2020. It is therefore possible that employees can be re-engaged if they agree and then placed on furlough leave.
    • Where staff are already in negotiations about reduction in wages, employers may wish to continue with those talks although staff will no doubt wish to wait to understand if furloughing is applicable.

We now await further guidance from the government including HMRC on the detail of the scheme which will hopefully enable us to advise further on the above issues.

For any questions please contact your usual advisor at Clyde & Co.