New legal principle of furlough a job saver
It’s up to employers if they want to furlough some or all staff, but it must be seen as an alternative to redundancy, explains Euan Bruce
The impact of coronavirus on employers is unprecedented. Faced with indefinite closure, many feared the worst and were starting to make efforts to cut their cloth accordingly. This left employees fearing for their jobs and ability to pay bills. It was a relief to employers and employees alike when the Chancellor announced details of a package of measures to protect jobs and incomes.
Among the package of protections is the coronavirus job retention scheme, where the UK government will cover up to 80 per cent of employees’ salaries.
Under the scheme, it is up to employers to identify employees as “furloughed”. Though this has similarities to the existing legal concept of lay-off, it is an entirely new principle under UK employment law.
It is an employer’s decision which staff should be furloughed and when, but such a decision must be an alternative to redundancies. It should not be viewed as an opportunity to make cost savings where work is available for employees.
During the period of furlough, an employee cannot undertake any work for the employer and must be furloughed for a minimum of three weeks. They can undertake training provided it does not generate revenue for, or on behalf of your organisation. They will also be free to undertake voluntary work.
Initial guidance suggested changing the status of employees to furloughed must be done in accordance with the principles of employment law. Subsequent guidance says employers should discuss with staff “any changes to the contract of employment by agreement”. Given the reduction in salary for staff being furloughed, this would suggest staff must give agreement to being furloughed. However, given the alternative is likely to be loss of employment, it’s expected most employees will readily accept the furlough. It may be that the existing contract already makes some provision for staff to be laid off, but employers must ensure they clearly explain and document the arrangements with employees.
The scheme applies to all forms of employment contract, including agency workers and those on zerohours contracts. However, individuals must have been on the PAYE payroll system on 28 February 2020. Anyone starting employment from 1 March 2020 is not eligible.
Furlough is an alternative to redundancy, so if an employee has already agreed to work reduced hours or a period of reduced pay while working, they won’t be eligible for furlough.
The scheme has been backdated to take effect from 1 March and to potentially apply to all employees laid off prior to the scheme being announced. This includes any employees made redundant since 28 February 2020, provided they are rehired by their employer.
It is ultimately a decision for the employer which employees are furloughed. If some are still required to work, the employer is entitled to identify these on the basis of business need, but it is important this is undertaken objectively and without discrimination.
The scheme will cover the lesser of 80 per cent of the employee’s regular wage or £2,500 per month. The figure is gross and excludes any bonus or commission. However, there is still uncertainty whether other allowances which form a routine part of pay, such as shift allowances, would be included.
Where an employee’s earnings vary, their entitlement will be based on the higher of either their earnings from the same month in the previous year or their average monthly earnings for the 2019/20 tax year.
Employers can choose to top-up the payment, but there is no require
ment to do so to participate. However, employers will have to continue providing benefits such as insurance cover and employees will continue to accrue annual leave.
Payments to employees will still be subject to tax, national insurance contributions and pension contribution for any auto-enrolment scheme. Employers will be able to claim for employer’s NICS and the minimum employer contributions for auto-enrolment purposes under the scheme. The scheme is open to all employers operating a PAYE scheme. It is their responsibility to register. They are required to make payments to employees as normal and claim back the government contribution. Claims must be submitted every three weeks.
The system is still being prepared by HMRC, but is expected to be available to administer payments by the end of April.
Additional government guidance on the scheme [was expected] to be published on 3 April 2020.
Euan Bruce is a senior associate, DLA Piper