On 20 March 2020, the chancellor, Rishi Sunak, announced the Coronavirus Job Retention Scheme (the Scheme) as part of the UK government’s measures to help support businesses through the current COVID-19 pandemic. Brief guidance followed after the announcement, with more detailed guidance released on the evening of 26 March 2020. There is a lot we still do not know, but here is the updated position.
About the Scheme
- What is the Coronavirus Job Retention Scheme? It is a temporary scheme announced by the UK government on 20 March 2020 as part of its package of measures to help support businesses through the current COVID-19 pandemic. The aim of the scheme is to protect jobs and avoid redundancies in organisations whose operations have been severely affected.
- What does the Scheme do? The Scheme allows an employer to designate certain individuals who are paid wages via the Pay As You Earn (PAYE) system as “furloughed”, keeping them on payroll as an alternative to terminating their employment. The employer can then seek reimbursement of some of their labour costs from the government (see #2 under “Payments under the Scheme”).
- How is the Scheme accessed? Reimbursement is via an HMRC portal. In guidance released last week, the suggestion was that employers must notify HMRC which individuals have furloughed status, along with details of their earnings, although the updated guidance suggests a more general approach to claiming under the Scheme (see #1 under “Payments under the Scheme”). We expect to understand more about the process once the portal is launched.
- When does the Scheme start? It will be back-dated to start from 1 March 2020 and will run for an initial period of three months, but may be extended. Employers can use the Scheme at any time while it is open. As HMRC is having to build its IT infrastructure from scratch to administer the Scheme, there may be a delay in funds being available. It is expected to be operational by the end of April.
- Is the Scheme compulsory? It does not appear to be a compulsory scheme; employers are not obliged to make use of the Scheme, and workers will need to consent to be furloughed if it means a change to their terms and conditions (see #2 under “About furloughs” below)
- Which employers can make use of the Scheme? The Scheme is available to any UK business, of any size and in any sector. This includes businesses, charities, recruitment agencies, and public authorities. The only caveat is that the employer must have created and started a PAYE payroll system on or before 28 February 2020 and must have a UK bank account.
- What about the public sector? Although available in the public sector, it is not anticipated that the Scheme will be used by many public-sector organisations given their need to provide essential public services at this time. Where public funding already is being used to fund staff costs, this is expected to continue, and it is expected that staff will not be furloughed. This also applies to nonpublic-sector employers who receive public funding for staff costs.
- What about companies in administration? If a company has gone into administration, the appointed administrator can access the Scheme.
- Which parts of the workforce are covered by the Scheme? All staff who are paid through the PAYE system and were on the payroll as of 28 February 2020 can be furloughed and covered under the Scheme. This includes full-time and part-time employees, employees on agency contracts (provided they are not working), and those on flexible or zero-hours contracts.
- Can employers reinstate workers who have been made redundant before this Scheme was announced? Yes. Employees who have been made redundant since 28 February 2020 can be reinstated and placed on furlough instead, and the Scheme can then be accessed in relation to them.
- What about people hired after 28 February 2020? Unfortunately, new hires after 28 February are not eligible to be furloughed under the Scheme.
- Can employers use the Scheme in respect of employees who have agreed to reduce their hours? No. The Scheme is intended for those who cannot work at all. It does not include those who are working but have agreed to reduced hours or pay.
Payments under the Scheme
- How do employers claim under the Scheme? Employers will need to make a claim for wage costs through the Scheme via the HMRC portal once it is live.
- What will be reimbursed? Employers can seek reimbursement of up to 80 per cent of a furloughed worker’s usual monthly wage costs, subject to a cap of £2,500 per month per furloughed employee, plus the associated employer national insurance contributions and minimum automatic enrolment employer pension contributions. Fees, commission, and bonuses are not included, nor are any voluntary automatic enrolment pension contributions above the minimum mandatory contribution. More guidance is expected to help employers calculate their claims for employer national insurance contributions and automatic enrolment pension contributions.
- Is that gross or net? It is still a little unclear, although the inference is that the reimbursement is for the employee’s gross pay.
- What tax or other deductions are the furloughed employees responsible for? The amount paid to the employee will be subject to the usual deductions for tax and national insurance. Employees will also have to pay automatic enrolment pension contributions on qualifying earnings, unless they have opted out or have stopped saving into a workplace pension scheme.
- Do employers have to top up the remaining salary shortfall? Not ordinarily. Employers must pay the employee the lower of (i) 80 per cent of their regular wage or (ii) £2,500 per month. An employer can choose to top this up, but there is no obligation to do so. This is the case even if the amount paid falls below the national living/minimum wage, because these minimums only apply where a worker is working. However, if workers are required to complete online training while furloughed, they must be paid at least the national living/minimum wage for the time spent training, even if this is more than the wage that is subsidized.
- Are employer national insurance contributions and pension contributions included under the Scheme in respect of any top-up salary? No. Where an employer chooses to top up salary, any associated employer national insurance contributions or automatic enrolment pension contributions will not be recoverable through the Scheme.
- How is someone’s pay calculated for the purposes of the claim? For part-time and full-time salaried employees, the employee’s actual salary, before tax, as of 28 February 2020 should be used as the basis for calculating the 80 per cent. Fees, commissions, and bonuses are not included.
- What about people on variable hours contracts? How is their normal pay calculated? Where individuals have been employed for 12 months, their employers can claim for the higher of (i) the same month’s earnings from the previous year or (ii) the average monthly earnings from the 2019/2020 tax year. Where they have been employed for less than a year, the claim is based on their average monthly earnings since they started work, prorated if they started in February 2020. Once this monthly pay has been calculated, this is used as the basis for the employer national insurance and automatic enrolment pension contributions elements of the claim. More detailed guidance is expected to help with these calculations.
- What happens if the employee has two jobs? Each job is treated separately, so the individual could be furloughed from one or both. Where they are furloughed from both, the cap applies to each employer separately.
- What about employees who qualify for maternity, paternity, adoption, or shared parental pay? Individuals who are taking or plan to take maternity leave must take at least two weeks off work (or four weeks if they work in a factory) immediately following the birth of their baby for health and safety reasons. Where they are eligible for statutory maternity pay (SMP), or maternity allowance (MA), normal rules apply (that is, they can claim for up to 39 weeks of SMP or MA). Where contractual payments are made in addition, this is a wage cost which can be recovered through the Scheme. The same principle applies to other contractual family-related pay.
Making a claim
- What information needs to be provided to claim under the Scheme? Employers will need to provide (i) ePAYE reference number, (ii) the number of employees being furloughed, (iii) the start and end period of the claim, (iv) the amount claimed, (iv) bank account and sort code, (v) contact name, and (vi) phone number.
- Who does the calculations? The employer will have the responsibility of carrying out the calculations for the basis of their claim, although HMRC retains the right to audit this. We suggest employers keep clear and detailed records to support the claims being made, that is, which individuals have been included and the basis of their calculations.
- Can employers claim more than they have paid the furloughed worker? No. The money received from HMRC for a furloughed worker’s gross pay must be what has been paid to that individual. No fees can be charged. The claim should be based on actual payroll amounts at the point payroll is run, or in advance or imminent payroll.
- How often can claims be made? A claim can be made once every three weeks, to coincide with the minimum period of furlough.
- How far back can a claim be made? Claims can be backdated to 1 March 2020, if applicable.
- How is payment made? Once HMRC has received the claim and confirmed eligibility, reimbursement will be made via BACS payment to a UK bank account.
- How do employers cover wages while waiting for the reimbursement? It is recognised that there could be cash flow issues for employers while waiting for reimbursement. The HMRC portal is being built from scratch as there is no current system in place to make payments to employers. It is hoped it will be ready by the end of April. In the meantime, the government has announced a 12-month, interest-free business interruption loan and corporate financial facility which may be of assistance, subject to eligibility.
- What happens to unpaid claims after the Scheme has closed? These will continue to be processed.
- What is furlough? Furlough is essentially an agreed leave of absence. The individual will not be required to work, but remains on payroll with their terms and conditions of employment varied as agreed with the individual.
- Does a worker have to consent to furlough? Businesses will need to identify who they want to furlough and then notify them. Where there is a change to terms and conditions of employment as a result of the furlough, for example, a reduction in pay, the individual will need to agree to this change. The guidance is silent on the issue of consent where the only change is the requirement not to work; where employers are making up the remaining wages such that the worker is not out of pocket, there is an argument that consent is not needed. We recognise that some employees, particularly higher earners, may be less inclined to agree to furlough. A negotiation may be required with these individuals to mutually agree to the terms on which they do consent.
- How long can the furlough be? The minimum period of furlough is three weeks; the maximum period of furlough will be the length of the Scheme.
- Does the whole workforce have to be furloughed? No. The Scheme also applies where only part of the workforce is furloughed.
- How do employers choose who to furlough? Employers could consider asking for volunteers for furlough which may avoid the need for selection. If an employer has to choose between individuals to furlough, some form of selection process is recommended for transparency; this does not necessarily need to be as rigorous as a redundancy selection exercise, but an employer should be able to demonstrate the basis for their decisions. Existing equality and discrimination laws continue to apply, so selections should not be based on discriminatory criteria. That said, given the current circumstances, furloughing certain older or vulnerable individuals may be justified in light of public health guidance.
- Do employers have to collectively consult? The duty to collectively consult arises where an employer proposes to dismiss 20 or more employees in a 90-day period. The guidance simply says that where furlough involves a change in terms of employment and there are 20 or more people affected, it may be necessary to engage in collective consultation to procure the agreement to those changes. It is our view that seeking consent to furlough, or imposing furlough where the employee will not be financially out of pocket, does not trigger these obligations. However, if someone does not agree to be furloughed, and the alternative is to make them redundant or impose changes to terms and conditions by dismissing them and reengaging on new terms, the obligation would arise if the numbers threshold is met.
- Can someone on sick leave be furloughed? Employees on sick leave or self-isolating should get statutory sick pay, and be on sick leave, but can be furloughed after this. Employees who are shielding in line with public health guidance can be furloughed under the Scheme. It is unclear what happens when someone becomes sick while on furlough leave.
- Can someone who is on unpaid leave be furloughed? They can, but only if they were placed on unpaid leave after 28 February 2020. If their period of unpaid leave predated this, they cannot be furloughed under the Scheme.
- What paperwork is needed to evidence furlough? To be eligible to be reimbursed under the Scheme, employers should write to the affected individual to confirm they have been furloughed, and should keep a record of this communication. A copy of the individual’s consent to furlough, if needed, should also be retained to protect against subsequent arguments that there has been an unlawful deduction of wages.
- How flexible is the scheme, that is, can employers rotate their workforce between furlough and working? This remains unclear and is not explicitly addressed in the guidance to date. We now know that the minimum period of furlough is three weeks, and so logically, a rotation in three-week blocks may be permissible. However, it is unclear if someone can be furloughed more than once.
- Can a furloughed worker still work? For an employer to be reimbursed under the Scheme, the furloughed employee cannot undertake work for or on behalf of the organisation. This includes providing any form of service or generating revenue. If someone has two jobs, these are treated separately, so if they are only furloughed from one job, they can continue to work as usual in the other. The guidance is silent on whether a furloughed worker can work for another employer with whom they had no prior relationship.
- Can a furloughed worker volunteer or carry out training? Yes, provided they are not providing services to, or generating income for or on behalf of, the organisation. Where workers are required to complete online training courses while they are furloughed, they must be paid at least the national living/minimum wage for the time spent training, even if this is more than the wage being subsidized.
- Does a furloughed worker still accrue service? The employment relationship will continue during the period workers are furloughed, meaning service continues to accrue.
- Do employment rights and benefits continue throughout furlough? The employment relationship will continue during the period workers are furloughed, meaning statutory rights and benefits continue to accrue, and entitlements to, for instance, sick pay and family leave continue, and protection against unfair dismissal and the right to a redundancy payment remain, subject to normal eligibility principles.
- Can employers make furloughed workers take their annual leave while furloughed? The guidance is silent on this issue, but under normal employment law principles, an employer can require a worker to take annual leave by giving them twice as much notice as the period of leave to be taken, that is, two weeks’ notice for a week’s leave. Payment for annual leave is ordinarily based on ‘a week’s pay’ principle, and so in the absence of guidance to the contrary, employers should pay any annual leave taken during furlough at this rate, which is likely to be higher than what can be recovered from HMRC. Helpfully, the government has also announced that workers who have been unable to take their four weeks of statutory annual leave entitlement due to COVID-19 will now be able to carry it over into the next two leave years.
End of furlough
- What happens at the end of furlough? Do we have to guarantee them a return to work and not redundancy? Guaranteeing a return to work does not appear to be a condition of the Scheme. Instead, the guidance says that when the Scheme closes, employers will need to make a decision, based on their circumstances at the time, as to whether the furloughed individual can return to work. If not, it may be necessary to terminate their employment by reason of redundancy. A fair and reasonable redundancy process will need carrying out at that time, with collective consultation if the threshold numbers are met, and a redundancy payment due to eligible employees. It is unclear whether termination and redundancy payments will be calculated on pre-furlough salary or the reduced furlough rates; as furlough is temporary, a termination after that temporary period would infer a return to their previous terms, but this may need to be clarified.