Should I Furlough My Employees?

Businesses forced to close to reduce the spread of coronavirus and those that are still operating but seeing no or very little work are now looking to lay offs, asking workers to take unpaid leave or to furlough employees to reduce their outlay on salaries.

Can you force employees to take unpaid leave?

Despite the enormity of the coronavirus crisis, the normal employment law rules relating to unpaid leave continue to apply.

In the absence of any express contractual right to impose unpaid leave, forcing an employee to take time off without pay would amount to a breach of contract. This means that you would first need the employee’s agreement, or a collective agreement for the entire workforce, to enable you to send people home without continuing to pay them.

This means that, in many cases in the UK, existing employment contracts will not unilaterally allow employers to put staff on leave of absence on either reduced or no pay.

Alternatively, it would be open to you to dismiss an employee by reason of redundancy, provided you have followed a fair redundancy process and met all statutory and relevant contractual entitlements to notice and pay.

Should I furloughed employees?

The phrase ‘furloughed worker’ is not a recognised term in UK employment law, although it is commonly used in the US. In simple terms, ‘furlough’ means temporary leave of absence. As such, someone is furloughed if they remain employed but are not undertaking work, and typically without pay.

While furloughed employees still technically retain their jobs and remain on the company’s payroll, the furlough itself means that they cease performing any work for their employer. However, the idea is that this is only a temporary arrangement, where workers will be able to return to their jobs in due course.

In practice, given the risk of redundancy and the lack of any other suitable employment across most sectors in the UK, most employees are agreeing to being furloughed under the new government scheme through which they will still be eligible to receive up to 80% of their wages.

What is the Coronavirus Job Retention Scheme?

Under the Coronavirus Job Retention Scheme, where you and those that you employ agree to this, you may be able to keep them on the payroll where you are unable to operate or have no work for them to do because of coronavirus.

The scheme enables employers who furlough workers during the COVID-19 pandemic to ask the government to subsidise up to 80% of their wages, capped at £2,500 per month. The purpose of the scheme is to incentivise employers to retain employees on paid temporary leave rather than making them redundant, where the scheme pays a grant, not a loan, to the employer.

All employers with an existing PAYE system will be able to access support through HMRC to continue paying a large part of their employees’ salary for those who would otherwise have been laid off during this crisis.

The government has stated that the scheme will be backdated to 1 March 2020 and will initially run for a period of three months, subject to review.

Who is eligible under the scheme?

The scheme is open to all UK employers, including any businesses, charities, recruitment agencies and public authorities that were operating a PAYE payroll scheme on or before 28 February 2020.

For public sector organisations, many of which will continue to provide essential public services, the scheme is unlikely to apply. For non-public sector employers who receive public funding for staff costs, whether specifically to provide services necessary to respond to COVID-19 or otherwise, that money should be used to pay staff, rather than choosing to furlough them.

The scheme applies to both full and part-time employees, to employees on agency contracts where they were on your PAYE payroll on 28 February 2020, as well as employees on flexible, variable hours or zero-hour contracts. However, to be eligible while on furlough, employees must not undertake any work for you, including providing services or generating any revenue in any way whatsoever.

Any employee placed on unpaid leave prior to 28 February 2020 will not eligible. Employees on sick leave or self-isolating should be eligible for statutory or contractual sick pay, where these workers should not be treated as furloughed under the scheme. However, once they have recovered, they may then be furloughed for any period after they would otherwise have returned to work.

For those employees who are shielding in line with public health guidance, for example, where they have a medical condition that makes them vulnerable if they contract the coronavirus or they need to stay home with someone who is shielding, they can be placed on furlough as long as they are unable to work from home and you would otherwise have to make them redundant.

How do employers apply under the scheme?

Prior to applying under the scheme, express agreement will need to be reached with employees to be treated as furloughed workers. This should be made in writing and a record of this agreement should be retained.

The Government will provide access to the scheme through an online HMRC portal which launched on 20 April 2020. To claim you will need various details including your ePAYE reference number, the number of employees being furloughed, the claim start and end dates and the amount claimed based on an employee’s normal contractual wage.

The maximum grant will be calculated per furloughed worker and will be the lower of 80% of their regular wage and £2,500 per month, plus the associated employers’ national insurance contributions (NICs) and the minimum automatic enrolment employer pension contributions on the subsidised wage. This equates to a maximum of
£2,804 (£2,500 + £245 employers’ NICs + £59 auto-enrolled pension contribution).

The guidance from the Government indicates that fees, as well as discretionary commission and bonuses, should not be included in the calculation. The guidance also makes provision for the calculation of what can be claimed for employees whose wages vary, such as those on flexible or zero-hours contracts whose pay varies depending on their working hours in any given pay period.

The claim will start on the day the employee was placed on furlough and can be backdated to any date from 1 March 2020.

Having received the government grant, you will pay your furloughed workers as usual through payroll, and report payments to HMRC using the Real Time Information (RTI) system as part of your routine payroll process. Wages paid to staff will also be subject to income tax and NICs and, where applicable, pensions deductions as usual.

Does the scheme require employers to pay the balance?

Under the Coronavirus Job Retention Scheme employees should receive up to 80% of their regular wages, subject to a monthly cap of £2,500. However, unless an employee has agreed to be furloughed under the scheme, then contractually employers will remain liable to pay the balance of the wages outstanding.

Absent any express agreement to take a temporary leave of absence under the scheme, you will be potentially liable to a breach of contract or deduction from wages claim. An employee could also resign in consequence of not receiving their full contractual pay, seeking damages for constructive dismissal against you.

You should also be careful not to unduly delay making any payments of wages, even where you have not yet received any funds from HMRC under the scheme. Where an employee has expressly agreed to be furloughed under the scheme, it is best to also reach a clear agreement as to when they will be paid, for example, an agreement for furloughed workers to accept delayed payments.

Alternatively, if your business needs short-term cash flow support, you may be eligible for the Coronavirus Business Interruption Loan Scheme.

What is the difference between furlough and layoffs?

Furloughing is intended to be a temporary measure allowing employers to retain their staff in circumstances where they are unable to operate or have no work for them to do, usually in response to a significant downturn in business.

This is not too dissimilar to a layoff, which can often refer to the temporary suspension of an individual’s employment. However, the phrase ‘being laid off’ is also commonly used to describe the permanent termination of someone’s contract of employment.

In light of the Government’s job retention scheme, many employers will be looking to furlough their staff, rather than permanently lay them off or make redundancies. That said, it remains open to you to dismiss an employee by reason of redundancy, even in the current crisis.

You may have already formed the view that your business is unlikely to be viable post-crisis with its existing number of employees. You may also want to make redundant those employees who refuse to agree to being furloughed, or who refuse to accept a reduction and/or a delay in pay.

As with any redundancy scenario, you must follow a fair procedure, although given the level of government support available by way of alternative, you can perhaps expect to receive a greater level of scrutiny of your processes from an employment tribunal in the event of any claim for unfair dismissal. You also run a reputational risk in the current circumstances.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

This article first appeared on our sister publication www.lawble.co.uk

Should I Furlough My Employees? 2
Taxoo
Taxoo is a leading business and financial resource aimed at supporting businesses by providing reliable information and resources that can save business owners time and money.

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