Furlough leave under the Coronavirus Job Retention Scheme

Updated as of 27 March 2020

On 20th March the Chancellor announced a new Coronavirus Job Retention Scheme which is intended to support businesses whose operations have been severely affected by the coronavirus crisis by underwriting the employment costs for the employees they would otherwise need to make redundant or to lay off temporarily without pay. This scheme will support an arrangement of ‘furlough leave’ during which the employer is reimbursed 80% of the employee’s wage costs, up to a cap of £2,500 per month, crucially enabling the employee to remain in employment and to continue receiving income.

The Government published guidance to this scheme on 26th March, however some of the technicalities and implications of the scheme are still unclear.

All UK organisations with employees are eligible to receive support under the scheme, provided they had an operative PAYE payroll as at 28th February. The scheme is not restricted to those businesses which have been required to close their premises, such as restaurants and cinemas, or restricted only to small businesses. It is also open to charities and not-for-profit organisations.

The scheme will apply to any employees of the business, and to other workers who are paid through PAYE such as casual staff, so long as they were on the organisation’s payroll at 28th February. Employees hired since 1st March are not eligible.

It will not cover consultants and contractors who are outside PAYE, who may be eligible for support under the separate Self-Employed Income Support Scheme announced on 26th March.

The Chancellor’s announcement referred to supporting “those employees that would otherwise have been laid off during this crisis”. This means both those employees whose employment would be terminated on redundancy grounds, and those who would be temporarily laid off under contractual lay-off powers.

The scheme can also be used where an organisation chooses to re-hire employees who were dismissed on redundancy grounds from 1st March. In this situation the employer may require the repayment of any redundancy payments which have already been paid.

The scheme does not directly support employees who are put onto reduced hours and pay (short-time working), and as a rule both employer and employee may be better off financially if the employee is instead fully released from their work duties for the time being. The scheme also cannot be used for employees who were already on unpaid leave before 28th February.

Employees who are off sick or self-isolating cannot be put on furlough and should be paid sick pay instead, but can be put onto furlough afterwards. Shielding employees can be put on furlough.

In order to access the scheme, the business will need to designate affected employees as ‘furloughed workers,’ and communicate this change to the employees in writing. This is likely to require the consent from the employee under their employment contract, as generally the contract will not contain a power enabling the business to place an employee on leave at a reduced level of pay. It will be best practice to set out in writing the furlough arrangements and the employee’s express consent to this temporary variation of their contractual terms.

Under the scheme, the Government will reimburse the business up to 80% of the wage costs of the employee who is on furlough, subject to a cap of £2,500 per month.

Wage costs means the employee’s gross basic salary or basic pay. This does not include other payments ordinarily made to the employee such as overtime, commission and bonuses.

For staff with variable pay, the business can reclaim the higher of their earnings for the same month in the previous year, or their average monthly earnings in the 2019/20 tax year.

The employer organisation will also be able to reclaim employer National Insurance contributions, and some employer pension contributions. Further guidance will be published on these aspects.

The business will need submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal. HMRC will set out further details on the information required, and are urgently setting up a system for reimbursement.

It will take some weeks before this system is up and running and the Government expects this to be by  the end of April 2020. In the meantime, if a business needs short-term cash flow support to meet its payroll obligations, it may be eligible for a Coronavirus Business Interruption Loan.

Businesses will not be obliged to make up the 20% difference (or higher, for employees paid over £37,500) or any part of this difference, although the expectation is that they will do so if they can. This may be a point of discussion and negotiation with the individual employees or their representatives.

The scheme will support furlough leave with effect between 1st March 2020 to 1st June 2020, and this period may be extended if necessary.

The minimum period of furlough leave will be 3 weeks.

The potential to apply furlough leave retrospectively back to 1st March enables businesses to revisit redundancies which they have already made, and the option to offer reinstatement to those employees on the basis that for the time being they would then be placed on furlough leave. It also enables businesses to review the lay-off and short-time working arrangements which they have already put into effect.

An employee placed on furlough leave will not be able to carry out any work duties for their employer. This rule is obviously designed to prevent abuse of the scheme by some unscrupulous employers. The employee could be required to carry out online training.

What is still clear is whether the employee on furlough leave could carry out other work for another employee – for example if they want to take up the temporary work which supermarkets and delivery companies are currently offering. As a rule the employee will under their contract require their employer’s permission to undertake other employment in any event.

Employees that have been furloughed have the same rights as they did previously. That includes Statutory Sick Pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and rights to redundancy payments.

The consequential effects of furlough leave on the full range of statutory rights and obligations are at this time unclear, but it is hoped will become clearer in the coming weeks.

 

For more guidance, and further information, visit our Coronavirus hub.