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Furlough Leave: What is it and how can it be implemented?

What is it?

On Friday 20 March 2020, the Chancellor, Rishi Sunak, announced a raft of measures to protect businesses, including, for the purposes of this note, unprecedented Government support in the shape of the Coronavirus Job Retention Scheme, allowing employers to “furlough” staff, rather than lay them off or make them redundant. Whilst welcome, the Government guidance (employers’ guidance COVID-19 guidance) is light on detail.

What we do know is that this scheme will allow all UK employers (which includes limited companies, sole traders, LLPs, partnerships, charities etc) to access financial support to continue paying part of their employees’ salary, for those employees who would otherwise have been ‘laid off’ or made redundant.

This will enable employers to look to retain their employees and also their continuity of service, at least in the short term, without worrying about having to make redundancies, and it will also give employees some comfort as to their ongoing status and pay, again at least in the short term.

In particular …

Under the scheme, in the Government’s words, employers will need to –

“designate affected employees as ‘furloughed workers,’ and notify [their] employees of this change – changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation”

But, it is important to stress that the designation –

“is a matter of agreement as between the employer and the employee, as to whether the employee becomes a “furloughed” employee. Please note that “furloughed leave” is not a concept currently recognised in UK law.”

Can it be imposed?

Unless the employer has a contractual right to lay off workers, it will need to obtain each worker’s agreement to be placed on furlough leave. So strictly speaking, in the vast majority of cases, the answer is “no”.

Therefore, in most contracts, particularly where there is no layoff or short time working clause, the employer will need to agree with the employee that they will become furloughed workers. It is almost inevitable that employees will agree to this, given that the alternative of redundancy (which will be all the more concerning if the employer does not have the money to pay a full redundancy package, meaning the relevant employee will need to claim from the Government fund or sue the employer).

There may, of course, be more militant employees who insist on working, in which case they will need to be dealt with in different ways, most likely through redundancy. This is unlikely to present an issue in most situations, if the worker is aware that the alternative to furloughing is redundancy or a period without pay.

In its guidance for employees, the government states that employers do not have to top up the worker’s wages, so they are paid in full, although the employer can choose to do so.

In his speech, on 20 March 2020, the Chancellor stated that the system for administering reimbursements is expected to be operational within weeks. Further details of how the scheme will operate are expected in due course.

The scheme will initially be open for three months, but the programme may be extended.

How much does the Government pay and what is the process?

Under the Scheme, if someone is designated as a’ furlough worker’, a grant will be available from HM Revenue and Customs (HMRC) to reimburse the employer for 80% of the wage costs relating to the worker, up to maximum of £2500 per month. Payments can be backdated to 1 March 2020.

In terms of process:

  • The employer will need to “submit information to HMRC about the employees that have been furloughed and about their earnings through a new online portal (which has yet to be set up).” HMRC will set out further details on the information required);
  • “HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month. HMRC are working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.”£2500 a month is broadly £30k per annum which happens to be (roughly) the national median salary.
  • The government has also produced guidance for employees that states that in order to qualify for the scheme “you should not undertake work for your employer while you are furloughed … allowing your employer to recover up to 80% of all employment costs”. The guidance is not clear whether the £2500 is gross or net pay, but it seems from the guidance to be a grant towards “all employment costs “, so pensions, NIC etc….

The reference to ‘reimbursement’ suggests two things: First that the employer will first have to pay the monies (i.e. in order to be ‘reimbursed’) and second, that it is a grant i.e. does the government expect to be repaid or not?

Need employers top up to 100%?

As above, the guidance for employers is silent on whether the employer needs to top up the 20%, albeit the guidance for employees suggests that this would be optional on the part of the employer. Thus, if an employer chooses to withhold the 20% of normal wages they have to have a contractual right to do so (ie will have to have the employees’ agreement). Though again, for the reasons above, the employee is likely to agree if the alternative is redundancy or just not being paid at all.

Can employees put themselves on furlough leave?

This should not be a problem for an employer, as the employer has to agree to the designation.

Is the system capable of abuse?

Probably. For example, some small (perhaps larger) employers could claim that they have sent their workers home on furloughed leave therefore seek to recover 80% of the salary from the government yet have that employee actually working (ie the employee might not even realise).

How about the self-employed?

Proposals have been put forward which would protect the incomes of self-employed and freelance workers to a set level.

The amendment to the Coronavirus Bill, entitled Statutory Self-Employment Pay, appears to propose that the Government will guarantee earnings of 80% of monthly net earnings, averaged over the last three years, or £2,917 a month (whichever is lower).

More information on the amendment can be found here.

Please note that the Government guidelines for employers in response to Covid-19 is constantly changing and the above note must be read on the proviso that further updates may have been issued since. For further advice or information please contact Richard Port rport@boardside.co.uk