Employee ‘furlough’ scheme

On 20 March, the UK Government announced a series of wide-ranging measures to assist businesses and employees through the COVID-19 crisis, including a Coronavirus Job Retention Scheme (the “Scheme”) (see the Chancellor’s speech here). Whilst details of the Scheme are sparse at this stage, we set out below answers to key questions our clients are asking about the Scheme:

1. What is the Scheme?

In brief, employers will be able to contact HMRC for a grant to cover 80% of the wages (up to a total of £2,500 per month) of employees who are not working but are “furloughed” and kept on payroll, rather than being dismissed. The Scheme is available to any employer in the country – small or large, charitable or non-profit.

It is not clear what is meant by “wages” in this context – whether it is just “basic pay” or includes allowances and bonuses paid in a prior reference period. Nor whether it includes employer pension and national insurance contributions. We understand further guidance will be issued shortly.

2. When will it apply?

The Government has announced that the Scheme will cover backdated wages from 1 March 2020, although it is likely to be some weeks before the payments are actually made under it.

3. How does an employer apply?

The details of application for the Scheme have not been announced yet as it is still being set up. We understand that an online portal is being set up for employers to notify HMRC and apply for the grant after the relevant employees have been notified that they are to be treated as furloughed.

4. What is a furloughed employee?

“Furlough leave” or “furloughed employee” are not familiar concepts under UK employment law. However, in this context, a furloughed employee is someone who rather than being dismissed for redundancy by their employer, is kept on the payroll during a period where the employer does not have any work for the employee.

Workers and self-employed individuals (independent contractors) are not covered by the Scheme. It is only intended to cover employees registered for PAYE purposes.

It does not apply to employees who have already been dismissed or made redundant – the Scheme is designed to reward employers who keep their employees on the books during the COVID-19 crisis by offering a significant wage subsidy.

Further, it does not appear to extend to:

  • subsidising wages where shorter hours or reduced pay have been negotiated in response to the COVID-19 crisis; nor
  • employees on sick leave or in isolation.

5. Does the Scheme create a legal right to place employees on furlough leave?

No, the Government has been clear that this announcement does not create a legal right to place employees on furlough leave. An employee’s status will be subject to employment law, and what is set out in their contract of employment.

Some employers may have what is called a lay-off clause in their contract, which allows them to send employees home without pay for a limited period, or they may have a practice of operating such an arrangement so that there is an implied contractual right to do it. This is rare however and most employers do not have the contractual right to lay staff off without pay. The position for them is that if they send employees home because there is insufficient work then those employees should continue to be paid. If they are not paid or there is no contractual right to send them home in the absence of work, then the employer could face claims for the unpaid wages (in the form of breach of contract or unlawful deduction from wages claims) and potentially constructive dismissal claims.

The Scheme is designed to cover both scenarios:

  • where an employer has a lay-off clause, the Scheme will see employees receive 80% of their salary (up to the £2,500 monthly cap) as opposed to the zero pay they would otherwise be entitled to; and
  • where there is no lay-off clause, the Scheme will see Government contribute the same amount towards the employers’ contractual obligation to pay staff their wages during a period of no work.

6. Do employers need consent to place employees on furlough leave and are they obliged to pay the shortfall in wages above the Government contribution?

If an employer does not have a contractual right to enforce temporary leave then it will need consent to place an employee on furlough leave. If an employer unilaterally places an employee on furlough leave, it runs the risk of a constructive dismissal claim, although in current circumstances, the risk of such a claim would appear low, particularly when the alternative for employees is likely to be the loss of their job entirely.

More significantly perhaps is the position regarding the pay due to the employee in excess of the Government contribution. Unless an employer has the right to reduce pay during a period of temporary leave, then it will be obliged to make up any shortfall and continue benefits during any period of furlough, unless employees agree to reduced pay (perhaps to avoid a risk that the employer has to make redundancies)

Article Credit: Mayer Brown