Accountancy lecturer Louise Dunford highlights key legal issues governing employees’ contracts, including consent, bonuses and benefits of those furloughed during the crisis
It is trite to say that the current lockdown is both unexpected and unprecedented; whatever the rights and wrongs of the situation, employers have been facing some difficult and painful decisions without the benefit of clear and comprehensive regulation.
Obviously, any guidance given here is based on the legal position as it is understood at the time of writing, and that is subject to change, amendment and clarification. In addition, we will need to make some assumptions but, where that is the case, it is clearly indicated.
The contract of employment
The legal position in relation to pay in the average contract of employment is straightforward:
- It is an unlawful deduction of pay to reduce an employees’ contractual pay, and possibly even to furlough them on full pay, unless you have either a short-time working or lay-off clause in the contract, which are quite rare.
- The breach of contract could also justify a claim for constructive dismissal in normal times.
- Thus, if you wish to change the terms of the contract, and in particular to reduce pay, you will need the employee’s consent.
- Having said that, it is difficult to justify a claim if an employee is sent home on full pay, but if they are missing bonuses and commission, this should be considered as potential loss.
- It is lawful for the employer to reduce pay if the employee consents, and this will be the way ahead for most employers.
- This will be particularly important where elements of the contract provide for other benefits that the employee will not now be receiving, such as commission or bonuses, or non-cash benefits (although it is assumed that most non-cash benefits, such as the company car and medical insurance or life assurance, will continue during the furlough).
- Even without consent, there is a body of law that allows employers to change terms for all or most of their employees. This is usually used where the business is in financial difficulties, and the employer needs to reduce costs across the board. It is not going to be difficult for the employer to prove hardship at the moment. If the employer cannot obtain the individual consent of all of their employees to the proposed change, it will need to go through a formal collective procedure, which is laid out below.
- There may be other elements of remuneration that are discretionary, such as bonuses and commission which have not yet been declared, and which the employer may be able to remove or reduce without breaking the employment contract.
- It is, of course, lawful to make redundancies where the business can show that there is a reduction in the need for employees going forward, subject to a consultation procedure and to the payment of redundancy compensation, where the employee qualifies for it. The employee may argue that they ought to be furloughed, but ultimately the decision is for the employer.
- The guidance clearly states you do not need to retain all your staff to qualify for furlough; you can make some redundant and place some on furlough.
- The employer might also consider other cost-saving measures such as reducing pay across the board while retaining staff and/or removing some benefits.
The Coronavirus Job Retention Scheme (JRS)
- The new legislation introduces the concept of ‘furlough’ into the UK. It is a US term and involves the employer putting the employee on a specific period of paid leave. The contract of employment continues, and the employee is paid, but is not required to attend work or provide work while the furlough continues. It does not apply where workers have had their hours of work reduced.
- The furlough scheme went live on 20 April, and at the time of writing was operating well. It will remain effective until 30 June 2020, subject to any extension.
- It applies where a person is paid through PAYE and the employer notified HMRC of a real time information (RTI) payment in respect of them on or before 19 March 2020.
- It applies to all UK employers, regardless of business type or size, as long as they have a UK bank account and operate a UK payroll as of 28 February 2020.
- It applies to any entity with a UK payroll, including charities, businesses, recruitment agencies and public authorities.
- It will apply to employees furloughed since 28 February. They will have to be designated as furloughed by the employer; it is not an option to insist on being furloughed.
- Also, employees made redundant since 28 February will be able to be reinstated, and recoup income, although there is no obligation to reinstate them. This is even the case if they were not reinstated until after 19 March.
- A new online portal has been set up on HMRC's website to receive employer's applications.
The essence of the scheme is that:
- HMRC will reimburse up to 80% of what are being termed 'furloughed' employees’ pay, in respect of their usual monthly pay or £2,500 per calendar month (£576.92 per week) per employee, whichever is the lesser. Fees, commission and bonuses and overtime should be included where they are non-discretionary, but discretionary bonuses, commission and non-cash payments will not be included.
- HMRC will also reimburse 80% of employer national insurance (NI) and automatic enrolment pension contributions on top of that.
- Employers can choose to top up the additional 20%, but do not have to.
- The furlough is payable from the date that the worker was sent home, not from the date they were notified or agreed to the scheme.
- In relation to salary sacrifice, HMRC has confirmed that it regards the current crisis as a ‘life event’ and will allow employers and employees to agree to reverse these agreements, provided this is done in accordance with their contract. However, subject to further guidance being given, as the salary for the purpose of furloughing is as at 28 February 2020, then unless HMRC allows any salary sacrifice to be backdated, the employer will only be able to recover 80% of the reduced salary before the sacrifice was reversed. HMRC has updated its salary sacrifice guidance.
- The scheme applies to full- and part-time employees, employees on agency contracts and zero-hours workers (the guidance specifically states that limb (b) workers, ie those providing their services personally in the intermediate stage between employee and self-employed, should be covered), and also potentially contractors on payroll as a result of the new IR 35 reforms (presumably even if they are in the private sector and have been required to go on payroll in anticipation of the changes, which were to take place in April 2020). The scheme also applies to salaried members of LLPs.
- Employees on unpaid leave at the time the scheme commenced cannot be furloughed until their agreed date of return. Those who are absent from work because of shielding or because they have caring responsibilities can be furloughed.
- For those whose pay varies, it is the earnings in the same pay period in the previous year, or the average earnings in the 2019/20 tax year (or fewer if they have worked for less time than this, including a part-month calculation if they were taken in February), whichever is the higher. This will be subject to deductions for income tax and employee NI contributions (NICs) in the usual way.
- In its guide to calculating the grant, HMRC says that employers will not be penalised for using the wrong method of calculation, provided there is ‘a reasonable choice of approach’.
- It does not matter if the 80% takes the worker below the national minimum wage (NMW) as the requirement to pay it only applies to hours worked (but see the reference to training below).
- It applies to apprentices, who may continue to train during furlough, but they must be paid at least the NMW, so the employer will have to make up any difference between what can be claimed on the furlough scheme and NMW.
- It applies to directors of companies, regardless of their size or type, but only extends to the part of their pay that is salary subject to PAYE and NI. They are permitted to carry out their statutory duties as directors during furlough, but not to do any of their normal work for the company which is aimed at generating revenue.
- The underlying principle is that repayment is only made in respect of payments made via payroll.
- Within the public sector, employees whose pay is financed by public funding will not be entitled to use the scheme; neither will any organisations that are publicly funded in order to respond to Covid-19.
- The JRS is available to all UK employers with a UK bank account for each furloughed employee on a PAYE payroll schemes as at 19 March 2020 (to exclude potentially
fraudulent claims such as subsequent employment of family to increase household income).
- The minimum period of furlough is three weeks, and employers cannot claim more frequently than every three weeks.
- A new employer is eligible to claim under the JRS in respect of the employees of a previous business transferred after 19 March 2020 if either the TUPE or PAYE business succession rules apply to the change in ownership.
- While on furlough, the worker cannot provide any work at all for their employer, although they are able to undertake volunteer work and also training. Where they are engaged in training at their employer’s request, they must be paid at least the NMW for this period. A furloughed employee is able to work for another employer, if they are contractually allowed to do so.
I want to furlough employees – how do I do it?
If you look at the combination of the two sections above, the safest way ahead legally becomes reasonably clear:
- The employer will write to the employee, stating that it intends to place them on furlough and ask for their consent.
- It may be possible to get the consent of all staff to the furlough proposed, in which case the employer should retain evidence of that consent, eg ask employees to sign a letter or a furlough agreement, or send an email confirming their consent.
- There is no standard template, but at the very least the letter/agreement should record the length of the furlough, any review period and the details of the variation of contract. A record of the agreement must be kept by the employer for at least five years.
- Consent is needed because otherwise the employer is technically in breach of contract and, if pay is not being made up, is liable for an unlawful deduction from wages. This would be a continuing loss if the employee then carried on working under protest.
- In situations where the employer has 20 or more employees who do not accept the furlough, they will need to carry out collective consultation with those employees, asking them to elect two or more representatives (depending on the size of the employer) to discuss matters with the employer. The normal consultation period for 20-plus employees is 30 days and 45 days for more than 100 employees; it is not clear whether these will be relaxed but it seems likely. You can see full details of the collective consultation process here. The penalty for failing to consult is considerable: a protective award of up to 90 days’ gross pay for each affected employee.
- The argument that the employer is reacting to a sudden steep drop in demand, the need to close premises etc is likely to justify the decision to furlough in most cases, and the tribunals are likely to regard this as a justifiable and proportionate response to an unexpected emergency.
- Where an employer is choosing some staff to go on furlough and others to continue to work, there is no particular method by which this must be done, other than to ensure that selection is not unlawful in terms of discrimination, eg allocating people on the basis of sex, race, disability etc.
- It seems clear that employers may rotate staff on furlough, but it is suggested that the minimum rotation period should be three weeks.
What happens during furlough?
The employee cannot work at all for their employer while in receipt of pay from their employer. It seems likely that they can take on work at times they would not be working for their employer, provided they are doing nothing for them, eg an office worker takes an evening job picking in a supermarket.
Employees on furlough can certainly volunteer or take part in training.
Employees continue to accrue annual holiday.
It is not clear whether the employer can require the employee to take some or all of their holiday during furlough, but it seems unlikely since if they are not working, they are not taking leave from work.
The government has relaxed the rules preventing carry over to the next holiday year in response to the crisis.
If a worker falls sick, they will be entitled to SSP rather than continue to receive their furlough pay (this makes it very unlikely that most workers will report any sickness).
Employees on maternity/paternity pay continue to be entitled to those benefits, but presumably not if the employer is making up any of those sums, for example to half or full pay. It may be possible to place them on furlough but since they are already on paternity/maternity leave, this seems unlikely.
Many employees are now working from home and employers must not neglect their duty to take reasonable care of their health and safety. Employers who have employees who are working from home should carry out a risk assessment of the work activities and take appropriate measures to reduce any associated risks.
The employer does not have to attend at each employee’s home to carry out the initial risk assessment and any follow-up risk assessment required. Instead, the risk assessment can be conducted by the employee from home. A useful checklist for employers by law firm Gowlings can be found here.
What will happen after this is all over?
That is anyone’s guess, but there are a number of issues that are likely to arise and which are interesting to consider:
- What will happen once the JRS is over? Will employers try to argue that they cannot restore the old wage rates and that employees will have to stay on reduced rates or face redundancy?
- How will the crisis impact on the tribunals’ approach to enforcing the law on matters such as collective consultation?
- Will the changed work environment persuade more employers to allow greater use of technology/home working?
- In relation to that, is physical office space going to become less and less important, even in businesses that had not previously embraced this?
- What will happen within the retail sector? It was already suffering; will this prove to be the death knell for much of the high street?
- Will the fallout include impact on corporate governance? Will the public expect more ethical behaviour from the large companies that have been in receipt of public funds? Will this be translated into regulation?
Some useful links are listed below:
Department for Business, Energy and Industrial Strategy: Covid-19: guidance for employees