From 31 July 2020, new rules apply to ensure furloughed employees who are made redundant will not be financially worse off merely because they have been furloughed when calculating a week's pay for certain statutory entitlements including statutory redundancy and statutory notice pay.

The Government has now published The Employment Rights Act 1996 (Coronavirus, Calculation of a Week's Pay) Regulations 2020, which come into effect on 31 July 2020 (the 2020 Week's Pay Regulations).

Broadly, the 2020 Week's Pay Regulations seek to ensure, for the benefit of furloughed employees whose employment is terminated, that the calculation of statutory entitlements relating to termination is based on their normal pay, rather than their furlough pay. It is important for employers to note that normal pay will not necessarily be the same as pre-19 March salary, which is used as the reference salary under the Coronavirus Job Retention Scheme (CJRS) where the employer and employee have agreed a contractual variation in pay and hours that is intended to endure beyond the employee's furlough arrangements.

Here, our employment law experts consider the impact of these important new regulations.

Why are the 2020 Week's Pay Regulations needed?

From 1 August, the CJRS begins to wind down with employers resuming responsibility to pay some costs previously covered under the CJRS in the lead up to the scheme's closure on 31 October.

As the CJRS winds down, the risk of redundancies increases. The CJRS does not prevent an employer carrying out a redundancy process in relation to furloughed employees. The HMRC guidance explicitly states that 'your employer can still make you redundant while you're on furlough or afterwards.'

However, if employees are served with notice of dismissal, secondary issues arise on notice periods and pay for furloughed employees. On 17 July 2020, the HMRC guidance was updated to confirm that an employer can continue to claim a grant under the CJRS for a furloughed employee who is serving a statutory or contractual notice period.

But does being on furlough and in receipt of reduced pay impact the amount of statutory redundancy and statutory notice pay an employee is entitled to? It is this question that the 2020 Week's Pay Regulations are primarily aimed at addressing.

Who do the 2020 Week's Pay Regulations protect?

The 2020 Week's Pay Regulations do not affect any entitlements of employees who have not been furloughed under the CJRS. It only comes into play in relation to furloughed, including flexibly furloughed, employees and those who have recently returned from furlough.

How do the 2020 Week's Pay Regulations provide extra protection?

The broad policy is to provide greater certainty in the calculation of a week's pay and to ensure that furloughed employees do not lose out by having been furloughed if their employment is terminated while, or shortly after having been, furloughed under the CJRS.

Under the ERA, the calculation date for notice pay is the day immediately preceding the first day of the period of notice required. The 2020 Week's Pay Regulations amend this for furloughed employees so that the calculation date will instead be the date immediately before the date on which the employee became furloughed, but this is subject to an important caveat.

The intent is to protect furloughed employees from disadvantage as a result of being furloughed, not to enhance their rights in comparison with non-furloughed employees. Accordingly, an exception is made where the employer and employee have agreed a more permanent contractual change in working hours, intended to endure beyond the employee's furlough arrangements. In that case, employers should use the calculation date as provided under the ERA for the various categories of employee set out in the ERA.

What are the ERA's week's pay rules?

The calculation of a week's pay under sections 220 to 229 differs for different employees depending on what category of employees the employer is dealing with. There are four categories:

1. Employees with normal working hours whose remuneration does not vary with the amount of work done.

The amount of a week's pay is the amount payable by the employer under the contract of employment in force at the calculation date if the employee works throughout their normal working hours in a week (section 221(2) of the Act).

2. Employees with normal working hours whose remuneration does vary with the amount of work done.

The amount of a week's pay is the remuneration for the normal working hours in a week calculated (broadly speaking) at the average hourly rate of remuneration payable by the employer in respect of the 12 weeks ending with the calculation date (sections 221(3) and 223 of the Act).

3. Employees whose normal working hours and remuneration vary according to the time of work.

The amount of a week's pay is the remuneration for the average number of weekly normal working hours at the average hourly rate of remuneration payable by the employer. In each case the average is calculated (broadly speaking) in respect of the 12 weeks ending with the calculation date (sections 222 and 223 of the Act).

4. No normal working hours

The amount of a week's pay is the average weekly remuneration in respect of the 12 weeks ending (broadly speaking) with the calculation date(section 224 of the Act).

For categories 2 to 4, where there are weeks when no remuneration was payable, those weeks are left out of account and earlier weeks are brought in to bring the total number of weeks used for the calculation back to 12.

How are the ERA's week's pay rules amended?

For the first three categories of employee, all of whom have normal working hours, the overall objective is that when calculating a week's pay, the employee's furloughed hours are treated as if they were normal working hours and the remuneration related to those furloughed hours is treated as if they had been worked, ignoring any reduction which was made because the employee was furloughed.

For furloughed employees in category 1 above, the amount of a week's pay is the amount that is payable under the employee's contract of employment in force on the calculation date, so the employees' normal working hours are in effect deemed to include any furloughed hours and any reduction in pay as a result of the employee being furloughed is disregarded.

Likewise for employees in categories 2 and 3 above, when calculating the amount of a week's pay, where the employee is furloughed for any part of the relevant period, normal working hours includes furloughed hours and the hourly rate is calculated based on the hourly rate under the contract of employment in force at the calculation date, disregarding any reduction in pay as a result of the employee being furloughed.

For employees in category 4 (no normal working hours) regulation 8 has a similar overall objective but takes a slightly different approach because there are no normal working hours that can be treated as if they had been worked. An example of a category 4 employee would be someone employed under a zero hours contract. The remuneration that the employee receives for any period when they were furloughed is calculated based on the reference salary that is used under the CJRS to calculate the employee's remuneration. That reference salary is informed by the employee's earlier remuneration during 2019 – 20. The full reference salary is to be used, rather than any reduced amount (for example, 80 per cent) which the employer may have agreed to pay the employee in accordance with the CJRS. Further, if the applicable cap under the CJRS of £2,500 per month limited the employee's remuneration, then this is disapplied for the purposes of regulation 8.

Which statutory rights do the 2020 Week's Pay Regulations cover?

There are a number of statutory provisions that provide for payments to be made using the rules on calculating a 'week's pay' contained in sections 220 to 229 of the Employment Rights Act 1996 (ERA). These week's pay rules are notoriously complex and clearly never designed to deal with the CJRS.

The 2020 Week's Pay Regulations provide that certain statutory entitlements based on a week's pay and connected with termination of employment are not reduced as a result of an employee being furloughed under the CJRS. The statutory entitlements covered are:

  1. statutory redundancy pay (Part II ERA);
  2. statutory notice pay (ss88 and 89 ERA);
  3. compensation for unfair dismissal (ss118-126 ERA);
  4. a payment resulting from a failure to provide a written statement of reasons for dismissal (s93 ERA);
  5. an additional award resulting from a failure to comply with an order for reinstatement or re-engagement (s117 ERA);
  6. remuneration for time off to look for employment or arrange training (ss53 and 54 ERA); and
  7. to decide whether an employee is taken to be on short-time for statutory purposes(s148 ERA).

This is an exhaustive list so the 2020 Week's Pay Regulations only apply in relation to the above. They do not apply in relation to:

  1. Awards for failure to inform and consult under the Trade Union and Labour Relations (Consolidation) Act 1992;
  2. Awards for failure to inform and consult under the Transfer of Undertakings (Protection of Employment) Regulations 2006;
  3. Holiday pay under regulations 13 and 13A/26A of the Working Time Regulations 1998 (WTR).

The statutory limit on a week's pay (currently £538) continues to apply where applicable, i.e. statutory redundancy payments, unfair dismissal compensation and additional awards.