Under the Coronavirus Job Retention Scheme, employers will be able to claim back 80% of the wages (up to £2,500 per month) of employees who have been furloughed (i.e. put on a leave of absence) in response to the COVID-19 pandemic. The guidance provides some much needed detail of the Scheme following the Chancellor's announcement on 20 March, including some detail on which businesses and employees will be covered, what counts as 'furloughing' for this purpose and how employees' wages will be calculated.

When reading the HMRC Guidance, it is important to remember that the guidance is for what employers can claim via the Scheme, not guidance on employee rights.

Below we look at the key points of the guidance and highlight some of the employment law issues raised as a result:

  1. What is the scheme and what period will it cover?
  2. Which employers can claim?
  3. Who may be placed on furlough leave?
  4. What can be claimed?
  5. Making a claim?
  6. What to do post-claim?
  7. Rights of employees that have been furloughed
  8. Tax Treatment of the Coronavirus Job Retention Grant

1. What is the scheme and what period will it cover?

The scheme is designed to support employers whose operations have been severely affected by coronavirus (COVID-19).

Employers can use a portal to claim for 80% of furloughed employees' (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.

The Scheme is a temporary scheme that will run for at least three months starting from 1 March 2020 (to be extended by HMRC if necessary). It is expected that the Scheme will be up and running by the end of April 2020.

Employers can use the Scheme anytime during their operational period.

2. Which employers can claim?

The Scheme is open to all UK employers that had created and started a pay-as-you-earn (PAYE) payroll scheme on 28 February 2020 and have a UK bank account.

Any UK organisation meeting the above criteria with employees can apply, including:

  • Businesses
  • Charities
  • Recruitment agencies (agency workers paid through PAYE)
  • Public authorities

Where a company is under the management of an administrator, the administrator can access the Scheme.

While potentially eligible, the government expects that the scheme will not be used by many public sector organisations. Where employers receive public funding for staff costs, and that funding is continuing, HMRC expect employers to use that money to continue to pay staff in the usual fashion - and correspondingly not furlough them. This also applies to non-public sector employers who receive public funding for staff costs.

Organisations that are receiving public funding specifically to provide services necessary to respond to COVID-19 are not expected to furlough staff.

It is only in a small number of cases, for example where organisations are not primarily funded by the government and whose staff cannot be redeployed to assist with the coronavirus response, that the Scheme may be appropriate.

COMMENT: The latest guidance states the Scheme is "to assist employers whose operations have been severely affected by coronavirus". While the aim is to help safeguard employees from being made redundant, there does not appear to be a requirement that employers demonstrate they had no other option than to make employees redundant.

3. Who may be placed on furlough leave?

3.1. 28 February 2020 key date

Furloughed employees must have been on the employer's PAYE payroll on 28 February 2020.

Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.

Employees who were made redundant since 28 February 2020, if they are rehired by their employer may be furloughed.

Employees on unpaid leave cannot be furloughed, unless they were placed on unpaid leave after 28 February.

COMMENT: If rehiring employees previously made redundant, specialist advice will be need on the treatment of redundancy payments and notice payments as well as issues around continuity of employment.

3.2. PAYE is key rather than type of contract

The Scheme appears to be based around PAYE, so anyone registered as self-employed for tax purposes will not be covered by the scheme.

The term 'employee' is used by reference to PAYE, not under the complexities of employment law that distinguishes between 'employees' and 'workers'.

Provided the 'employee' is on the payroll on 28 February 2020, the Scheme can be used. The guidance specifically references "any type of contract", including:

  • full-time employees
  • part-time employees
  • employees on agency contracts
  • employees on flexible or zero-hour contracts

COMMENT: Some employers may take the view that those casual or zero hours workers and employees who are not guaranteed work from the employer do not need to be put on furlough leave at all because the employer can instead simply refrain from offering them work. However, this approach is not in the spirit of the scheme which intends to ensure that employees and workers who are subject to PAYE retain a basic income during the crisis stages of the pandemic.

.3. No work requirement

When on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue.

If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and employers will have to continue paying the employee through their payroll and pay their salary subject to the terms of the employment contract that was agreed.

3.4. Alternating work/furlough

Employers do not need to place all their employees on furlough. However, those employees placed on furlough cannot undertake work.

The minimum furlough period is three weeks

COMMENT: While the guidance does not expressly provide for alternating periods of work and furlough for sets of employees, it is possible for employers to furlough part of their workforce for 3 weeks only and then furlough a different part of their workforce for three weeks to cover the same work.

3.5. Can an employee request furlough leave?

The guidance is silent on this. While there is nothing to prevent an employee requesting to be put on furlough leave, the employer does not have to agree. It is the employer's decision which employees to place on furlough leave, if any.

COMMENT: It seems that it is also the employer's decision whether to place employees on furlough leave or make them redundant. Potentially redundant employees do not have a right to require their employer to place them on furlough leave as an alternative to redundancy. However, it is hoped that many employers will see the new scheme as preferable to business closure and making redundancies. It is unclear whether refusing to place an employee on furlough leave and making them redundant could amount to an unfair dismissal.

It may seem to some employees that it is unfair that they will be required to continue working, potentially increasing their risk of infection if they are unable to work from home, and others will be permitted to receive a substantial proportion of salary and not be required to do so. However, provided the employer has used appropriate, non-discriminatory criteria to choose who is placed on furlough leave, it is possible for an employer to lawfully choose to furlough only part of the workforce. Some employees may look at this issue the other way and prefer to continue to receive full pay so the employer may find that seeking volunteers for furlough identifies the preferences of individual employees and avoids a feeling of unfairness.

3.6. Can employees be placed on holiday leave instead?

The guidance is silent on this. It is the employer's decision which employees to place on furlough leave, if any.

COMMENT: The Scheme does not contain any provisions that prevent the taking of holiday leave instead. In a separate measure, the Government has amended the Working Time Regulations 1998 (WTR) to allow carry forward of up to four weeks accrued holiday leave. This will allow leave to be taken sometime in the following two years but only where the holiday leave was not taken in this current holiday year as a result of the effects of coronavirus on the worker, the employer or the wider economy or society. See our alert, COVID-19: How Coronavirus is impacting the taking of UK holiday leave - permissible carry over.

While carry over is now permitted, workers who are not on sick leave or statutory family related leave (maternity, paternity etc), can still be instructed by their employer to take statutory annual leave on particular dates, provided that they are given the required amount of notice. The amount of notice will be as contained in the contract of employment. If silent, the default position is that twice as much notice as the period of holiday leave to be taken must be given.

3.7. Need to notify employees

To be eligible for the subsidy, employers should write to their employee confirming that they have been furloughed and keep a record of this communication.

Employers should discuss with their staff and make any changes to the employment contract by agreement. When employers are making decisions in relation to the process, including deciding who to offer furlough to, equality and discrimination laws will apply in the usual way.

3.8. Employees with more than one job

If an employee has more than one employer, they can be furloughed for each job. Each job is separate, and the cap applies to each employer individually.

3.9. Employees is on sick leave

The guidance provides that:

  • Employees on sick leave or self-isolating should get Statutory Sick Pay, but can be furloughed after this.
  • Employees who are shielding in line with public health guidance can be placed on furlough.

COMMENT: The guidance only deals with employees on sick leave before being put on furlough leave. The Guidance does not address the question of employees who become sick while on furlough leave.

It is likely that once employees are on furlough leave, they cannot then go on sick pay as:

  • To be eligible for SSP, an employee must have a day of incapacity for work (which sits within a period of incapacity for work). A day of incapacity for work is generally understood to mean one on which a person is not fit, through illness or injury, to perform their duties.
  • A day of incapacity is defined as - "A day on which the employee concerned is, or is deemed in accordance with regulations to be, incapable by reason of some specific disease or bodily or mental disablement of doing work which he can reasonably be expected to do under that contract" (Section 151(4), Social Security Contributions and Benefits Act 1992).

As such, an employee who has been placed on furlough leave is not incapable of work by reason of illness because they are on furlough leave under their contract because there is no work that they can reasonably be expected to do.

3.10. Employees on maternity leave, contractual adoption pay, paternity pay or shared parental pay

Individuals who are on or plan to take maternity leave must take at least two weeks off work (four weeks if they work in a factory or workshop) immediately following the birth of their baby (the Compulsory Maternity Leave period). This is a health and safety requirement.

If the employee is eligible for Statutory Maternity Pay (SMP) or Maternity Allowance, the normal rules apply, and they are entitled to claim up to 39 weeks of statutory pay or allowance.

Employees who qualify for SMP, will still be eligible for 90% of their average weekly earnings in the first six weeks, followed by 33 weeks of pay paid at 90% of their average weekly earnings or the statutory flat rate (whichever is lower). The statutory flat rate is currently £148.68 a week, rising to £151.20 a week from 5 April 2020.

Where the employee is entitled to enhanced contractual maternity pay, this is included as wage costs that the employer can claim through the Scheme. The same applies where employees qualify for contractual adoption, paternity or shared parental pay.

COMMENT: Employees on statutory family rated leave such as maternity leave can be put on furlough leave. While this will not impact their right to statutory pay, it can impact any enhanced contractual pay.

3.11. Volunteer work or training

A furloughed employee can take part in volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of the employer's organisation.

However, if workers are required to for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

COMMENT: While work that provides services to or generate revenue for the employer cannot be done, self-improvement training can be undertaken.

4. What can be claimed

4.1. Claim for wage costs through this scheme

Employers will receive a grant from HMRC to cover the lower of 80% of an employee's regular wage or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage. Fees, commission and bonuses should not be included.

At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month. An employer can also choose to top up an employee's salary beyond this but is not obliged to under this scheme.

Further guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions is to be provided before the scheme becomes live.

4.2. Actual salary before tax

For full time and part time salaried employees, the employee's actual salary before tax, as of 28 February should be used to calculate the 80%. Fees, commission and bonuses should not be included.

COMMENT: Salary before tax as at 28 February is to be used to make the calculation. When reading the HMRC Guidance, it is important to remember that the guidance is for what employers can claim via the Scheme, rather than guidance on employee rights. To claim under the Scheme, the starting point is salary as at 28 February 2020, but if a salary cut has been agreed since then, that is the salary that would otherwise be payable to the employee and so the revised salary would appear to apply. What you cannot use is any pay increase post 28 February (even if agreed before this date) to calculate the amount that can be claimed via the Scheme.

4.3. Employees whose pay varies

If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, employers can claim for the higher of either:

  • the same month's earning from the previous year
  • average monthly earnings from the 2019-20 tax year

If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.

If the employee only started in February 2020, use a pro-rata for their earnings so far to claim.

4.4. Employer National Insurance and pension contributions

Once the proportion of the employee's salary that can claim for has been worked out, employers must then work out the amount of Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions they are entitled to claim.

All employers remain liable for associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on behalf of their furloughed employees.

Employers can claim a grant from HMRC to cover wages for a furloughed employee, equal to the lower of 80% of an employee's regular salary or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on paying those wages.

If employers choose to provide top-up salary, employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through the scheme. Nor will any voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards).

4.5. National Living Wage/National Minimum Wage

Individuals are only entitled to the National Living Wage (NLW)/National Minimum Wage (NMW) for the hours they are working. Therefore, furloughed workers, who are not working, must be paid the lower of 80% of their salary, or £2,500 even if, based on their usual working hours, this would be below NLW/NMW.

However, if workers are required to for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

COMMENT: This means furloughed employees receiving 80% of their salary, or £2,500 should not dip below their NLW/NMW as they are not working any hours (save for the possible personal training exception)

5. Making a claim?

5.1. What employers need to make a claim

The guidance again stresses that employers should discuss with their staff and make any changes to the employment contract by agreement. Employers may need to seek legal advice on the process. If sufficient numbers of staff are involved, it may be necessary to engage collective consultation processes to procure agreement to changes to terms of employment.

To claim, employers will need:

  • their ePAYE reference number
  • the number of employees being furloughed
  • the claim period (start and end date)
  • amount claimed (per the minimum length of furloughing of 3 weeks)
  • their bank account number and sort code
  • their contact name
  • their phone number

The employer will need to calculate the amount they are claiming and HMRC will retain the right to retrospectively audit all aspects of your claim.

5.2. Claim submissions

Employers can only submit one claim at least every three weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.

6. What to do post-claim

  • Once HMRC have received the claim and the employer is eligible for the grant, HMRC will pay it via BACS payment to a UK bank account.
  • The employer should make your claim in accordance with actual payroll amounts at the point at which it runs its payroll or in advance of an imminent payroll.
  • The employer must pay the employee all the grant received for their gross pay, no fees can be charged from the money that is granted.
  • Once the scheme has been closed by the government, HMRC will continue to process remaining claims before terminating the scheme.

7. Rights of employees that have been furloughed

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 to redundancy payments.

Wages of furloughed employees will be subject to Income Tax and National Insurance as usual. Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have chosen to opt-out or to cease saving into a workplace pension scheme.

Employers will be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions on qualifying earnings unless an employee has opted out or has ceased saving into a workplace pension scheme.

8. Tax treatment of the Coronavirus Job Retention Grant

Payments received by a business under the scheme are made to offset these deductible revenue costs. They must therefore be included as income in the business's calculation of its taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles.

Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.