More than a quarter of the UK workforce have been furloughed since the Coronavirus Job Retention Scheme (CJRS) opened in March 2020. As the scheme winds down, stories relating to employers' misuse of the scheme are on the increase. The CJRS - or Furlough Scheme - is an emotive topic and the Government has invested billions of pounds into the scheme. As such, stories of misuse or 'Furlough Fraud' have been making the headlines- such as the Sunday Times' weekend headline of 'the Great Furore over Furloughing'. It will impact employee morale and engagement as well as the bottom line if HMRC refuse an employer's claim for funds under the scheme or, worse still, recoup money or issue fines for misuse.

Many news stories so far have been about seemingly deliberate abuse: employers making "ghost" claims for employees who are no longer on their payroll; or claiming furlough pay for employees who have been required to continue working. There has also been a widely reported first arrest in relation to alleged fraud and misuse of the scheme. However, with the constantly changing guidance and the introduction of complex rules allowing "flexible furlough", it is easy to see how employers might inadvertently slip up and find themselves in breach.

The signs indicate that HMRC are rolling up their sleeves to deal with reports of abuse seriously, as might be expected given the anticipated cost of the scheme. Employers who are found to have acted in breach could face civil claims, penalties, personal liability for directors and (in the more serious cases) criminal liability.

It is vital for all employers who have made claims under the CJRS to make sure they are able to spot errors or issues and are prepared to investigate and deal with reports of misuse. Taking such concerns seriously will not only help employers to stay on the right side of far-reaching whistleblowing law and governance requirements (internally or externally), but it may also bring issues to the fore and allow them to be dealt with before reaching crisis point.

Consequences of breaching the CJRS

HMRC

  1. Employers will have 30 days from the breach of the furlough conditions to self-report any breach of the scheme to HMRC, via the online form "Report HMRC administered coronavirus relief scheme fraud". HMRC has stated that it will be checking all claims, and it has all of its standard powers of information gathering and discovery available for investigating misuse of the scheme.
  2. Employers must keep records in relation to the scheme for six years (see the full list below) but where fraudulent behaviour is involved, HMRC is able to make discovery assessments relating to behaviour in the previous 20 years. In the case of breach, HMRC can apply its standard penalties, which are dependent upon the nature of the breach and whether disclosure of the breach was prompted or unprompted.

Directors' liability

  1. Directors should ensure as part of a good governance framework that key risks affecting its business are identified and managed. CJRS claims are a potential risk that can impact a business significantly if there is not an appropriate system in place to ensure that the scheme was used properly. Directors are subject to various statutory duties, not least the duty to exercise reasonable care, skill and diligence and to promote the success of the company. These duties may be breached if CJRS claims arise and/or are not managed properly. In the event of any breach of duty, directors may be liable for damages, the breach could provide grounds for dismissal under their service contract. Directors can face disqualification if the breach amounts to unfit conduct. The issues will be especially relevant in the event that the company is (or is at risk of facing) insolvency, as a director's conduct during this period can be subject to further investigation and scrutiny during the insolvency process.
  2. In addition to potential breach of duty issues, if the scheme has been deliberately misused simply to extract funds, for example by claiming for "ghost" employees or those that have in reality continued to work, then more draconian consequences might follow. HMRC are likely to take a very dim view of such conduct, and it may be that claims will be brought directly against those responsible.
  3. There is an additional suggestion that HMRC is looking to hold directors jointly and severally liable for penalties raised in relation to CJRS claims. It is expected that this action would only be imposed to catch directors who intentionally flouted the rules. But this is yet to be clarified.
  4. In the more serious cases of abuse, it could also be that criminal charges would follow. There are a number of bases for criminal charges, including under the Fraud Act 2006 which, for example, makes it a criminal offence to obtain a gain (such as payment from the scheme) by making false statements (such as claiming for an employee who does not exist). The penalties for this include up to 10 years in prison and an unlimited fine.

Whistleblowing

  1. Under the Employment Rights Act 1996, an individual who raises concerns of potential wrongdoing, including fraud, may well have protection from being dismissed, or being subjected to a detriment. Colloquially they will have protection as a whistleblower.
  2. The law on whistleblowing is complex. In essence, if a worker discloses information that in their reasonable belief shows a breach of a legal obligation and is in the public interest then they may get protection from dismissal or being subjected to a detriment. The most common scenario is when they disclose it to their employer, but they can also get protection when it is disclosed to a 'prescribed person' directly- which includes HMRC. They also don't need to raise the concern in good faith to get protection so even if it is out of spite they can still be protected (they just might not get as much in a Tribunal).
  3. The penalties are quite onerous and can include individual liability. A dismissal by reason of someone having made a protected disclosure is automatically unfair. There is also no limit on compensation. Likewise, there is no limit on compensation for a detriment claim and individuals can also be found liable. So coupled with negative PR and potentially damaging employee relations issues you could face a significant financial penalty in the Employment Tribunals. Employment Tribunals also take a long time to resolve (we are seeing Hearings being listed 18-24 months after a claim is raised) so it will hang over you for some time.
  4. Any concerns raised around fraud, or misuse of a government scheme, should be treated as a potential whistleblowing incident and managed accordingly. You may have a sophisticated whistleblowing framework (perhaps to meet regulatory or governance requirements) but at the very least you should have a working whistleblowing policy and staff trained in how to use it.
  5. So, in a nutshell, if someone tells you or HMRC that you have misused the CJRS in anyway (deliberately or not) then they are likely to be protected and you need to be careful in how you then manage them. You should investigate in accordance with internal policy and process and ensure that appropriate protections are in place.

Key steps to prepare for concerns

  1. The following key steps will help organisations prepare to deal effectively with concerns about misuse of the scheme:
    1. Check, check and check again. It seems obvious but have effective controls in place to ensure that what is submitted to HMRC is accurate; consider undertaking an internal audit; ensure that there is a comprehensive audit trail.
    2. Encourage staff to highlight concerns in an effective and appropriate manner. Ideally raising concerns is already part of the overall risk management and control framework and is part of an open culture of raising concerns. At the very least, ensure you have a clear whistleblowing policy in place, and that employees know how to use it.
    3. Have a clear plan and process of how you will investigate issues raised. Will it be done internally, or is it best to have an independent investigation to keep it at arm's length?
    4. Consider how your key internal teams will work together in the event that concerns are raised. This may involve a wide range of teams including risk, audit, compliance, legal, HR. Identify who will have responsibility for each area and how the teams will work together, particularly if they are working remotely.
    5. Ensure that the Board are kept fully informed on any issues of significance that arise.
    6. Employers must keep the following records for six years:
      1. Amount claimed and claim period for each employee;
      2. Claim reference number;
      3. The underlying calculations for each claim;
      4. For flexibly furloughed employees, the calculations of the usual and actual hours worked; and
      5. A written record of the agreement made with the employee to furlough (the legal requirement for this document is five years but it is advisable to retain this for 6 years to accord with the other record keeping requirements).
    7. Review your D&O insurance although note that it will not cover fraud.

Other steps

  1. Regulators, shareholders, the workforce, the public and indeed the media will expect there to be consequences for those who have misused the CJRS scheme. Employees who are found to have been involved in fraud or misuse of the CJRS (and indeed in general) should expect to be disciplined. Where there is no misconduct involved it is still likely to be a performance management issue.
  2. Contracts of employment and/or disciplinary proceedings are likely to have fraud as an example of gross misconduct and people in regulated environments (such as the Senior Manager and Certification Regime) could also expect there to be regulator issues as well - on a personal and corporate level.

What do you do if you have an issue?

At Gowling WLG, we have a multi-disciplinary team offering which is well placed to deal with internal investigations, whistleblowing/employee relations, governance requirements and tax disputes. Please do contact us should you wish to discuss anything relating to the issue raised in this article.