HM Government published a Treasury Direction to HMRC on 16 April 2020 which direction to HMRC on how to implement the Coronavirus Job Retention Scheme (also known as the “furlough scheme”. At the same time, HM Government published further updated guidance to businesses. This note summarises the key points and builds on questions clients have asked us about the furlough scheme.
The furlough scheme is a temporary scheme which is available to all UK employers affected by COVID-19. It was available for an initial period of 4 months starting from 1 March 2020 but has now been extended until 31 October 2020. Employers can claim for 80% of furloughed employees’ usual monthly wage costs up to an upper limit of £2,500 per employee per month (plus all associated employer National Insurance and mandatory pension contributions). The furlough scheme is open to all UK employers that had a PAYE payroll scheme in operation on 19 March 2020.
What does “furlough” mean?
An employer who has no work whatsoever for an employee to do can place that employee on furlough. The furloughed employee remains on payroll during the furlough period with a view to be returning to full employment once things return to normal.
It is important to note that the furloughed employee must have no work to do: merely reducing an employee’s working time does not qualify them for furlough.
Who can claim under the Scheme?
All UK entities with employees can participate in the furlough scheme, this includes businesses, charities, recruitment agencies (agency workers paid through PAYE) and public authorities.
To which employees does the furlough scheme apply?
The furlough scheme allows an employer to furlough the following employees:
• full-time employees;
• part-time employees;
• employees on agency contracts; and
• employees on flexible or zero-hour contracts.
The furlough scheme can also apply to employees who were made redundant since 28 February 2020, if they are re-hired by their employer.
The furlough scheme only applies to employees employed (and recorded through PAYE) as at 19 March 2020.
What are the requirements for the employee/employer for furlough?
Furloughed employees cannot undertake any work for their employer (whether that be providing services or generating income). An employee will usually need to agree to be furloughed (depending on the provisions in the employee’s contract with their employer), ideally in writing. The date of commencement of furlough can be backdated as far as 1 March 2020 on condition that the employee was carrying out no work from that date. For employees who were carrying out work on that date, the furlough would commence on the date they stopped having any work to do.
Any employees working, but on reduced hours/pay will not be eligible for the furlough scheme and the employer will still be required to pay salary, tax and all usual liabilities concerning their employees. However, from 1 August 2020, the government have indicated that employees who return to work part-time may be eligible for a reduced contribution with the employer paying an additional portion of the costs. Speculation in the press has suggested a government contribution of 60% of salary, though this has not been confirmed.
An employee on sick leave/self-isolating cannot be furloughed until the end of the sick leave/14-day quarantine period. Such an employee would be paid statutory sick pay and can be furloughed once the period of sick leave/self-isolation has finished.
If an employee has two or more jobs (with different employers), they can be furloughed for each job.
An employee can take part in volunteer work or training during furlough, as long as this provides their employer with no services to generate revenue.
No employees hired after 19 March 2020 are eligible for the Scheme.
All employers should communicate (and potentially consult) with their employees in respect of any requirements relating to furlough, including any changes needed to their contracts. Should there be no provision in the employees’ contracts to enforce temporary leave, the employee must consent to furlough or the employer runs the risk of constructive unfair dismissal (which would only apply to employees employed for 2 years or more).
The Treasury Direction to HMRC requires that the employee and employee must have agreed in writing to furlough. The implication is that the employer must write to the employee stating that they are being furloughed and the employee must confirm their agreement to this in writing.
All equality and discrimination laws apply to any furlough decision-making process. All employers should set up proper procedures when selecting employees to be placed on furlough. Should an employer be required to change 20 or more of their employees’ contracts and the employees do not consent, the employer will trigger a mandatory collective consultation process.
In the event that an employee is eligible for statutory maternity pay, maternity allowance or paternity pay, the normal rules apply, and they are allowed to claim up to 39 weeks of statutory pay or allowance. If the employer offers enhanced (earnings related) contractual pay to women on maternity leave, this is included as wage costs that can be claimed through the furlough scheme.
What can an employer claim under the furlough scheme?
Employers will receive a grant from HMRC to cover the lower of (i) 80% of an employee’s regular wage or (ii) £2,500 per month (plus N.I and pension). When calculating the entitlement, commissions, bonuses and TRONC (tip-related remuneration for staff in hospitality businesses) are excluded.
Placing an employee on furlough does not inevitably remove the obligation of the employer to continue to pay 100% of salary: it merely means that HM Government will contribute 80% or £2,500 (whichever is lower). Employers will need to check whether they have a contractual right to reduce pay and/or whether employees who have been furloughed will consent to a temporary reduction in pay.
Employer national insurance and pension contributions on any sums paid in addition to the Government contribution will not be funded through the furlough scheme. Similarly, no voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income will be covered by HM Government.
How do the calculations work?
For an employee with regular monthly earnings, the employee’s actual salary before tax as of 28 February 2020 should be used to calculate this.
If an employee’s pay varies and they have been employed for a full 12 months prior to claim, the employer can claim for the higher of:
• the same month’s earning from the previous year; or
• average monthly earnings from the 2019-20 tax year.
If the furloughed employee has been employed for less than a year, the employer is entitled to claim for an average of their monthly earnings since they began employment.
What about holiday entitlements and furlough?
ACAS have published guidance stating that normal employment law applies in terms of furloughed employees and holiday. Holiday entitlement will continue to accrue during furlough.
If an employer had placed an employee on mandatory holiday (in accordance with their employment contract), or the employee was on annual leave, prior to commencement of any period of furlough, the employer can only claim furlough from the end of the holiday period.
Can directors be furloughed?
HMRC confirmed on 27 March 2020 that a director can be furloughed, provided they were paid via PAYE as of 28 February 2020. Company directors are permitted to complete their statutory duties in accordance with the Companies Act 2006 and associated legislation during a period of furlough but are not permitted to carry on any work (such as marketing activities and managing the business).
Can employees be made redundant during or after furlough?
An employer can make any employee who has been furloughed redundant, either during furlough or after the Scheme completes. Employers should comply with employment law when undertaking a redundancy process and should be mindful of the requirement to choose an appropriate pool for redundancy and selecting suitable criteria for redundancy.
Note that contractual notice periods will continue to apply regardless of furlough. An employer wishing to start a redundancy process after a period of furlough has ended will need to honour notice obligations. There is nothing in the guidance that prevents an employee serving their notice period to be placed on furlough.
What are the tax implications of receipt of furlough contributions from HM Government?
Furlough contributions are treated as income for tax purposes. They will have to be recorded as income when calculating corporation tax at the end of the employer’s financial period. Employment costs continue to be treated as a deductible expense in the usual way.
What information/documents does an employer need to make a claim?
In order to make a claim for furlough, an employer will need the following:
• its PAYE 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);
• the employer’s bank account number and sort code;
• the employer’s contact name; and
• the employer’s phone number.
HMRC are due to launch a new platform through which employers can claim under the furlough scheme on 20 April 2020.
Where can I find further information?
We have published a general overview of all of the available COVID-19 schemes.
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