Putting employees on "furlough" to protect jobs

What does the recent UK Government announcement mean for employers and their employees?

Last Friday the UK Chancellor announced a package of temporary, targeted measures to support public services, people and businesses due to the disruption caused by COVID-19.

From an employment perspective, measures to retain employees and reduce redundancies during this period will be by way of the Coronavirus Job Retention Scheme. Under the Scheme, all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis. These employees will be on "furlough".

On Sunday 22 March the Government published "COVID-19: guidance for employees" and also "COVID-19: support for businesses".

Coronavirus Job Retention Scheme

We outline the key features set out by the Government below, and, where possible, flag implications for employers and employees. However the essence of what is proposed is not detailed and we hope that more information becomes available soon.

• Any UK employer, big or small, private or charitable can access the scheme.
• The employer will designate affected employees as ‘furloughed workers,’ and notify their employees of this change.
• Employers will need to submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal (HMRC will set out further details on the information required).
• HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month. HMRC are working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.
• The Government hopes to have processed the grants by the end of April but if a business needs short term cash flow support, it may be eligible for a Coronavirus Business Interruption Loan, as set out in the Guidance.

The Government intends that the Coronavirus Job Retention Scheme is to run for at least 3 months from 1 March 2020, but will extend it if necessary.

What do employers need to do

Employers are considering either lay-off for employees or making them redundant. Placing staff on furlough will allow business a bit of breathing space. In such situations employers will be explaining that roles would be made redundant/ laid off which is why they are seeking to implement furlough. Therefore if an employer intends to access the Coronavirus Job Retention Scheme, they will need to discuss with employees about becoming classified as a furloughed worker. This means that individuals are kept on the employer’s payroll, rather than being laid off. The Government makes clear that changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation.

What are the implications of being put on furlough for the employer and employee?

• To qualify for this scheme the employee should not undertake work for their employer while they are furloughed.
• The employee will remain employed while furloughed.
• The employer can choose to top up any the differences between this payment and the employee's normal salary, but does not have to.
• If employees' salary is reduced as a result of these changes, they may be eligible for support through the welfare system, including Universal Credit.

Employees sponsored on a Tier 2 visa

If any furloughed employees are sponsored on a Tier 2 visa, their immigration status is tied to employment at a minimum salary. Based on current Coronavirus guidance published by the Home Office, there won't be a sponsorship issue with those employees not working for several weeks or months. But sponsors will need to consider the impact of salary reduction, if the employer is not topping up the 20% shortfall in salary.

Pensions implications

Auto enrolment pension obligations will continue, which will involve a minimum employer pension contribution having to be paid in relation to the furloughed workers but based on the pay they actually receive during that period. It might be possible to negotiate about any amount of employer pension contributions that are usually paid over and above the automatic enrolment minimum, although that is subject to matters including The Pensions Regulator being flexible about compliance with the usual 60-day consultation period. What is not clear is whether or not these employer pension costs (minimum auto enrolment and any 'extra' pension contributions, if applicable) will be reimbursed as part of the Coronavirus Job Retention Scheme. There could be further implications if a salary sacrifice arrangement is being used for pension contributions (these will almost certainly need to be reviewed in the light of any salary adjustments if employers wish to drop them to take account of the reduced salary).

Issues that are currently unclear

• The Government has not yet produced clear guidance of whether the "wage costs" which will be reimbursed include just salary or other benefits, and whether the £2,500 figure is gross, and implications for employer's National Insurance Contributions.
• It seems likely that holiday (at least statutory) entitlement will continue to accrue during this period but we are waiting for clarification.
• Lay off: The Guidance states that the Scheme involves paying part of employees’ salary for those employees that would otherwise have been "laid off" and whether this means that they would otherwise have been made redundant.

While we wait for further clarification, it is important to remember that the usual employment processes and procedures continue to be necessary. If redundancies are necessary then fair individual or collective consultation should be followed. It is also likely that employers should seek employees' consent when placing them on furlough, though this will depend on the terms of an individual contract of employment.

While the Government's announcement is welcome across the UK, many questions remain. If you would like further advice on this issue, please contact your normal TW contact.