The information in this note is correct as of 14 May 2020.
The Coronavirus Job Retention Scheme (CJRS), which has been around since March, has rapidly become the main topic of advice requested from employment lawyers.
The UK Government has released several iterations of online employer guidance relating to the scheme so far, most recently on Thursday 14 May. The Chancellor of the Exchequer released his Direction to HMRC on 15 April. This Direction has legal force under the Coronavirus Act 2020 and, unhelpfully, there are potential clashes between the Direction and the online guidance. On 12 May, the Chancellor announced that the Government would be extending the scheme until the end of October, with new flexibility being introduced from August. Official guidance on these latest announcements is still awaited.
This blog shares our insights on five pressing questions regarding the CJRS to assist employers.
1. What can employers claim from HMRC (it’s not always 80% of salary)?
There are two very important questions for employers. The first is What level of subsidy can be claimed under the CJRS in respect of each individual? It has become clear that ‘80%’ of the reference salary is a maximum that can be recovered yet, in many cases, the grant available will be less than it might first appear:
- there is a well-known cap of £2,500;
- salary sacrifice sums are not included in the reference salary. This means employers will (unless a different agreement is reached with the employee) have to continue to fund the sacrificed element of pay but will not be able to reclaim this as part of the subsidy from HMRC. While HMRC has stated that COVID-19 is a ‘life event’ that permits employees to make changes to salary sacrifice arrangements, an employee reversing their decision to sacrifice will have no impact on the grant an employer can claim under the scheme because it is calculated based on the reference salary, which is pre-19 March 2020;
- the cost of providing other benefits/allowances (such as a company car) cannot be recouped;
- the reference pay might not match what the employee was expecting to earn during the period of furlough. For example, if they were due a bonus or pay rise, the employer will (unless a different agreement is reached with the employee) have to fund the bonus or pay rise but will not be able to increase the amount of subsidy claimed; and
- the reference pay period may produce an 80% figure that is disproportionately high, particularly where earnings fluctuate or a forward-looking reduction in pay/hours has been agreed. Employers must ensure all claims are appropriate and take advice in windfall situations.
- From August, the government intends to reduce the level of subsidy that it will pay, however, further detail on what the reduced level will be has not yet been announced.
2. What should employers pay to the employee?
The second key question for employers is What should I pay my employees? Employers must pass on the full grant claimed under the CJRS (less any deductions for employee income tax and National Insurance contributions, which must be paid to HMRC, and any employee pension contributions that must be invested in the pension scheme in the usual way). However, just because employers only receive a grant of 80% (or less) of salary does not mean that is all they should pay the employee. Any change to pay or benefits is a contractual variation and so any reduction in pay or benefits during a period of furlough leave will need to be agreed with the employee. As the alternative to a temporary pay reduction may be redundancy (at a difficult time to be looking for new employment), most employees will likely agree to a temporary reduction in pay during the furlough period.
There may be unique challenges when it comes to altering benefits, particularly pensions. Employers with more than 50 employees considering any reduction in the employer pension contribution rate will need to be mindful of their obligation to provide certain information to workers or their representatives and consult with them under The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 for a minimum of 60 days before implementing any such change.
It is important to be aware of the impact on the employees who have been furloughed and the remaining workforce. While many employers have maintained full pay for furloughed colleagues during at least the initial period of furlough, others have agreed a reduction in pay. As the crisis progresses, the level being paid to furloughed employees, particularly those who earn over the £2,500 cap, will become a bigger issue. If cuts have to be made, reducing pay for those on furlough first may be an instinctive thought.
However, as we are in the midst of a public health crisis the issue of whether an employee is furloughed or not may be outside the control of any individual, and it is often the lowest paid and most vulnerable members of the workforce who are furloughed. Accordingly, when considering the impact of the crisis on its workforce, businesses will want to treat both furloughed and non-furloughed employees equitably. Each situation is unique and it is unlikely there will be a one-size-fits-all approach. Employers should be mindful of unintended consequences and discrimination risks that could arise from treating groups differently.
3. How do you choose who to furlough?
Choosing who goes on furlough should be based on business needs, although employers can also take into account individual circumstances such as the health of the employee, their family situation and any caring duties they may have. The guidance specifically permits furlough for those shielding or with caring duties. Businesses may decide to seek volunteers first, and then develop a tailored process to select employees for furlough. We suggest that this is done in consultation with employees (and unions, if applicable) where possible. Care should be taken to avoid inadvertently discriminating against certain groups. Furlough can be rotated between employees (subject to the minimum three-week period).
A business can furlough anyone, with agreement. However, employers can only claim a subsidy if certain conditions are met. Updated rules mean that employees must have already been working for the business on or before 19 March 2020. However, it is not enough that the employee started working for the business by then: HMRC must also have been notified online using the Real Time Information system by this date, which means there are still individuals for whom no subsidy may be available.
4. What does “no work” mean and how do you agree it?
The online guidance states that employees cannot work during furlough. Work is defined as providing services to or generating revenue for, or on behalf of, the employer or a linked or associated organisation. Training and voluntary work is allowed provided it does not fall within that definition of work. The Direction to HMRC goes further and says the employee must have been instructed by their employer to cease all work in relation to their employment (other than training – interestingly, volunteering is not mentioned). It states that: “An employee has not ceased all work for an employer if the employee works for a person connected with the employer or otherwise works indirectly for the employer.” There is no de minimis level of work permitted. Employees can keep in touch with work for HR matters connected to their own employment and to undertake training, but it appears that they cannot continue to do any work: even maintaining a watching brief on projects or forwarding emails could count as work.
The Treasury Direction provides that an employer and employee must agree in writing (which can be in electronic form, such as email) that the employee will cease all work in relation to their employment. This has called into question whether implied acceptance of furlough is sufficient to qualify for grant under the CJRS. There is an argument that a claim could be rejected/reversed on audit where there is no express written agreement from both parties about no work being done during the furlough period.
Since the Treasury Direction was published, the government has updated its online guidance to employers to make clear that no written response from the employee is required. There remains the potential for a clash between this updated guidance and the Treasury Direction but we consider the government’s intention to now be clear that there is no need for a written response from employees.
From August the government plans to allow employers and employees greater flexibility in using the scheme with workers being able to return to work on a part time or phased basis while still taking advantage of the scheme. Exact details of how this will work are likely to be published in the coming weeks.
5. What are the rules on holiday while on annual leave?
It has been confirmed that holiday can be taken without ‘breaking’ furlough and, in more recent guidance, that employers can require employees on furlough to use their holidays during furlough provided statutory notice periods are adhered to. While that may initially appear unfair, it could create balance between those employees who are not furloughed but are being required to use annual leave during lockdown and those who are furloughed and may otherwise have been perceived to benefit from paid time off on furlough and a build-up of paid holidays to be taken on their return to work.
Employees must be paid at 100% of their normal pay for any holidays they are entitled to that form part of the 5.6 weeks of holiday they are due under the Working Time Regulations 1998 (although 80% can still be claimed under the scheme in the usual way).Employees can agree what should happen in respect of holidays in excess of their WTR entitlement.
Conclusion
The purpose of CJRS is to support employers and employees by covering at least some of the employment costs of furloughed employees arising from the health, social and economic emergency of coronavirus. The CJRS has been established at pace. As such, there will no doubt be loopholes and unintended consequences. There still remain some unanswered questions on points of detail. The Direction to HMRC mitigates the risk of fraud by providing that no subsidy is payable if the claim is abusive or is otherwise contrary to the exceptional purpose of CJRS. HMRC has a power to audit claims so there is a risk that a claim approved now could be reclaimed at a later date. A hotline has been set up to allow employees to report abuses of the furlough scheme (for example, being required to continue working whilst on furlough).
Employers should be considerate of the purpose of the scheme when making claims and take advice on any particular issues that are unclear to avoid over or under claiming. HMRC may also be able to give guidance on particular cases in advance although, given the volume of claims likely to be made, it may be difficult to obtain answers and employers are actively discouraged by the government from phoning HMRC. The CJRS opened on 20 April, and 7.5 million employees had been registered by the 12 May 2020. The practical approach taken by HMRC when processing these initial claims will hopefully help to clarify the operation of some aspects of the scheme.
The novelty, pace of change and intricacies of the scheme mean that it is vital that employers take up-to-date (and even up-to-time!) legal advice on the CJRS.