Read in PDF version <here>. 20th April 2020
- What is the position in relation to employees on maternity leave and other forms of parental leave?
The normal rules for maternity and other forms of parental leave and pay apply. Employers can claim through the Scheme for enhanced (earnings related) contractual pay for employees who qualify for either:
shared parental pay.
For example. employers who offer enhanced contractual maternity pay can furlough employees on maternity leave so that they can receive support with the cost of the enhanced payment.
For employees returning from statutory leave after 28 February 2020, an employees salary is calculated, for the purposes of calculating their furlough grant, on the employee’s new salary before tax, not the pay when on statutory leave.
- Can an employer impose a furlough on an employee?
The guidance states that employers should discuss with their staff and make any changes to the employment contract by agreement and in the vast majority of cases, UK employment contracts will not give employers the contractual right to unilaterally place employees on a leave of absence and/or reduce their pay; however in practice, an employee faced with redundancy or furlough will agree to furlough. . In the absence of such a contractual right, unilaterally imposing a leave of absence and/or a reduction in pay will amount to a breach of contract giving rise to potential breach of contract and (where pay is unilaterally reduced) unlawful deduction of wages claims. Such unilateral action may give rise to a successful constructive unfair dismissal claim. It is, therefore, strongly advisable that employers seek a written signed agreement for furlough. Consider a furlough agreement for furloughed employees and workers. The contract is important as the guidance states that to be eligible for a grant under the Scheme employers “must confirm in writing to their employee confirming that they have been furloughed”. A record of this communication must be kept for five years.
- How should an employer select employees for furlough?
When employers are making decisions in relation to the process, including whom to offer furlough to, equality and discrimination laws will apply in the usual way. In some cases, the entire business will be closed, in others the entire business except a core communications team will be furloughed and in other cases there will be businesses that have to furlough some employees but not all. Employers should consult with employees in relation to a furlough selection exercise to the extent (at the present time) that it is practicable to do so.
Where 20 or more employees at one establishment are being considered for furlough, collective consultation rules may apply.
- Do employers have to pay the balance of a furloughed employee’s remuneration?
The Scheme does not require employers to pay the balance of a furloughed employee’s remuneration, but normal employment law rules apply and as the vast majority of UK employment contracts do not provide the employer with the unilateral right to reduce an employee’s pay, unilateral (non-agreed) action by an employer to reduce an employee’s pay will give rise to strong breach of contract and amount to an unauthorised deduction of wages and will lay the foundations for a constructive unfair dismissal claim.
It is, therefore, strongly advisable that employers reach written agreement with any employees that they propose to furlough if they intend to pay those employees less than their normal pay.
Employers should also keep in mind that even if they do obtain consent from their employees to a pay cut whilst on furlough it is likely that the employee may later claim that such consent will be given under duress (ie. employee faced with alternative of furlough with pay cut or dismissal). In such circumstances it may be possible for the employee to subsequently bring a successful claim for breach of contract and/or unlawful deduction of wages for the balance of his or her salary.
- How much can an employer claim under the Scheme?
Employers can claim for:
80% of the employee’s wages, even if the employee is on the National Minimum Wage, up to a maximum of £2,500;
employer National Insurance contributions that are paid on the subsidised furlough pay.
Employers can also claim in relation to pension contributions that are paid on the subsidised furlough pay, up to the level of the minimum automatic enrolment employer contribution. The maximum that can be claimed is set in line with the minimum automatic enrolment employer contribution of 3% on qualifying earnings. Employers must pay the whole amount claimed in relation to pension contributions in to a pension scheme for the employee as an employer contribution.
For the avoidance of doubt, the amount that will be paid is the lower of 80% of wages or £2,500 per month.
The guidance states that an employer can choose to top up an employee’s salary, above the relevant cap, but that it is not obliged to do so under the Scheme. It is important to note, however, that this does not relieve employers from their legal obligations under their contracts of employment (See above question).
Employers can claim for any regular payments that they are obliged to pay their employees. This includes wages, past overtime, fees and compulsory commission payments.
Discretionary payments, such as bonuses, tips, commission payments and non-cash payments must be excluded.
The reference salary must not include the cost of non-monetary benefits provided to employees, including taxable Benefits in Kind. Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should also be omitted from the reference salary.
Normally an employee cannot switch freely out of a salary sacrifice scheme unless there is a life event. HMRC agrees that COVID-19 counts as a life event that could warrant changes to salary sacrifice arrangements, if the relevant employment contract is updated accordingly.
- What is the position in relation to employer National Insurance and pension contributions?
Employees and workers will continue to pay income tax and National Insurance contributions in the normal way on any payments received from the Scheme (ie. via PAYE deductions made by the employer).
Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have opted out.
Employers are still required to pay employer National Insurance and pension contributions on behalf of their furloughed employees. Employers, however, can claim for these too.
Employers cannot claim for:
a) additional National Insurance or pension contributions that they make because they chose to top up their employer’s salary; or
b) any pension contributions that they make that are above the mandatory employer contribution.
- How do you calculate the level of remuneration of an employee whose pay varies?
Where an employee or worker has been employed for 12 months or more, the employer can claim the highest of either:
a) same month’s earnings from the previous year (not defined); or
b) average monthly earnings for the 2019/20 tax year.
If the employee or worker has been employed for less than 12 months, the employer should claim for 80% of their average monthly earnings over the period since they started work.
If the employee or worker only started work in February 2020, the employer should work out a pro-rata for their earnings so far and claim 80% of that figure.
- How are payments made under the Scheme to be treated for tax purposes?
Payments received by a business under the Scheme are made to offset these deductible revenue costs and must, therefore, be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes and businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles.
- What is the position if the amount an employee gets on furlough is less than the National Minimum Wage?
Individuals are only entitled to the National Living Wage, the National Minimum Wage and the Apprentices Minimum Wage for the hours that they are actually working or treated as working under national minimum wage rules. This means that furloughed employees and workers who are not working can be paid the lower of 80% of their salary or £2,500 even if, based on their usual working hours, this would be below the applicable minimum wage.
Time spent training, however, is treated as working time for the purposes of the minimum wage calculations and must be paid at the appropriate minimum wage. Remember – the minimum wage rates increased from 1 April 2020. Employers must therefore ensure that furlough payments provide sufficient monies to cover these training hours. Where the furlough payment is less than the appropriate minimum wage entitlement for the training hours, the employer will need to pay the additional wages to ensure at least the appropriate minimum wage is paid for 100% of the training time.
- Over what period can an employer furlough an employee? `
Employees and workers placed on furlough must be furloughed for a minimum period of three consecutive weeks. When they return to work they must be taken off furlough. Employees can be furloughed multiple times but each separate instance must be for a minimum period of three consecutive weeks. These provisions allow an employer to have alternating/rotating periods of furlough, allowing for some employees (subject to agreement) to be furloughed for three weeks whilst others are working and then switching employees from active to furlough status and vice versa. Such an approach may be regarded as fairer by employees and reduce the risk of a challenge in relation to selection criteria at a later date. Conversely, however, such an approach could create practical and logistical problems for employers.
- What happens after the Scheme ends?
When the government ends the scheme, an employer will have to make a decision, depending on circumstances, as to whether employees can return to their duties. If not, it may be necessary to consider termination of employment (redundancy). (Grants under the Scheme cannot be used to substitute redundancy payments).
ADL Solicitors Ltd
Dr Nick Lockett
English Barrister (NP30499)
English Solicitor Advocate 213086
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