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COVID 19 Your workforce: What on earth is "furlough"?

24 March 2020. Published by Kelly Thomson, Legal Director and Patrick Brodie, Partner

Even the most seasoned HR professionals would be forgiven for asking this question. Furlough is an unfamiliar concept in the UK. It will soon become much more familiar to many businesses, families and individuals as it is the concept which underpins the Government's new Coronavirus Job Retention Scheme.

A "furloughed worker" is a worker who is on temporary leave due to special needs of a company or employer. This could be due to economic conditions at the specific employer or in the economy as a whole.  These furloughs may be short or long term.  In the US, those affected may seek other temporary employment during that time - however, this approach does not sit naturally with our rules on fidelity and loyalty, save to the extent that these express or implied rights are waived, by agreement or under the terms of the contract.  Equally, if a worker was permitted to take on alternative paid engagement during any period during which they are furloughed, it is not clear how an employee with a second mitigating income would offset that income from the sums sought to be recovered by the primary employer under the Government's scheme. 

So, how will the scheme operate? At present, the published guidance is limited and vague – much of the detail remains to be worked through. The Government hopes to have the scheme up and running by the end of April. But many businesses are having to make decisions imminently. Drawing together the key principles as currently published, albeit those are limited, here is what we know:

  • To access the scheme, the worker's status must be changed to that of a 'furloughed worker' – being as written above an employee who is temporarily on leave from the business.  The right to require an individual to remain away from work, in circumstances where they are ready and able to work, but work is not available to them, will be subject to normal employment principles.  The existing terms of employment will be important.  For example, whether or not employees are paid only for the work they undertake (say a minimum or zero hours contract) or, alternatively, if they are paid a fixed income, irrespective of the availability or otherwise of work. Advice on individual contractual arrangements should be sought before implementation.
  • HMRC will reimburse 80% of the worker's "wage costs" – this term is not defined – up to a maximum cap of £2,500 per month.  The normal meaning of "wages" flows from national minimum wage legislation and covers salary and certain other remuneration payments. However, and this is important, the opening paragraph of the Government's publication refers to employers having support "to continue paying part of their employees' salary for the employees who would otherwise be laid off".  The underlining is ours.  The term "salary" has a narrower legal meaning to "wages", where "wages" covers salary and other payments. In other words, the precise scope of the recoverable payments remains to be confirmed.
  • Please bear in mind that other contractual benefits will be payable to the employee unless the contract provides otherwise or the employee agrees otherwise.
  • Payments can be backdated to 1 March 2020 though the limitations around who will be eligible will, also, need to be confirmed.

As well as the points of detail mentioned above, the Chancellor's announcement and subsequent brief guidance issued to employers and employees left open a number of broader questions. In particular:

  • Will HMRC reimburse 80% of:
    • normal wage costs/salary or 
    • what the employer actually pays to the furloughed worker? 

The distinction is crucial. If the former, it is open to employers to seek to agree a 20% wage cut with staff and to be able to recover the full payment from HMRC. If the latter, any employer looking to furlough workers will, always, need to be in a position to fund 20% of the wage bill itself. The cash flow difference is critical. Although the official guidance is opaque on this point, we understand from the Financial Times that Treasury officials were "horrified" at the weekend to discover that employers were considering lay-offs over fears of having to fund 20% of all furloughed staff wages. Apparently, the intention is that 80% of normal wages will be reimbursed up to a cap of £2,500.

  • The announcement does not deal with whether the costs to be underwritten, include tax and deductions relevant to employees – for example employer's NIC's, pension, cost of other benefits. We understand guidance on the employer's NIC's position may be issued this week.
  • To to be a furloughed employee the person must be on leave, not working.  What is the position if an employer wishes to rotate its workforce, some working with others at home on leave, not working and then swapping those teams?  Are the employees never furloughed because they will work or are they furloughed for when they're at home?
  • The guidance does not confirm whether the scheme will be operated as a loan or a pure payment.  The supporting announcements, including by Ministers, speak to it being a loan, but that is not clear from the guidance, itself.