Furlough Furore: the Treasury Direction and the Coronavirus Job Retention Scheme

On 15 April 2020 the Treasury finally issued a Direction to HMRC setting out in quasi-legislation the detail of the Coronavirus Job Retention Scheme. This followed four iterations of HMRC Guidance.

In this blog Daniel Dyal highlights some important unintended problems and pitfalls which the Directive has created. Users of the Job Retention Scheme and their advisors need to be aware of them.


On 20 March 2020, the Chancellor of the Exchequer, the Rt. Hon. Rishi Sunak, first announced the Coronavirus Job Retention Scheme (‘Scheme’). In very short, the Scheme is intended to incentivise businesses to ‘furlough’ employees instead of dismissing them, by paying a grant to cover some wage costs.

On 26 March, HMRC issued guidance explaining the Scheme (‘the Guidance’). The Guidance was re-issued on 4 April, re-re-issued on 9 April and finally (for now) re-re-re-issued on 15 April 2020. Each iteration was pored over by millions.

All the while, lawyers craved some law setting out the scheme rather than mere guidance. Initially it was widely assumed (and naturally so) that legislation including regulations would be forthcoming and would spell out the detail of the Scheme. As recently as 13 April 2020, the judge dealing with the first case arising out of the scheme still anticipated it would be (In the matter of Carluccios (in administration) [2020] EWHC 886 (ChD) at para 15).

However, it became increasingly clear that there would be no specific further legislation and that the legal basis of the scheme was essentially section 76 Coronavirus Act 2020. Section 76 is very general and of itself makes no mention of the Scheme: it simply gives the Treasury the power to direct HMRC’s functions in relation to coronavirus.

On 15 April 2020, the Treasury finally made and published The Coronavirus Act 2020 Functions of Her Majesty’s Revenue and Customs (Coronavirus Job Retention Scheme) Direction (‘the Direction’). The Direction is addressed to HMRC and requires it to be responsible for managing and making payments under the Scheme. The Scheme is defined in a detailed schedule to the Direction. The Direction is not a statutory instrument but it is drafted in a technical, legalistic way, much like one. The detail of the scheme is now spelt out in this piece of quasi-law.

The Direction is the (quasi-)legislative description of the Scheme. The Guidance is the explanation of the scheme for lay-users (and their advisors). It is perhaps odd that the Guidance was issued before the Direction and not once but four times. By the fourth iteration of the Guidance, while some important questions remained unanswered (notably around annual leave), the general shape of the scheme evolved and became tolerably clear.

With all that background, the terms of the Direction are unfortunate. It has brought layers of complexity and uncertainty where simplicity and clarity were needed.

This paper does not purport to be comprehensive of the issues arising out of the Direction. It’s ambition is limited to pointing out some central shortcomings of the Direction and inconsistencies with the Guidance, so users of the Scheme and their advisors are aware of them, and in the hope that they can be swiftly corrected.

Overarching problems

There are (at least) three overarching problems with the Direction which it is worth identifying in general terms:

  • The first is that the meaning of the Direction is uncertain in places, and at times, it is simply impenetrable.
  • The second is that the Direction and the Guidance depart from each other in their description of the Scheme in some important respects.
  • The third is that it is far from clear which document will prevail over the other where there is inconsistency. This is in part because it is possible that one or other or both of the Guidance and the Direction might be amended in light of the inconsistencies. In further part it is because the legal relationship between the Guidance and the Direction is complicated and unusual given that the Direction is not a statute or statutory instrument. And in yet further part because it is unclear what will be done in practice to prevent employers who have relied upon the Guidance (particularly pending the publication of the Direction) from being prejudiced. (I hope to write more about this third issue in another paper). 

The definition of furlough

The concept of furlough is at the very heart of the Scheme. A fundamental feature of the Scheme is that it only applies to employees who are furloughed. Reading the Guidance, you could be forgiven for thinking that it is straightforward to furlough an employee. In fact there are many wrinkles. The Direction gives furlough a technical and at times complex meaning (paragraph 6).

In order to be furloughed the first two conditions an employee must meet are basic and unsurprising:

  • The employee must be instructed to cease all work in relation to his/her employment;
  • The cessation of work must be for a period of at least 21 days;

However, an employee is not furloughed within the meaning of the Scheme unless some further conditions are also met.

Reason for the furlough

One longstanding question that the Direction does answer is ‘does the reason for furloughing the employee matter?’. Yes, it does. The instruction to cease work must be “by reason of circumstances arising as a result of coronavirus or coronavirus disease”. If it arises for another reason, the employee is not furloughed within the meaning of the Scheme.

This means that it will clearly be inappropriate to claim against the Scheme in some circumstances. For example, if an employee was going to be made redundant anyway quite apart from the pandemic, it would not be appropriate to furlough him/her instead and claim against the scheme. That said, there is some complexity: if the coronavirus crisis brought forward the date on which the employer wished to make the redundancy the employee could presumably be furloughed, instead of dismissed, until the originally planned date of dismissal (so long as the furlough period were at least 21 days).

The written agreement problem

According to paragraph 6.7 of the Direction, a further limb to the definition of furlough is that there must be a written agreement between employer and employee that the employee will cease all work in relation to their employment.

The requirement for a written agreement was not clearly indicated in the Guidance (which simply required the employer to record the decision to furlough in writing). Many employers that furloughed employees before the Direction was published will need to contact their furloughed employees again and seek written agreement if they did not do so originally. This is likely to have happened in a large number of cases particularly where the employer decided to ‘top-up’ the employee’s wages. In such cases the decision to furlough may have been considered uncontroversial – generous even – and written agreement might well not have been sought.

The optimistic view is that where no written agreement was originally obtained, it can now be obtained and have retrospective effect so that the employee meets the definition of furlough for the whole period. However, that is not what the Direction says. On a strict reading of the direction (see paragraph 6.7 particularly) an employee is not furloughed unless there is an agreement in writing to cease work and there is no indication that a written agreement can have retrospective effect.

Finally, note that a written agreement can be electronic, so an email exchange or even text message exchange could in principle suffice.

The training problem

The Direction has created real uncertainty in relation to training and the circumstances which it can be undertaken without breaching the rules of the Scheme whilst the employee is furloughed.

According to the Guidance the employee is able to engage in training and still be furloughed as long as the training does not generate revenue for, or provide a service to, the employer or an associated organisation.

However, training is dealt with completely differently in the Direction. The Direction provides that training does not count as work if certain conditions are met (remember that there must be a cessation of work for the employee to be furloughed so it is important that the training does not count as work). The conditions are that the training is “directly relevant” to an employee’s employment and agreed between the employer and employee before being undertaken.

These are odd conditions and ones that have no similar expression in the Guidance. They appear to suggest that if the training is not “directly relevant” (whatever that means) to the employee’s employment, and/or if the employee has embarked upon it without the employer’s agreement, and/or there is agreement but it was only reached after the training commenced, then the training counts as work and the employee is not furloughed. This seems absurd but is the natural reading of the Direction.

Statutory Sick Pay

The Direction introduces complicated and hard to follow provisions in respect of Statutory Sick Pay into the conditions of furlough (para 6.3):

  • If the employee is entitled to SSP at the time the employer’s instruction to cease all work is given, the employee cannot be furloughed until entitlement to SSP has ended. That is so whether or not a claim for SSP is actually made. The employee can only be furloughed if, at the point that entitlement to SSP has ended, the 21 day requirement is met, i.e., the furlough period must be at least 21 days commencing with the end of entitlement to SSP. If the employee is indeed furloughed, but then becomes unfit for work again, any subsequent entitlement to SSP is disregarded (i.e., the employee can continue to be furloughed).
  • All of the above deals only with the specific situation in which the employee is entitled to SSP at the time the instruction to cease work is given. It does not deal with the slightly different situation in which, at some point after the instruction to cease work is given, i.e., during the furlough period itself, the employee becomes sick and entitled to SSP. In this latter scenario it seems that the employee can simply remain furloughed and the availability of SSP is immaterial to his/her status.

The Guidance deals with sickness and sick pay in some detail. Its provisions are significantly different to the Direction and there is no suggestion that an employee’s entitlement to SSP precludes him/her from being furloughed. The emphasis in the Guidance is simply that:

  • The Scheme is not designed for short-term sickness or absence and the same should not be a factor in deciding whether or not to furlough a member of staff;
  • Employees who are off sick can be furloughed for “business reasons” and if so they should cease to receive sick pay and be classified as ‘furloughed’ instead;
  • Employees who are on long term sick-leave or who are shielding can be furloughed. It is up to the employer whether to do so or not;
  • Employers can claim against the Scheme and claim an SSP rebate in respect of the same employee but not in respect of the same period of time;
  • Furloughed employees who become sick are entitled to at least the amount of SSP; So if this is greater than the furlough payment to the employee the employer must either make up the difference whilst keeping the employee furloughed or transfer the employee to SSP. (SSP is very low so this will only be relevant to employees who both have low pay and low hours).

Many employees that were furloughed between the Scheme being announced and the Direction being published were no doubt on or entitled to or claim SSP (given the pandemic, the modifications to SSP rules and public health guidance). Thus this change of position from the Guidance to the Direction will adversely affect many employers.

Family related leave

It is clear, that employees on family related leave (by which I mean maternity, paternity, adoption, and shared parental leave etc) can be furloughed. Several paragraphs of the Direction only make sense if that is so. The Guidance also makes clear that employees can be furloughed while on such leave because it says that employers can claim through the Scheme for enhanced contractual pay that such leave may attract above statutory pay (which cannot be claimed through the scheme).

However, nothing in paragraph 6 of the Direction (which defines furlough) deals with family related leave or makes any special provision or concession in relation to it.  

Since employees on family leave can be furloughed and since there are no special provisions as to what needs to be done to furlough them, the usual conditions must surely be met. The problem is that those conditions sit uneasily both in practice and intellectually with family related leave:  

  • The employee must be instructed to cease work and the instruction must be given by reason of circumstances arising as a result of coronavirus or coronavirus disease. This is odd cases in which the employee is not due to be doing any work anyway.
  • In order to be furloughed the employee must agree in writing to cease work. It is odd to reach a separate agreement with an employee who is on a planned long term period of absence in any event and who would not be working in any event. But the Direction appears to demand this.

Problems relating to pay

Before continuing it is important to remember that there is vital distinction between the amount that the employer is obliged by the Scheme to pay the employee and the amount that the employer is otherwise obliged to pay the employee. That is because the Scheme is not the only source of obligations that the employer has. Others include the contract of employment, which may or may not permit the employer to pay the employee something less than full pay when there is no work.

What follows is a discussion of what the Scheme requires the employer to pay the employee in order for the employer to make a claim for a grant under the Scheme. The employer may (or may not) be otherwise obliged to pay the employee more than the amount the Scheme obliges it to pay. And thus the employer could easily comply with the Scheme but make unlawful deductions from the employee’s wages (see further here for more detail on the relationship between the Scheme and employment law).

The fundamental importance of the employer paying at least the minimum amount

In simple terms the minimum amount that the employer must pay the employee under the Scheme is 80% of gross pay capped at £2,500 per month. If the employer is not paying at least that, then it is not entitled to claim against the Scheme. It is for that reason, and others, of first importance that the employee is paid at least the minimum amount.

Unfortunately this simple summary of what must be paid belies some truly horrific complexity. The provisions of the Direction (paragraph 7) are so monstrous that in many cases it will be very difficult (or impossible?) to confidently discern what the employee must be paid in order for the employer to comply with the terms of the Scheme.

Fixed rate and variable rate employees

There are two main categories of employee (the treatment of LLP members is beyond the scope of this paper).

The first distinction is between employees that count as ‘fixed rate’ employees and those that do not. The calculation for ascertaining the minimum amount that must be paid by the employer in order for the employer to claim against the Scheme depends on which category the employee falls within.

Fixed rate employee is defined at paragraph 7.6. In essence it is someone who has an annual salary, who is entitled to the annual salary and nothing more for working their basic hours (e.g. 9 – 5, five days a week) and who is paid in equal weekly, or multiples of weeks or monthly instalments. Even this definition however, is not easy and all of paragraph 7.6 needs close consideration.

The Direction does not give a name to those who are not fixed rate employees so I will call them ‘variable rate’ employees for ease of reference.

How should the minimum pay for variable rate employees be calculated?

By paragraph 7.2 the basic principle is that the variable rate employee should be paid the greater of (a) the average amount paid to the employee for the 2019-20 tax year before the furlough period began (or if the employee only worked for part of that tax year it is the average for that period) and (b) the amount paid to the employee in the corresponding calendar period in the previous year.

This is already quite complicated, because it means that the employer will need to assess what (a) and (b) are for each variable rate employee and pay the higher of the two. Then in subsequent pay periods it will need to reassess (b) in respect of each employee, compare it to (a) and claim the higher of the two (e.g. if the first claim is made in April and the second in May a reassessment of (b) is required in case the employee earned more in May than April last year).

Alas, if that was not bad enough, layers of further complexity are added to the point of fiendish difficulty.

The regular pay complication

In calculating what I have called (a) and (b) above, the employer must only have regard to what is defined as “regular salary or wages” (paragraph 7.4 – 7.5).  This is an attempt to define some conception of pay that excludes certain types of add-ons to basic pay but includes others. However, as we will see, it is highly problematic because:

  • the term “regular salary or wages” is used but the definition of “regular” means that many elements of pay that are normally (indeed regularly) paid in fact fall to be excluded. Thus “regular” pay as defined will often bear zero relation to the employee’s “regular” pay in fact. Indeed the employee’s regular pay as defined is a figure that must be specifically calculated for the purposes of the Scheme and will very often not be a figure that otherwise exists (e.g. on a payroll record);
  • The definition of “regular” is entirely new and bears no relation to established/existing employment law that seeks to identify and define pay, such as s.221-229 Employment Rights Act 1996 or reg.10 Working Time Regulations 1998 as recently amended by The Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018). This presumably means that businesses will have to invest in new systems to calculate “regular” pay for the purposes of the Scheme or simply make each calculation manually. This is a major burden;
  • The definition of “regular” is really hard to actually make sense of (see immediately below).

Turning to the definition of “regular”. Paragraph 7.4(a), which must be read together with paragraph 7.5, appears to exclude from the definition of “regular” certain types of variable pay unless they have a contractual or other legally enforceable basis in which case they are included. The types of variable pay which are excluded (absent a contractual or legally enforceable basis) are:

  • (a) pay that depends upon company performance;
  • (b) pay that depends upon individual contribution to company performance; and
  • (c) pay that depends upon the performance of “any duties” of the employment. It is hard to understand what this means. The best sense I can make of it is that it excludes pay premia that are payable if and when the employee carries out particular duties (perhaps those duties attract premia because they are more onerous, unpleasant or dangerous).
  • (d) other matters whether they are similar to (a-c) or not if they are payable at the discretion of the employer or another person (e.g. a customer’s gratuity).

To make matters more complex, while it would thus seem to be the intention of the Direction (reflected in the Guidance) that discretionary bonus and commission payments should be excluded it is not clear that the wording of the Direction actually achieves this. The underlying assumption of the Direction appears to be that there is a bright line distinction between discretionary pay and non-discretionary pay whereby there is a legal obligation to pay the former but not the latter. That assumption is embedded in the wording of paragraph 7.4. The concept of ‘legal obligation to pay’ is used to exclude discretionary pay. However, this does not really work. In many cases a legal obligation to pay arises even if in some way the element of pay is discretionary. For example, once an employer has declared that a non-contractual bonus or commission will be paid on certain terms, a legal obligation to pay it in accordance with those terms will usually arise (as e.g. in Farrell Matthews & Weir v Hansen [2005] IRLR 160 EAT). In such circumstances, if the employer does not pay, the employee has a legally enforceable right to claim the bonus (e.g. as unpaid wages); and if the employer does pay the bonus by doing so it satisfies the employee’s legal right. If one looks back at the such a bonus payment in the preceding year and asks, was there a legal obligation to pay? The answer is ‘yes’ (at least once it was declared). Thus applying the wording of paragraph  7.4(a) and (d) it is readily arguable that past discretionary bonuses fall within rather than without the definition of “regular” salary or wages despite the opposite being apparently being intended. This creates confusion and uncertainty as to what is and what is not regular salary or wages.

However, the most problematic aspect of the definition of regular salary or wages is that it only includes pay which is “not conditional on any matter” (7.4(b)). The meaning of this is wholly unclear. As a matter of broad generality pay is routinely conditional on the employee being ready, willing and able to work. This surely cannot be the sort of ‘matter’ that paragraph 7.4(b) envisages; that is clear but what is less clear is what it does envisage.

In many cases pay will only be payable on the condition that the employee does actually work (in addition to being ready willing and able to), e.g. zero hours contracts, or hourly paid employees. Is pay in such cases conditional on a matter within the meaning of paragraph 7.4(b)? Presumably not, because otherwise millions of people who fall within the Scheme (because they are furloughed employees) will have an entitlement of nil under it.

What about overtime? Many employees receive additional pay for working overtime. That pay is conditional on working that overtime. Does the fact that the overtime must be worked in order to be paid make it conditional on a matter within the meaning of paragraph 7.4(b)? The plain wording of the scheme suggests so. But this would significantly reduce the entitlement under the Scheme of huge numbers of low paid employees.

What about pay premia (enhancements to basic rates) for, say, weekend work, night work or overtime? Again these would seem to be excluded from the definition of regular pay because they are conditional on working shifts that attract such premia. Again this has a serious impact on low paid employees who rely on such premia to earn a wage they can survive upon. And again it is not clear that the intention was to exclude the same.

Yet another problem is that paragraph 7.4(a) and (b) do not fit easily together. Most or all of what is included in the definition of regular by s.7.4(a) would seem to then be excluded by a natural reading s.7.4(b). For instance, the purpose of paragraph 7.4(a) seems to be to include performance related pay (e.g. commission) which has a contractual basis. But such pay then appears to be excluded on a natural reading of paragraph 7.4(b) because it is conditional on a matter, namely, performance.

It is unfortunate to say the least that the Direction gives rise to these uncertainties. Instead of re-inventing the wheel in seeking to define pay perhaps it would have been better simply to borrow existing legal definition of pay such as those in s. 221-229 ERA. Those provisions are complicated, but pay is complicated, and at least they have a developed body of case-law behind them to explain their meaning. Or alternatively, perhaps for the sake of simplicity and workability the Scheme should simply have used actual past average pay inclusive of all elements (the 80% and £2,500 caps would still be there to keep things in check but this approach would admittedly still be more expensive). 

A final problem to note is that while it is true that the Guidance deals with pay pretty summarily and at times opaquely, what it does say is not easy at times to reconcile with the Direction. For instance it says that past overtime and contractual commission payments should be included when calculating variable employees’ pay and this is not easy to reconcile with paragraph 7(4)(b). Perhaps the answer is that paragraph 7(4)(b) must be given a very narrow meaning; it is just that it difficult to know quite what.

The problem of those on family leave

The Direction does not make any special provision dealing with the amount that must be paid to employees who are variable rate employees, who are on family leave, and who have been furloughed. However, as discussed above, it is clear that such employees can be furloughed. The purpose of furloughing them is for the cost of any contractual enhancement to statutory pay for family related leave to be covered by the Scheme.

One would think, then, that the amount that the employer must pay to the employee who is on family leave, in order to claim against the scheme, would be defined by reference to the employee’s entitlement to contractual pay during family leave. Very often such an entitlement, if it exists at all, is to a percentage of pay that is well under 100%, often well under 50%, for parts of the period of leave.

However, the scheme makes no special provision at all for variable rate employees on family leave when it comes to the amount the employer must pay them in order to claim against the Scheme (it does for fixed rate employees but, see below, in a way that is problematic). This would seem to mean that in order for the employer to calculate how much it must pay such an employee so as to meet the requirement of the Scheme, the employer must apply the same formula as it does to all other variable rate employees who are not on leave i.e. the higher of (a) the average monthly pay in the tax year 2019-20 excluding the period of furlough and (b) the amount paid to the employee in the corresponding calendar period in the 2019. The problem is that this figure will often be far greater than the amount of pay that the employee is entitled to be paid whilst on leave (e.g. an employee that has contractual maternity pay that is say 50% of normal pay).

This is highly problematic because under the strict wording of the Direction, if the employer does not pay the employee the amount provided for by paragraph 7, it fails to meet the qualifying conditions necessary to be reimbursed for what it does pay the employee. So in order to comply with the Scheme, in some circumstances, the employer may be required to pay the employee on family related leave more than they are contractually entitled to. This is absurd and cannot have been intended.

Fixed rate employees

For fixed rate employees the basic principle is that their pay should be calculated by reference to the amount paid in the latest salary period ending on or before 19 March 2020, so in most cases pay in February 2020.

Again, however, only “regular salary or wages” counts so all of the above problems with that definition also apply here.

There is further uncertainty too. If the employee was on unpaid leave, unpaid sabbatical, SSP or family related leave this complicates the calculation. Instead of using the pay actually paid a fictional sum must be used. It is the sum that would have been paid if the leave had been granted on the “same terms as the employee’s paid leave”. This confusing. It is unclear what is meant by “paid leave” in this context. Most employees do not have a generic ‘paid leave’ term in their contract (do any?). Many have no terms at all in respect of paid leave and their only entitlement to paid leave is statutory (n.b. statutory rights are not necessarily implied contractual rights). Those that do have some contractual provisions dealing with paid leave may well have different provisions for different types of paid leave. So it really is not clear what this means and thus not clear what figure should be used.


The Direction was long awaited. It was hoped and anticipated that it would bring further clarity to the Scheme which had taken shape through four iterations of Guidance. However, it did the opposite. It created deep uncertainty in relation to some fundamental and basic matters. It departed from the Guidance in places in its characterisation of the Scheme. And ultimately it brought complexity and confusion where simplicity and clarity were needed.

My hope is that all of these problems can be rectified and rectified quickly. If they are not, my fear is that many employers will be put off using the Scheme, and instead will make redundancies, because the Scheme is so complicated, time consuming and difficult and/or because they fear that the indemnity from the Scheme will not materialise.

Cloisters barristers are available to discuss the many issues arising in the current COVID-19 crisis. Please contact us through our clerks in the usual way.


Daniel Dyal


This blog does not constitute legal advice and you should not rely upon as if it were legal advice. If you need legal advice please seek individual legal advice which takes into account your specific circumstances.

Other blogs in this series are available here:

Covid-19: Critical workers refusing work – What if everyone is being reasonable?   Schona Jolly QC 26 March 2020
Covid-19: Pay for working parents forced to look after their children Rachel Crasnow QC 27 March 2020
Covid-19:  Is Facial Recognition Technology in the workspace the answer to social distancing or discriminatory? Robin Allen QC and Dee Masters 31 March 2020
Covid-19: Legal implications of identifying immune workers Rachel Crasnow QC 1 April 2020
Covid-19: An employer’s guide to homeworking Tom Gillie, Ruaraidh Fitzpatrick and Catherine Casserley 2 April 2020
Covid-19:  Offering blood, toil, tears and sweat: Emergency Volunteers and the Law Declan O’Dempsey and Tom Gillie 3 April 2020
A collaborative view on the coronavirus job retention scheme Caspar Glyn QC 8 April 2020
Covid-19: Furlough and job retention: Key issues for Employment Lawyers     Daniel Dyal 11 April 2020