UPDATED 11.04.2020: Covid-19: Furlough and job retention: Key issues for Employment Lawyers

By Daniel Dyal

Employers are making difficult choices at this time in situations which have never affected their workplaces before. As fresh guidance is issued and new headlines emerge, the next legal queries evolve. This blog by Daniel Dyal examines the interplay between the workplace and the coronavirus. It has been updated in light of the further guidance issued on 9 April 2020.  

In this blog, Daniel addresses some of the implications of The Health Protection (Coronavirus) Regulations 2020 including: How should an employer choose which employees to ‘furlough’ when there is some work that needs to be done?  What are the legal implications if an employer is unwilling to ‘furlough’ staff? What if businesses go insolvent during a period of ‘furlough’? These important issues are analysed here.

Introduction

The Health Protection (Coronavirus) Regulations 2020 contains sweeping lockdown measures, in response to the Covid-19 crisis, that have closed or curtailed businesses and workplaces on a scale that would be unimaginable if we had to imagine it rather than live through it.

On 9 April 2020, the Government further updated the details of the Coronavirus Job Retention Scheme (‘Scheme’) with a further guide. The Scheme is a central part of the effort to mitigate the profound economic impact of lockdown.

In short, the Scheme is intended to incentivise businesses to ‘furlough’ redundant workers instead of dismissing them, thus avoiding redundancies on a colossal scale the nation has never seen before. In this context ‘furlough’ simply means putting on paid leave during which the worker cannot carry out work for the employer.

No legislation has been published as yet in relation to the Scheme and it is starting to look as though none will be. It seems that the Scheme might simply be operated by HMRC pursuant to the very general powers contained in sections 76 and 86 Coronavirus Act 2020. Section 86 simply permits government departments and public authorities to give financial assistance to persons as a result of coronavirus. Section 76 gives the Treasury the power to direct HMRC’s functions in relation to coronavirus. This in itself is a remarkable sign of the times. It is astonishing that a scheme, which will cost billions of pounds, might be operated without a single set of regulations underpinning and guiding it.

The guide, then, may be as good as our understanding of the scheme is going to get until it starts to actually operate. The current estimate is that it will go live in late April.

Basic features of the Scheme

The Scheme works by enabling businesses to apply to HMRC for a grant that covers 80% of furloughed workers’ wages, capped at £2,500 (gross) per month s employer’s NICs and minimum pension contributions. The worker is then paid their wages by the employer through its payroll.

The Scheme applies:

  • from 1 March 2020 onwards for at least three months;
  • only to workers who are on a PAYE payroll and then only to workers who were on the payroll as at 28 February 2020;
  • if a worker was made redundant on or after 28 February 2020 the Scheme applies to them but only if they have been rehired by their employer (and they can be rehired in order to be furloughed);
  • there are additional provisions dealing with variable pay and employees on leave of various kinds (including maternity).

Previous versions of HMRC guidance, which were not very technical, oscillated between using the term ‘employee’ and the term ‘worker’. They did so in a way that suggested that the legal distinction between those terms was not intended (or perhaps understood). However, the impression was very much that the Scheme would apply broadly rather than narrowly. In essence, to anyone who falls into the category of people that employment lawyers would identify as a ‘worker’ (within the meaning of either limb of s.230(3) Employment Rights Act 1996) and who was on the payroll.

The current version of the guidance confirms that both employees and workers (including ‘limb b’ workers) are covered under the scheme. So too are:

  • Agency workers, including those who supply their services via an umbrella company;
  • Office holders, including company directors who are salaried. It would also seem to include the fee-paid judiciary most of whom have received no work (and thus no pay) since lockdown began and some of whom rely upon judicial work as their primary income;
  • Salaried LLP members who are classified as employees for tax purposes;
  • Apprentices;
  • Workers on fixed term contracts. Such contracts can be renewed or extended during the furlough period without breaching the rules of the scheme.

When the Scheme was first published, it appeared that it would not apply to those who TUPE transferred to a new employer after 28 February 2020. However, the updated guidance makes the position clear: the scheme does apply to those who are furloughed from employment which commenced before 28 February 2020 and subsequently TUPE transferred to a new employer.

Thus the scheme has a broad coverage. However, one group that is left unprotected are those who started new employment on or after 1 March 2020. Those workers cannot be furloughed pursuant to the Scheme. This is discussed further below.

General relationship with employment law

A fundamental point of importance is that the Scheme will operate within the parameters of existing employment law rather than varying or suspending parts of it. It is thus not the panacea that business and the general public might imagine it to be from reading headlines.

So, for example, the headline is that the government will pay 80% of wages up to £2,500 which the employer can choose whether or not to top-up. However, that headline overlooks real complexity. While it is true that the employer will not be obliged to top-up wages by the Scheme the Scheme is not the only source of employers’ obligations. The employer will often be obliged to pay normal pay, not because the Scheme demands it but because the contract of employment does. (Many contracts will not permit the employer to pay anything less than full wages; many will, especially if pay is based upon time worked or pieces produced.) If the contract obliges full pay, it will be no answer to a breach of contract or unauthorised deduction of wages claim to say that the grant from HMRC did not cover full wages.

If follows that in many cases there will need to be a specific furlough agreement (whether a stand-alone agreement or one that varies another contract) to deal with the furlough period. Contracts can, of course, be varied but this can only be done lawfully in particular ways that employment lawyers are accustomed to advising upon. And if a consensual variation cannot be achieved dismissal with an offer of re-engagement is another familiar scenario. These are difficult matters that are fraught with pitfalls and in respect of which specific advice should be obtained including, for instance, in respect of collective consultation obligations (which the guide recognises may apply).

It remains to be seen whether a precondition of entitlement to a claim under the Scheme will be that the employee would otherwise be made redundant. If so, then, the interrelationship between the law of redundancy, especially its collective consultation obligations, and the Scheme will be all the more important.

Further, there is already a body of employment law that deals with lay-off, short-time working and guarantee payments. It is unclear currently how the Scheme will fit in with the existing law. 

There are also many equality implications arising out of the Scheme. The guidance makes clear that the employer must apply the Scheme in a way that is consistent with equality law. Some of these implications are obvious and simple: it would be unlawful to dismiss rather than furlough an employee because he is of a particular race. But others are complex and difficult. For instance, if furloughing decisions take into account the number of hours particular employees are able to offer in current circumstances that could easily engage indirect sex discrimination considerations, which would need to be carefully thought through. Likewise furloughing decisions may need to take into account what tasks particular employees can do and from where. They will often then engage challenging disability discrimination issues, particularly in respect of reasonable adjustments, indirect discrimination and discrimination arising from disability.

There are tricky issues in respect of annual leave. Does it continue to accrue during the furlough period? Can it be taken during the furlough period? If so can the worker be forced to take it during the furlough period? If it is taken, how should holiday pay be calculated? Does the answer to the foregoing differ depending on the type of annual leave in issue? There are three types: firstly, leave mandated by the Working Time Directive and given effect by reg.13 Working Time Regulations 1998 (four weeks p/a), the further leave mandated by reg.13A of the Working Time Regulations 1998 which has no basis in EC Law (1.6 weeks p/a), and leave that has no basis other than contract. ACAS has published some advice on annual leave and furlough. It is well worth a read but it has no legal force and does not grapple with what is almost always the most difficult issue: holiday pay. Further guidance from the government is expected on annual leave issues in the week commencing 13 April 2020 (and this blog will be updated in light of it, so do check back).

The guidance deals with statutory family related leave (maternity, paternity, adoption, shared parental leave) extremely briefly. The explanation is so short that it is confusing. It appears that:

  • Statutory entitlements to pay (which are of course very limited) cannot be enhanced by the Scheme. So, imagine a woman on week 40 of her maternity leave. She has exhausted statutory entitlement to pay and assume she has no contractual enhancement. The employer cannot use the Scheme to obtain and pay 80% of her salary (subject to the £2,500 cap) whilst she remains on maternity leave. However, there does not seem to be anything stopping the woman from ending her maternity leave earlier than planned. If she does that, her right to pay returns to normal and so she and her employer it seems would be able to take full advantage of the Scheme if she moved from maternity leave to furlough.
  • Contractual enhancements to statutory pay for those on family related leave are covered by the Scheme. Thus, imagine a woman who is contractually entitled to full pay whilst on maternity leave. The employer can claim against the Scheme in the usual way for a grant to assist with 80% (subject to the £2,500 cap) of those wages.

It’s all or nothing and that’s a problem (or a lot of problems)

Some features of the Scheme itself are problematic and are bound to generate employee relations problems.

The employer cannot claim under the Scheme if the employee is continuing to work on reduced hours or reduced pay (with very limited exceptions – volunteering and training). Thus it is essentially all or nothing: the worker is furloughed or they are not. The reason for this rule, it can be assumed, is to limit the complexity of the Scheme given the sheer demand for it and to avoid fraud. However, it makes the Scheme rigid and unresponsive to businesses’ and workers’ needs for flexibility in an unprecedented, fluid, situation.

It the business has some work for a worker to do, but not as much as usual, it has to choose between asking the worker to do a reduced amount of work and furloughing the worker. What it cannot do, is ask the worker to do the little work that exists, pay the worker for that work and top up the wages to 80% using the Scheme.

In practice this means that it will often be difficult or impossible for businesses that have some limited amount of work to do what will often be the fairest thing: divide the work equally between its employees. Instead it will make more sense to keep one cohort of employees fully occupied and another furloughed.

However, it may be that this problem can be avoided by rotating staff. Thus for instance in any given month (or whatever period proves to be the most appropriate) furloughing cohort 1 of workers and keeping cohort 2 occupied. And the following month reversing the roles. There is a minimum furlough period of three weeks so the rotation would have to be at intervals of at least three weeks. Subject to that three week rule, workers can go in and out of furlough.

While this might be a solution for businesses, it may not be a good solution for many workers. Schools are closed (to all but a few) and workers have their children home with them. Workers need flexibility more than ever and the best that many are able to offer given childcare commitments is a few hours here and there.

These are difficult waters to navigate and it is obvious to the trained eye that steering the wrong course will create employment disputes (as indeed might steering the right course, although fewer of them one would hope and ones more likely, ultimately, to be won).  

A further difficulty from an employee relations perspective is that furlough is something of a Jekyll and Hyde. It will be a benefit in some cases and to some workers (e.g. if the alternative is redundancy or if the worker cannot work because they have no childcare in place) but it will be a detriment in others (e.g. if the alternative is work with full-pay). It needs to be approached with sensitive advice save in the very simplest of cases.

The unwilling employer problem

As noted above, the mechanism of the Scheme is to incentivise employers to forbear from redundancies by paying a proportion of the employee’s wages. However, whether that is a sufficient incentive for an employer to furlough rather than dismiss or indeed simply do nothing, will vary very widely.

This is a problem because there is no indication to date of any obligation on the employer to take part in the Scheme. And, if the employer does not take part in the Scheme there is no indication that the Scheme itself will provide any mechanism for redress for the employee. To be clear, this is a real problem not a theoretical one. It is reasonable to predict that many employers will not take part in the Scheme:

  • The Scheme operates by HMRC providing the employer with a grant to cover the wages of the furloughed employee.
  • However, it is the employer not HMRC that retains liability in contract law and in the law of protection of wages (Part II of the Employment Rights Act 1996) to the worker.
  • With a Scheme of this size some employers are, realistically, bound to encounter problems and delays using the Scheme. The employer is the one on risk for this.
  • Engaging with the Scheme will take up management time. In many cases that will be time very well spent. In other cases, the Scheme may not be the priority, for any number of reasons (some good some bad). For example:
    • the very survival of the business may take precedence over spending time understanding the Scheme and making an application for a grant pursuant to it for redundant employees;
    • it appears that holiday pay and potential future liabilities based upon length of service (e.g. redundancy pay) continue to accrue;
    • the employer might actually want to dismiss particular employees (or all employees) and use this crisis as a way of doings so;
    • the employer may be content to continue employing those on zero hours contracts or time/piece workers where there is no or almost no cost involved in doing so.

Does a worker have any remedies if the employer does not furlough when it could?

The short answer, is that it depends on the situation. A few examples are given here. But there are also some other potential creative solutions that might be offered to help incentivise the employer to furlough.

If the worker is an employee with qualifying service to complain of unfair dismissal and if they are is dismissed when they could have been furloughed then that will often be a good basis for an unfair dismissal claim. Furloughing is an alternative to dismissal. It is well established that, in all but exceptional cases, the employer will need to consider alternatives to dismissal in order to act fairly. Furloughing is just that; an alternative to dismissal.

Imagine a worker that has a zero hours contract who in practice, prior to the current crisis, worked regularly. Imagine that there is now no work but that the employer does not bother furloughing the employee because they are no cost to the business. If the employer did furlough them, under the Scheme the wages would be calculated as the higher of the same month’s earning from the previous year and average monthly earnings from the 2019-20 tax year. So in our example the worker would be entitled to a significant amount of pay if furloughed. A very interesting question arises as to whether or not there is any implied term which requires the employer to furlough the worker if that is what the worker wants. There may not be a single answer to that and it may depend for instance upon whether or not the worker is an employee and many other factors such as why the employer has not furloughed.

If there is a discriminatory reason for the decision to furlough/not furlough as the case may be then the worker has obvious remedies.

The insolvent business problem

Sadly many businesses will fail as a result of this crisis. This is a tragedy and it is a problem for many reasons, including that the Scheme does not look as though it is designed to assist the workers of failed businesses save in a perfunctory way.

This Scheme operates through the payment of wages by the business to its workers. That depends on there being a business and an active payroll. If there is no business and if there is no payroll there is no grant from HMRC and there is no payment to the workers.

Does the employee of have any remedies?

The guide says this: “Where a company is being taken under the management of an administrator, the administrator will be able to access the Job Retention Scheme.”

No doubt this is true so far as it goes, but without legislative intervention it will not go very far. Insolvency arrangements for businesses can take many different forms depending upon many different factors. However, the reality is that it is very typical for insolvency practitioners, e.g. during an administration, to immediately or almost immediately dismiss the workforce (or swiftly do it in tranches keeping on only the very most essential employees). This is done for at least three reasons. Firstly, to avoid adopting the contracts of employment. Secondly, in the interests of creditors. Thirdly, because the employees are redundant.  

Left to their own devices, it is fair to assume that insolvency practitioners will not generally prioritise this Scheme. They have their own objectives and framework to operate within that make widespread prioritisation of this Scheme unlikely. There is an argument at least that some legislative intervention is needed then. But this enters yet more complex areas of not just law but social and economic policy and indeed ideology.

The concern expressed above is borne out by the guidance updated on 9 April 2020 which says this:  “However, we would expect an administrator would only access the scheme if there is a reasonable likelihood of rehiring the workers. For instance, this could be as a result of an administration and pursuit of a sale of the business.” Administrations sometimes aim for some sort of business rescue but in huge proportion of cases that is not the aim, rather the aim is to achieve improved results for creditors and/or realise property for distribution to secured/preferential creditors. The Scheme will not assist in such cases which are, unfortunately, the norm.

Where a business become insolvent in many situations workers can claim (capped) wages pursuant to part 12 of the Employment Rights Act 1996. That will help some in respect of unpaid wages before termination, but it will not help with wages thereafter.  

The new starter problem

The Scheme only applies to those who were on payroll on or before 28 February 2020. Thus workers who commenced with new employers on or after 29 February 2020 are left almost entirely unprotected by the Scheme.

The only option such workers have, if their current employer dismisses them, is to ask a previous employer (if any) to re-engage them for the purpose of being furloughed. However, this is a lot to ask and many former employers will be unwilling to re-engage former workers for a wide range of reasons. Not least because a furloughed relationship is not necessarily a no strings attached relationship. There are tricky issues such as holiday pay and, at the end of the furlough period, redundancy.

The Chancellor has explained that the rationale for excluding new starters is the need to prevent abuse of the Scheme. That is undoubtedly a very real consideration but a blanket exclusion from the Scheme is a very blunt way preventing abuse. That is particularly so in these circumstances in which a significant cohort of people, who have done nothing wrong but happen to have obtained new employment after 28 February 2020, are left unprotected.

It is also curious that such a tough approach is taken to protect against fraud arising out of new starters when the Scheme is otherwise so permissive and (depending upon your viewpoint, unfairly) generous:  

  • it does not appear to require the employer to do anything to prove that the employee would have been made redundant but for the availability of the Scheme;
  • it allows workers who have been furloughed and are thus receiving wages from their employer, to work for another employer (so long as the two employers are not associated). Some workers then who are able to find fresh employment alongside their furloughed employment will do well out of the Scheme;
  • it puts the cap on the employer not the worker. The cap on pay has been well publicised: it is the lower of 80% of the employee’s regular wage or £2,500 per month. What is less well known is that if the worker has more than one employer, the cap applies to each employment individually (or to coin a phrase, the employers rather than the workers wear the caps). Which means that if the employee has two jobs (each with a different employer) they could be entitled to furlough payments for both and thus receive up to £5,000 per month. And if they have three employers, up to £7,500 per month. It is likely that there will be a significant minority of people who will fall into this category. In employment lawyer’s jargon, they will be well paid ‘limb b’ workers who are on boundary with independent contractor status and provide well remunerated services to more than one business.

Conclusion

The coronavirus crisis has caused unprecedented shutdowns and slowdowns of businesses and workplaces across the country. The Coronavirus Job Retention Scheme is a central plank to mitigate the economic damage. It is certain to raise a host of difficult employment law issues.

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.

Updated on 11.04.2020

Daniel Dyal

Cloisters

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