Covid-19: furlough and lay-off

This note considers the legal issues for employers when taking measures of this type. We also comment on the radical "Coronavirus Job Retention Scheme" announced by the government in an effort to dissuade employers from making redundancies during the crisis.  

This bulletin is intended as high-level guidance only. The situation is evolving quickly - please speak to your usual Macfarlanes contact to discuss your particular requirements.

Contents

• Government support to employers
• The Coronavirus Job Retention Scheme
• Self employed workers
• Furloughing employees and lay-off
• Contract variations
• Redundancy
• Collective redundancy consultation
• Atypical workers, zero-hours workers, self-employed consultants or agency staff
• Summary of measures which employers are considering at the moment

Government support to employers

The UK government has encouraged employers not to implement redundancies while the crisis continues and has announced a range of measures to support businesses so that they are able to maintain staffing levels and pay.

• Coronavirus Job Retention Scheme (CJRS)
  The UK Chancellor announced the CJRS on Friday 20 March 2020. The CJRS will guarantee to employers 80% of “furloughed” employees’ salaries up to £2,500 per month in respect of the three month period from 1 March to 31 May 2020. Further details of the CJRS are outlined below. 
• Amendment of the statutory sick pay (SSP) regime
  New emergency legislation has been proposed which entitles workers to SSP immediately if they are in self-isolation following the government’s advice (SSP is normally only being paid from day four of sickness absence). This measure will apply retrospectively from 13 March 2020.
• A SSP relief package for all SMEs
  Legislation is being brought forward to allow SMEs to reclaim up to two weeks of SSP paid for sickness absence due to COVID-19. Employers with fewer than 250 employees (as at 28 February 2020) will be eligible. ­
• Beneficial loans
  A £350bn emergency rescue package for businesses (in the form of business loans) has been announced. This includes cash grants of up to £25,000 for certain retail, hospitality and leisure businesses and small business grant funding for certain small businesses. These loans will be interest free for 12 months and are available from Monday 23 March 2020.
• Business rates
  Business rates have been abolished in certain sectors and a 12 month business rates holiday has been announced for all retail, hospitality, leisure and nursery businesses.
• Tax holiday
  The government has announced a VAT “holiday” under which these payments have been deferred from 20 March to 30 June 2020.

The Coronavirus Job Retention Scheme

The CJRS was announced by the government on 20 March 2020 and short-form guidance is now available on the Government website (for employers and employees) on the scheme and how it will operate. Many detailed questions remain unanswered and employers should keep a watching brief on the issue for further updates. The central features of the CJRS are summarised below.

Will my business be eligible? The CJRS will apply to all employers regardless of their size. There has been no suggestion of any requirement to justify access to the scheme. The CJRS will be in force by the end of April 2020, and will run for at least three months (it will be extended if necessary). It applies retrospectively from 1 March 2020.

To whom does CJRS apply? The scheme applies only to (a) employees who (b) would otherwise have been "laid off" during this crisis and (c) who aren’t working (i.e. “furloughed” employees). The government has pledged to pay wage costs of up to 80% of all furloughed employees in the relevant period. It is anticipated that this will cover all salary, benefits and employer’s NICs. Payment will be made via a new HMRC portal through which the employer can reclaim these costs, up to a cap of £2,500 per month per employee. The employer may choose to fund the 20% difference, but it does not have to.

Which of my employees will be eligible? Only employees who would otherwise have been “laid-off” are covered by CJRS. The phrase “lay-off” has a technical statutory meaning in employment law to refer to employees who are denied work and pay pursuant to a contractual lay-off provision in employment contracts. However the term “lay-off” is also used colloquially to refer to redundancy. It is not yet clear which of these meanings will apply to the scheme although it is probable that the government, when referring to laid-off employees, means employees who would otherwise have been made redundant.

What is clear is that the scheme will only apply to existing employees and not to employees who have actually been made redundant, laid-off or put on reduced hours or unpaid leave since 1 March 2020 (unless they are re-employed) and, secondly, the scheme applies to employees who the employer has designated as furloughed (see above).

Nothing has yet been said about what, if any, evidence employers will be required to produce to show that its employees would have been laid-off or made redundant.

How do I designate my employees as furloughed for the purpose of CJRS? The scheme requires employers to designate affected employees as furloughed workers and to notify the employees of that fact (see further below). The government has said that if an employer intends to access the CJRS, they will need to discuss with the employee about them becoming classified as a furloughed worker, which they would presumably follow up in writing. However, this is separate from the legal question of whether an employer has a right to lay-off or furlough its employees in the first place without their consent. The general rule is that an employer cannot lay-off its employees without their consent unless their contracts contain a right for the employer to do so (and it is relatively unusual outside of manufacturing industries for contracts to include lay-off provisions).

Employers have therefore deployed a number of measures in response to the crisis – some (the minority in our experience) have been able to use contractual lay-off provisions to send staff home without pay; others have suggested that employees work from home or are maintaining pay while employees are at home; others have required employees to take holiday; some are treating absence as sick leave; some employees have taken unpaid leave; others have had lay-off or short time working or pay cuts imposed on them without regard to employees’ contracts or legal risks. Other employers have agreed lay-off terms with employees as an alternative to redundancy. It remains to be seen which of these multiple responses to the crisis will be treated as lay-off for the purposes of the CJRS, particularly given the requirement for employees not to undertake work whilst they are furloughed.

Certainly, it will be in employers’ best interests to designate as many of their non-working employees as furloughed while these details are clarified.

Designating employees as furloughed: To access the CJRS employers will need to designate affected employees as “furloughed workers”, and notify employees of this change. This remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation (see further below). Employers would then need to submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal. The government has advised that existing systems are not yet set up to facilitate these payments to employers, but HMRC is having this set up. HMRC will also set out further details on the information required in due course. This of course may be unwelcome news for businesses who currently have significant cash flow issues – to which the government has suggested checking eligibility for a Corona Business Interruption Loan.

Can employees still do ad-hoc work if required whilst they are furloughed? If the employee is furloughed, they should not be undertaking any work for the employer. This is not mentioned in the Government guidance to the employer, but it is mentioned in the guidance to employees.

Ambiguities? The lack of full guidance or emergency legislation to date means there are inevitably questions around the precise scope of the CJRS, including the following.

Categories of worker: Will the CJRS apply to those who don’t have fixed hours or wages, such as workers on zero-hour contracts? It appears not, because these employees would not be laid-off, rather simply be given no work;

Employment continuity: Whilst an employee is furloughed they will not be performing services, so questions might arise as to: (i) whether holiday continues to accrue; and/or (ii) whether continuity of service is broken (and therefore statutory rights for employees) when employees have a gap in service. This issues are probably more relevant for employees who are on unpaid leave, or those who are dismissed and then re-engaged (see further below);

Pension: It remains to be seen whether employer and/or employee will be liable to pay normal pension contributions, even though pay is in fact reduced. This will depend on the definition of “pay” in employee’s contracts.

Self-employed workers

One immediately controversial facet of the CJRS is that it does not apply to self-employed workers, contractors or consultants. It remains to be seen whether the government will do more for this part of the workforce.

For now, the only benefits so far made available to the self-employed in response to the crisis are outlined below. These benefits are obviously far below those given to employees, so we might see an increase in arguments from workers claiming that they are in fact employees (though they would need to get over the hurdle of the CJRS of having to be on the payroll).

Other mechanisms to support the self-employed have been announced:

• the suspension of the minimum income floor for certain benefits so that self-employed individuals can access Universal Credit at the rate of equivalent to SSP. Businesses are estimating that a self-employed person earning £25,000 per year could access only £5,000 of government support;
• access to a beneficial loans scheme; and
• the deferral of self-assessment income tax payments to January 2021.

Furloughing employees and lay-off

The Covid-19 crisis has exposed a gap in existing employment laws because there is no automatic right in English law to furlough or lay-off employees when work is not available or when it is not possible for employees to work. Instead, employers must in principle either agree lay-off arrangements with employees (unless they are that rare category of employer that has a contractual lay-off right in employees’ contracts of employment).

Lay-off & short time working: It is only possible to lay-off staff on no pay (or reduce their hours/pay) if their employment contracts contain a right allowing the employer to do this. During the first five days of a lay-off, employees are entitled to “guarantee payments” up to £29 per day from the employer.

It is quite rare for modern UK employment contracts to include lay-off clauses (they were more common in manufacturing industries in decades gone by). If there is such a right, then the statutory framework for lay-off applies (which, in short, entitles employees to claim for a statutory redundancy payment if the lay-off lasts for four weeks or more, or six weeks in any period of 13 weeks).

If there is no lay-off right in the contract, any attempt to force lay-off or to reduce employees’ paid hours or salaries without their consent will be a breach of contract. Employees would then, in principle, have the right either to sue for damages or resign and claim constructive dismissal (whether they would choose to do so in the current circumstances is another matter).

Contract variations

It is possible to agree contractual changes with employees e.g. to reduce pay temporarily or permanently, or to take unpaid leave or lay-off, to take paid holiday, or to reduce hours. All of these things can be done immediately by agreement with employees.

Of course, employees may well refuse to agree to these changes. In order to encourage employees to agree to the changes, employers inevitably will say that if the changes are not agreed, a business will have no alternative but to commence consultation over redundancy. In the context of Covid-19, this is likely to become ever more common.

It is possible to force through contract changes without consent, but the process is not straightforward or quick. There must be a consultation process (broadly in line with that required in a collective redundancy – see below); then the employer must serve notice to terminate the old contracts before the new contract terms take effect and must respect the unfair dismissal laws when doing so.

Simply imposing new contract terms without consent or consultation carries the risk that employees will resign and claim constructive dismissal compensation.

Redundancy

An employer can make employees redundant at any time if there is a reduced need for their work. Whether redundancy will be seen by the Tribunals as reasonable given the CJRS is open to debate. If employees are made redundant, their entitlements are as follows.

Notice pay: All employees are entitled to paid notice if they are made redundant. Their contracts will stipulate the length of the notice period. If they do not, statutory minimum notice in the UK is one week’s notice for each complete year of service up to 12 weeks.

Statutory redundancy pay: If an employee has two or more years’ service, they qualify for statutory redundancy pay. This is a formula payment of one week’s pay (capped at £538 from 6 April 2020 (slightly less before then)) for each complete year of service (capped at 20 years’ service). It is then increased by 1.5 for years’ service during which the employee is aged 41 or over.

Unfair dismissal compensation: If an employee has two or more years’ service, they can claim unfair dismissal compensation in addition to statutory redundancy pay and notice pay if the procedure by which they were made redundant is unfair. Compensation is capped at a maximum of one year’s pay or £88,519 (from 6 April 2020 (slightly less before then)) if less, per person.

Collective redundancy consultation: Where a business proposes 20 or more redundancies at one place of work in a 90 day period, it must consult with elected representatives of the employees for 30 days (or 45 days if 100 or more redundancies are proposed) before it can issue notice of redundancy.

The desire to avoid unfair dismissal liabilities and the requirement to consult collectively mean that redundancy is not an immediate solution for employers facing the current crisis – on the one hand, any attempt immediately to lay-off employees (absent a contractual right to do so) could result in claim and on the other hand, while it is always possible to make employees redundant, it takes time to do this fairly and in compliance with the legal requirements.

Collective redundancy consultation

As noted above, the requirement to consult collectively arises where a business proposes to dismiss as redundant 20 or more employees at one place of work in a 90 day period.

• Consultation period: The employer must consult with elected representatives of the employees for 30 days (or 45 days if 100 or more redundancies are proposed) before it can issue notice of redundancy. Only in “special circumstances” can this requirement be relaxed – it is unclear whether the current situation would qualify, so employers should still comply with their duties to the greatest extent possible.
• Employee representatives: Collective consultation is with the elected representatives of the affected employees and not with the employees themselves. Where trade unions are recognised by the employer, consultation must be with the union. Otherwise, the employer must arrange for a secret ballot to take place for the employees to elect their representatives. Conducting secret ballots is likely to be particularly challenging in circumstances where employees are working from home or self-isolating (email, for example, cannot be used easily if it identifies the person voting).
• Sanction: Failure to consult collectively entitles all employees (regardless of length of service) to claim compensation of 90 days’ pay per person.
• Criminal liability: The employer must also notify the government on Form HR1 about any proposed collective (20+) redundancies at the start of the consultation. It is a criminal offence not to do so.

Atypical workers, zero-hours workers, self-employed consultants or agency staff

Only employees are entitled to statutory redundancy payments, to claim unfair dismissal compensation or to collective redundancy consultation. These rights do not apply to other types of worker who do not have employment contracts.

Each business should establish which of its workers are employees and which are not. If a decision is taken to terminate the arrangements with self-employed contractors or agency workers before implementing redundancies in the employed workforce, an employer should ensure that this done in accordance with the termination provisions in the relevant contract and complying with any notice provisions.

Summary of measures which employers are considering at the moment

The government’s Coronavirus Job Retention Scheme is radical and unprecedented. Undoubtedly, it has caused many employers to pause before implementing redundancies. However, while we await more extensive guidance on how the scheme will operate in practice:

• a priority for business will be to identify which of its employees can be categorised as furloughed for the purposes of CJRS and then to take steps to designate those employees formally as furloughed for the purposes of claims under the CJRS;
• if an employer has not already laid-off or furloughed its staff, it should consider carefully how to do so without breaching employment laws (given that furlough or non-statutory lay-off is not recognised by existing laws);
• the first priority is to find out if employment contracts contain a clause allowing the employer to lay-off workers without pay. If there are no lay-off clauses in contracts, businesses should next consider whether and how to implement lay-off with employees’ consent (e.g. as an alternative to redundancy or to enable the employer to claim under the CJRS). Some employers have certainly risked implementing lay-off without employees’ consent given the circumstances, but this runs the risk of employees claiming damages or constructive dismissal; and
• other cost reductions that employers can consider are:
  • terminating independent contractors, agency or casual workers who are not employees, or by not offering follow-up work to zero-hour workers;
  • revoking offers made to new hire employees who have accepted an employment contract, but not started work – while these employees have insufficient service to qualify for statutory redundancy pay or unfair dismissal protection, if they have accepted an offer, they will be entitled to paid notice of termination in the normal way;
  • requiring employees to take paid holiday during periods of self-isolation. Notice of double the relevant period of holiday is required under the Working Time Regulations although there have been instances of employers ignoring the notice requirement given the urgency of the current situation;
  • asking employees to agree to other changes to their contracts as an alternative to avoid a redundancy situation such as reduced pay or hours; and
  • giving notice to terminate any employee who has under two years’ service (and who does not therefore have sufficient service to bring a claim for redundancy pay or unfair dismissal). These employees do, however, count towards the threshold for collective redundancy consultation.