May 14, 2020

UK Government's Furlough Scheme: End of the Line?


Contrary to the fears of many commentators we have had news of an extension to the UK Government's Furlough Scheme. This update looks at the announcement, and the details we are awaiting.

End of the line?

On 12 May the Chancellor of the Exchequer announced that the current Coronavirus Job Retention Scheme will remain open until at least the end of October 2020. We do not yet have the details of the proposed amendments to the Scheme, but here is what we do know.

  1. The Scheme will remain in identical form until the end of July 2020.
  2. The Scheme will continue to provide 80% of salary to employees who are being furloughed up until the end of October 2020.
  3. The Scheme will be varied from August through until October. The indications are that employers will be expected to contribute towards that 80% figure payable to employees. Equally that there will be some flexibility to allow furloughed employees to carry out some work during the period August to October.

The Government Briefing Note, also published on 12 May, provides a little further detail. It says that "The Government will explore ways to which furloughed workers who wish to do additional training or learn new skills are supported during this period". It also provides figures for the number of individuals currently on the Furlough Scheme (7.5 million) and the number of employers who are making use of the Furlough Scheme (935,000). 

So what does this mean?

Well clearly at this stage we do not have any of the necessary details. The Government's note is slightly ambiguous as to whether it envisages part-time working for furloughed staff after 1 August or merely additional training during this period. However, the statement by the Chancellor was very clear. The Government are envisaging "part-time working" in the period from August to October with employers sharing the costs of paying 80% of salary to furloughed employees. 

We assume that the reference to employers sharing the costs of paying 80% salary is another way of saying that the Furlough Scheme will simply cover a lower percentage of the furloughed employees salary. However, if the drafting of the announcement has been done precisely it would seem to follow that employers cannot furlough employees on less than 80% salary. So at present employers can reduce an employee’s salary to 80% of normal salary and then claim back the full salary cost for the employee during the furlough period. If the furlough period were to go down to 60% for August, then the way the announcement has been framed makes it look as if employers cannot drop furloughed salary, even with the consent of the furloughed employee, below 80%. We will have to see if that is how any Treasury Direction is framed.

Once we move into the tapering period for the Furlough Scheme employers are not simply contributing to a share of the 80% salary. Almost certainly this is going to understate many employers contributions to the remuneration costs of furloughed employees. At present, of course, employers are responsible for paying at least 20% of salary to employees with benefits, unless the employee has agreed to take a pay cut as against their normal pay. Therefore, talk of employers now contributing to 80% of salary is accurate, in so far as this ignores additional costs and benefits which employers are already paying or providing, unless the employee agrees otherwise. If the true benefits and costs for an employer mean that in a hypothetical August reduction to 60% furlough recoverability rate the employer is bearing 60% of the employee’s true remuneration costs itself, then it remains to be seen whether large scale redundancies will start to happen at that point.

Secondly, the idea would seem to be a sensible one given the vast scale of the Furlough Scheme, which is surely unsustainable in the longer-term. A similar scheme exists in Germany, which operates on the basis that employees must only undertake part-time work in return for part of their salary to be paid by the Government, part by the employer (and a small part of their salary being given up by the employee). In Great Britain the Government is moving towards a halfway house. Presumably the hope is that by allowing part-time working, the Government avoids a situation where the mass redundancies are triggered on the first reduction in the Furlough Scheme, if employers decide that they are not willing to pay the greater contribution to the ordinary salaries of furloughed employees. 

If the employers are required to contribute (say) 20% during August or to put it another way, are only entitled to claim back 60% of salary in August, but can require an employee to work 20% or their time during August then this has several advantages. First, it will encourage a transition back to more normal working. Secondly, employers may be less likely to make immediate redundancies, if they hope to be able to employ the individual gainfully during August to some extent. Importantly from a political perspective it avoids a headline grabbing nightmare date on which probably hundreds of thousands of people would be losing their job.  Instead it probably spreads job losses over a three or four month period, as various employers evaluate their options using different timescales. To this extent the Government may be looking to flatten this particular curve. 

Of course the devil, as always, is going to be in the detail. Is this Scheme going to say that for every reduction in the percentage claimable under the Furlough Scheme an employer is entitled to ask the employee to carry out that percentage of work for that month?

It will also be interesting to see how the Government will handle a reduction in the Furlough Scheme support with any consequences for employees being required to work part-time.  Logically one might expect that a reduction for a three month period would see the Furlough Scheme go from 80% to 60% in August, to 40% in September and then to 20% support in October. However, this does not necessarily translate easily into working schedules for (for example) part-time workers. Equally it may be difficult for employers with shift working to accommodate such part-time working.

But even for full-time employees it is not straightforward. Take the most basic situation. A full-time employee is furloughed at full pay, which lets assume is £2,500 per month with the employer paying a 20% top-up. If the Furlough Scheme recovery rate drops from 80% to 60% is the employer able to ask the employee to work for one day or two? A 20% drop looks to be equivalent to one day of work for a full-time employee. Or is it two days of work based on the total contribution being made by the employer in this hypothetical example.

Either way, this is going to show a sharp relief for some of the issues that we looked at in our most recent note on returning to work (Life in the Time of Corona, part 2). This is going to be precisely the situation where unwilling employees are required/instructed to return to work by employers. The host of issues that employers need to consider will come into sharp relief. At least employers have until the end of July to start thinking about how they will handle the return to more normal work for furloughed staff. Provided full details are available by the end of May, then that two month period could be vital for employers deciding whether to move, sadly, towards headcount reductions, or whether it is feasible to keep employees on the Furlough Scheme and in part-time working.    

However, on a final and rather less optimistic note, there is surely a risk that with the encouragement to return to work being issued by the Government this week, the rate of infection for Coronavirus cases will increase between here and the end of July. As such, it is likely that if there is pressure for a further lockdown, if the rate of infection is threatening to get out of hand, that the Chancellor will face significant pressure to defer even a gradual reduction in the Furlough Scheme. 

We are in May, living in interesting times.

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