June 02, 2020

End of the Line: UK COVID-19 Furlough Scheme Update


On Friday 29 May, in keeping with its practice of releasing important updates on the Furlough Scheme immediately before the weekend, the UK Government published a key update to the Coronavirus Job Retention Scheme. We do not, as yet, have the third Treasury Direction which will be necessary to enshrine these particular changes in the Furlough Scheme. However, the Government, in its press release, and more importantly a factsheet put out by it at the same time, has provided a certain amount of information already. We look at the key issues coming out of these changes and, at the end of this note, a couple of other changes to the coronavirus support framework.

It is very important to appreciate that employers now have less than 10 days (i.e. by 10 June 2020) to prepare for some of these changes, since a new deadline is facing employers who wish to make use of the Furlough Scheme. 

First, it may help to put some of the changes into context. The Furlough Scheme is now being used by something like 1 million employers. It is estimated that there are roughly 8.4 million people covered by the Furlough Scheme and the value of the claims made under the Scheme so far is something like £15bn. When you consider that the UK's working population was slightly over 32 million, this means that 25% of the economic acting population are furloughed. Clearly what understandably concerns the Government is that if "only" one third of those are made redundant when the Scheme is wound up, the country is looking at an increase of a jobless total of 3 million in the next three months. When added, alongside that, to the support for the self-employed under the Self-Employment Income Support Scheme ("SEISS") the scale of the challenge becomes starker. 

Reductions in the grant under the Furlough Scheme

The UK Government had previously announced that the salient features of the Furlough Scheme would continue unchanged until the end of July 2020. The Government would continue to pay 80% of an individual's wages up to a maximum cap of £2,500 per month together with national insurance costs and mandatory pension contributions on that salary.

The first change is that from 1 August 2020, the Government will no longer make any contribution to employer NIC's and pension contributions. 

From 1 September, the Government will, in addition to the changes introduced in August, reduce the amount of the Furlough Scheme grant. This will move to 70% of the employee's wages up to a maximum of £2,187.50 per month. The explanation for this precise figure is that 80% of a salary up to grant of £2,500 (the original level) equates to paying 80% of a monthly salary of £3,125. 70% of that salary produces a figure for the Government's contribution to that salary of £2,187.50. In addition however, the employer must also pay a minimum of 10% of the employee's salary (up to £312.50). This will mean that employers will no longer be able to furlough staff on the basis that the only money received by the individual will be the Furlough Scheme grant. We are aware of many cases where employers have furloughed staff on the basis that their pay would be reduced to 80% of normal wages.  Employers taking this step are, entirely legitimately under the current arrangements, transferring the full salary cost to the Furlough Scheme (assuming the individual is not receiving in total more than £2,500 per month). From 1 September this will no longer be possible since individuals are entitled to receive a minimum of 80% of their normal wages (up to the limit of £2,500 per month) for any time spent on furlough. It would appear therefore that if an employer furloughs an employee on 70% of normal pay, and does not top up the additional 10% then the employee will not have been validly furloughed. In short, in addition to paying employer's NIC's and pension contributions on the wages covered by the furlough scheme, the employer must now pay 10% of the employee's normal salary during September. 

In October, the employer must contribute 20% of the employee's salary, i.e. up to £625 and the Government grant goes down to 60% of the normal wages salary, i.e up to a maximum of £1,875 per employee.

The Scheme then ends on 30 October 2020.

From this it can be seen that the furloughed employees will receive the same sum throughout.  However, the amount that is payable by the employer will increase by 20% plus the cost of the employer's NIC's and pension contributions. 

Timescales and Time Limits

The most important part to appreciate about the Government's announcement is that there is now a deadline that employers need to recognise. It will not be possible to put individuals onto the Furlough Scheme from 30 June onwards if they have not previously been furloughed. Moreover, in order to furlough any employee after 1 July, that employee must have been furloughed for a minimum of three weeks by 30 June. In other words the Government has, without any prior warning, set a hard deadline of 10 June 2020 for employers to decide whether any employees need to be furloughed who have not previously been put on furlough. It is unclear why the Government has introduced such a stringent time limit for furloughing new employees especially given that the overall number of employees furloughed cannot be increased by an employer (see below).

This might not sound like a significant issue. It is not entirely clear whether employers who have been rotating employees on and off furlough, for three week periods, will be able to keep doing that after 30 June. In other words, if an employee was validly furloughed for three weeks during (say) April, will they count as a new employee for the purposes of the Furlough Scheme if they are next furloughed after 10 June? This has already come up as a significant factor for employers we have been speaking to. We do not know for certain at this point. However there are a couple of pointers which would support the ability to re-furlough employees who had come off furlough before 30 June.  

First, the Chancellor in his speech on the changes said:

“The scheme will close to new entrants from 30 June. From this point onwards, employers will only be able to furlough employees that they have furloughed for a full 3 week period prior to 30 June. This means that the final date by which an employer can furlough an employee for the first time will be 10 June, in order for the current 3 week furlough period to be completed by 30 June.”

The latest iterations of the various Guidance Notes have been amended to make passing reference to the future changes to the Furlough Scheme but without providing much detail.  Each of them repeats, word for word the above statement, from which we can deduce that it has been carefully crafted.

Our view is that form of words is more consistent with being able to re-furlough a previously validly furloughed employee who has since come back from furlough leave. A previously furloughed employee is not easily described as a “new entrant” to the furlough scheme. And it is notable that 10 June is described as the “final date by which an employer can furlough an employee for the first time…” Of course a re-furloughed employee is not being furloughed for the first time. So, although it is important to emphasise that we do not have the full guidance yet and this point is clearly critical, our view is that employers can still probably rotate employees on and off furlough if that is their preferred system.

We have also been provided with a  copy of an email from HMRC’s helpline in response to a question raised with them.  The helpline email confirms that it is possible to furlough staff validly after 30 June if they have been working again after a prior period of valid furlough.  So employers who plan to continue rotating staff on or off furlough may draw a lot of comfort from that, although it would be good to see this confirmed in a Guidance Note or the next Direction.

Certainly for employers who were planning on continuing to rotate staff throughout June and July, this needs to be reviewed. However, in any event employers are going to have to do some quick thinking to work out whether they wish to continue to use the Furlough Scheme and who it will apply to, if there is any risk that they would wish to furlough a member of their staff who has not previously been furloughed.

The second time limit employers need to be aware of is that 31 July has been set as the last date on which it is possible to make a claim for any furlough leave for periods prior to 30 June. It is likely that most employers will be making claims under the Furlough Scheme in the same month in which the relevant wages are being paid to the furloughed staff. Hopefully this will not cause employers any unnecessary stress. However, where employers have furloughed staff but have not yet worked through the intricacies of actually submitting a claim or are still reviewing calculations, it is worth knowing that there is now an end point.

The other point to note is that from 1 July onwards claims made through the portal for furloughed employees under the Coronavirus Job Retention Scheme cannot cover a period of more than one month. Up until now the employer was able to put in a furloughed scheme claim that covered more than one payroll period. This is going to end, given that the transitional arrangements will start to apply from 1 July onwards. 

Finally, we have a change with no applicable date. The Government factsheet says that an employer cannot furlough any greater number of employees than have been furloughed previously. The factsheet gives no date from which this limitation will apply although, from where it appears in the factsheet, it would seem likely that this too is a change which applies from 1 July. However, whatever the date this applies from, it is another factor for the employer trying to plan what use it is going to make of the Furlough Scheme.

Flexible Furloughing

The other major change to the Scheme, which had been hinted at previously, is the opportunity for flexible furloughing. This is going to be introduced from 1 July, which is a month earlier than anticipated. 

The employer and employee can agree any level of part-time working without the employee coming off the Furlough Scheme completely. However, it is important to appreciate that the employer will be solely responsible for salary payments in respect of the periods in which the employee is working directly for the employer. They are going to be judged by reference to the employee's normal hours. When this is happening the employer is going to be able to make a claim for a furlough period of one week, rather than three. In other words, from 1 July the Furlough Scheme is being loosened up so that it permits some work to be done by the employee and it no longer has to be a pattern that is maintained for a minimum of a three week period. Flexible working can be done on a week by week basis for the purposes of the furlough claim.

This is undoubtedly helpful because it increases the flexibility that employers will have if they are phasing back a return to work. We think many employers may be quite attracted by this, particularly where they need to encourage staff to come back to work, and so that they are going through what is essentially a re-familiarisation exercise for employees embarking on the process of coming to work for scheduled hours rather than working from home or not working at all. The legislation is clear that it is not necessary to submit a separate claim for each week worked. It is still possible to submit a claim for a monthly payroll period. It is simply that the working pattern needs to be a weekly working pattern. In his presentation the Chancellor, Rishi Sunak gave the example of an employee working two days and then furloughed for three days. The factsheet is clear that employers will be able to agree "any working arrangements" with previously furloughed employees, so that is very helpful. 

It follows from the timetabling and from what we said about the time limits introduced to the Furlough Scheme above, that the scope for agreeing flexible working (part furlough, part work), only applies to employees who have previously been furloughed before 10 June. We have been promised further guidance on flexible working, and the calculation of claims for employees who are going to be working flexibly whilst remaining on furlough, by 12 June (which is, as you will no doubt already have guessed, a Friday). It is unhelpful that the planning for ongoing use of the Furlough Scheme has to be completed by 10 June but the guidance on what is involved in flexible working only becomes apparent by 12 June. As set out in more detail in the next section, there are some pretty major gaps in our understanding at present.

Practical Issues

The concept of flexible working is less well developed in the factsheet and press announcement. Presumably, this is why further guidance is going to be promised. However, it is apparent that there are a significant number of issues already to be considered by employers. 

First, the factsheet indicates that the revised working arrangements must be agreed with the employee and that agreement is confirmed in writing. Bearing in mind the ongoing unfortunate residual uncertainties around what constitutes sufficient agreement where an individual is being furloughed, we anticipate that some employers may err on the side of caution and get specific consent to part-time working combined with part-time furloughing before the new arrangements apply.

However, we think it is likely that other employers will be concerned about this step. If it is a legitimate instruction to send an employee on furlough, based under either the specific terms of the contract of employment or, more broadly, the duty of loyalty owed by an employee to the employer, then we think it is likely that a return to work on a partial basis for a transitional period would also seem to be a reasonable instruction. It is a short-term step (for a maximum of four months) which is less disruptive than an immediate requirement to return to work full-time. There is also, naturally, an administrative burden for employers where they are seeking to obtain the consent of employees to revised working arrangements. 

We also think that inviting employees to consent to a partial return to work may produce examples where people decline their consent and thereby create more of a headache for the employer.

Accordingly, we think many employers will be tempted to announce that unilaterally, to confirm the instruction in writing, asserting that a requirement to return on a partial basis is a legitimate business instruction. Certainly there would seem to be less of an issue about implied consent. An individual who is sent on furlough who does not turn up for work may be able to argue more readily that they should not be taken to have accepted the instruction merely by a failure to turn up to work the following day. Conversely, an employee who is instructed to turn up for work and he/she does turn up for work is, one would anticipate, going to be taken to be agreeing with that instruction by means of turning up for work. 

Naturally, the above analysis assumes individuals are not vulnerable or shielding or have other legitimate reasons for not coming in to work.

What happens if the employee disputes the part-time work offered? Much would depend on the particular facts. However, unless the employee has a legitimate reason for declining to return to work (e.g. the individual is shielding for example or is themselves in a particularly vulnerable category), our view is that employers are likely to be able to instruct individuals to return to work on a part-time and transitional basis. However, a lot will depend on effective communication and, so far as possible, procuring agreement rather than having to wield a big stick with employees who may be legitimately concerned, even if they do not have the right to decline the return to work. Much may depend on what will happen in the event of such a refusal. Will they continue to be furloughed or will they be instructed to resume all working at the office location? 

Secondly, the concept of “normal working hours” is clearly going to be a challenge. Employers are going to need to know what an employee’s normal working hours are, for the purposes of claiming under the Furlough Scheme from 1 July onwards, if they are making use of a partial return to working.

Will normal working hours include regularly worked overtime? What will the period be for measuring what amounts to normal working hours where those hours fluctuate? 

Equally, how will an employer monitor the hours which the employee is working? Law firms have timesheets, but many businesses have no record keeping of time spent by employees. It is probably going to be important, where the employer wishes to make use of flexible working, that the instruction letter to the employee is clear that the employee should not be working more than a certain number of hours or should be attending work on only a set number of days per week or some other limitation. 

There is a further challenge. If the employer is obliged to pay the employee for the hours worked, then the rate which the employee will be paid, in respect of those worked hours, will be the contractual rate of pay (whatever that is agreed to be). In other words, there will be nothing to stop an employer and employee agreeing that the employee would be paid at a rate of (let's say) 60% of normal wages, (assuming that the National Minimum Wage obligations are complied with) whilst the furloughed time would be paid at 80% of normal rate so as to comply with the Scheme. That is a matter of contractual agreement and clearly it would be necessary for there to be a written document signed by the employee. So employees who are part working part furloughed may get less than 80% of their normal pay.

And what about the situation where an employee earns more than £3,125 per month? Imagine an individual who is earning, say, £6,250 per month. The employer brings the employee back to work by agreement on 1 July to work 50% of the time and to be furloughed for the other half of the normal working week. In July, will the employer be able to claim £2,500 under the Furlough Scheme per month, or will the employer only be able to claim 50% of the Furlough Scheme grant i.e. £1,250 (because the employee is working half of the time)? It is going to depend whether the calculation looks at the total salary payable to the employee, reduces it by a percentage of working time which is actually spent working and then applies the cap of   £2,500 per month, or you start with the cap (£2,500 per month then reduce that down by the percentage of time spent actually working).

The Chancellor in his speech said:

“From July 1st, employers will have the maximum possible flexibility to decide on the right arrangements for them and their furloughed staff. For instance, if you are watching at home and on furlough, your employer could bring you back two days a week. They would pay you for those two days as normal, while the furlough scheme will continue to cover you for the other three working days.”

From this example, there would seem to be a risk that the furlough scheme would only be paying 3/5ths of £2,500 as a maximum, irrespective of what percentage of normal wages were being paid by the employer. If the latter is correct then it would be a significant disincentive to making use of the flexible working scheme, because it could leave employers significantly out of pocket. This in turn would either push employers to give up on the Furlough Scheme in August when the changes start to apply, or to refuse to get drawn into the complexity of the flexible working arrangements which would delay a return to more normal working.

This uncertainty is then compounded by the fact that the guidance which, one would hope, clarifies all of these issues comes out 2 days AFTER the last date for deciding who may need to be furloughed between the start of July and the end of October. This is not conducive to calm and rational planning by employers and the end result may be to speed up the job losses which the Coronavirus Job Retention Scheme is there to reduce or delay.  

Planning, planning, planning

The key message coming from the Government's documentation is that employers need to start planning now. There are a number of key questions:

  1. Does the employer have an idea as to the likely shape of its business in, say, October or November? The hard truth is that for many employers, they will already know or suspect that their business will survive but only in a reduced form. For those employers, who are now being asked to share an increasing share of the furlough costs, there may need to be a hard edged calculation as to whether they wish to continue to furlough staff if they can no longer do so on the basis that the costs are largely being borne by the Government. We are aware of a number of employers who have furloughed staff on the basis that they will only receive what the Furlough Scheme pays to the employer or furloughed at 80% (plus benefits) and so the salary costs are effectively covered in full. Since those arrangements are no longer going to be feasible going forward, such employers need to ask whether the time has come to start planning for headcount reductions (as to which see our note on collective consultations, and a checklist we’ve also produced for UK employers). More generally, employers who have no expectation of jobs continuing longer-term have little to gain financially by prolonging the furlough arrangements beyond the end of July and may prefer to carry out any collective consultation process before the recoverable sums, under the Furlough Scheme, start to reduce.
  2. Employers who intend to continue using the Furlough Scheme in the period from July to October need to review their existing furlough documentation urgently. It is important to recognise that it is not going to be permissible to furlough employees on the basis that the entire salary is payable under the Furlough Scheme. This may require changes to existing furlough documentation. Additionally, in a number of cases employers will have furloughed staff up until the original end of the Furlough Scheme, which was originally going to be 30 June. If these staff are going to remain furloughed then their furlough documents may need to be amended and reissued(and potentially consent sought for those changes unless the employer is happy to rely on the argument that it is a reasonable business instruction).
  3. Employers who have been using a series of rotations for furloughing staff, in order to spread the load, need to know urgently whether previously furloughed staff who are back at work can be furloughed again after 10 June. If there is any doubt, then the effect of the changes may be to shatter the rotational system and mean that employers need to identify, before 10 June, who is going to be furloughed for the remainder of the scheme and who is to be working throughout that period.
  4. If employers are going to look into the prospects of flexible furloughing, then it is important to keep an eye out for the further details promised on 12 June. It is possible that further guidance will be issued in one form or another before then, but the clear commitment to make the publication on 12 June is an indication that the main developments will occur on that day.
  5. Employers need to look at whether they wish to make use of the flexible working option, whether on economic grounds (because their businesses need to be supported) or for employee relations reasons (as part of ensuring a smoother and easier return to more normal working for employees). If they do then there is some planning which can be done now ahead of the 12 June announcements. For example what sort of work is to be done part-time? Why is the employer looking to have this work done? How will payroll operate if the furlough rate for the job is different to the normal pay rate and so part work part furlough attracts two different rates of pay? This could come up in two different ways at least. First, if the employer furloughed staff on less than full pay but kept working staff on full pay. Secondly, if the furlough calculation for variable staff (assuming the existence of overtime working or shift working which is no longer available in these more constrained times) the furlough rate might be more generous to such staff in respect of their furlough periods rather than their working periods. How will the employer monitor or limit the hours worked by an employee to ensure that the employee neither oversteps the mark nor is working less than the employer would wish?
  6. If employers wish to furlough staff who have not been previously furloughed then these employees need to have been furloughed by 10 June. The employer needs to have gone through the necessary mechanism, probably consistent with its past practice if it has furloughed staff previously, to ensure that those staff are on furlough validly by 10 June.
  7. Employers need to look at total numbers of staff who have been furloughed at any one time, to ensure that they have headroom sufficient to furlough the staff they need to furlough before the end of October. If a business is seasonal it is possible that the need to furlough staff might go up rather than down after the summer is over. It is unhelpful that the Government has not made it clear what date applies for calculating this upper limit, but for planning purposes it is probably appropriate to assume that an employer could put more staff on furlough up until 1 July, and the limit will be set from 1 July. But this too requires immediate planning to ensure that enough staff are furloughed by 10 June to ensure that the high water mark is set at a level which will not be exceeded subsequently.
  8. When it comes to implementing flexible furloughing the employer needs to consider where employees are going to be working. If the business is to open and employees will be attending work for part of their time, the employer, obviously, needs to ensure that its business is able to open in a way which is in compliance with its health and safety obligations (which we have written about previously). We anticipate that many employers will look at a pattern of days on and days off. Short-term working which still involves travelling to and from work is less likely to be attractive given the time wasted in travelling during working time. If the job can be done from the employees home then that at least is not an issue. However, the employer will probably need to be very clear about what hours of work, or days of work are expected and what should be counted as a furlough period.
  9. In that context, the employer may well want to establish who is keen to come back to work flexibly, and who would have to be required and/or instructed to attend work. To that extent, surveys of employers workforce have proved to be a popular option, designed to establish what percentage of the workforce would be keen to come back, what percentage might consider it and what percentage would be significantly opposed. It may also help in the context of that survey, for there to be an ability for an employee to explain the basis for their concern, if they are not willing to come back to work. In this way employers will know what the percentages are and where their employees are willing to return to work. It may also be possible to form some generalisation as to the hot spots where individuals are unlikely to return voluntarily. Such employees, particularly if critical to the reopening of the business at the resumption of more normal working, may require greater attention of an employer to understand their concerns. To this extent the flexible working option reflects closely the steps employers should be taking where they are simply looking at a resumption of more normal working, irrespective of whether staff have previously been on furlough or not.
  10. In producing any further documentation connected with furloughing of employees it may be appropriate for employers to bear in mind the possibility of a further lockdown. Clearly there is significant uncertainty at the moment and we do not yet know whether the rate of infection will increase rapidly that it becomes unsustainable to have people seeking to return to work or to open up offices or premises that have previously been closed. To that extent the employer will not wish to be having to go through an extended furlough exercise again, with any delay in shutting down its operations. Therefore, we suggest that any further letters that are issued now are drafted in a way which allow them either to be terminated at short notice or potentially extended (perhaps subject to consultation or some other safeguards to reassure employees) if it becomes apparent that the current return to work is not going to be sustainable.

Other news

The Government has announced that the Self-Employment Income Support Scheme is also going to be extended. There have been roughly 2.3 million claims under this Scheme as at 24 May. This Scheme, which allows individuals to put in a claim worth 80% of their average monthly trading profits covering three months' worth of profit and capped at £7,500 in total, is going to be amended. It will be payable to the same category of eligible individuals, but instead it is only going to be worth 70% of the average monthly trading profits, and will be capped at £6,570 in total. 

Finally, the Government has amended the statutory sick pay rules to take account of the Test and Trace system. In this Scheme individuals can be notified if they have been in contact or near someone who has subsequently tested positive for Coronavirus. In these circumstances individuals who are notified that they are in that situation will be entitled to statutory sick pay under the Amendment Regulations which have been introduced. It is likely that employers will find that employees expect that company sick pay will apply to them too, even if they are not actually ill at that point. Of course for employees who are able to work from home, this may be an unnecessary complication. Such employees can probably be expected to work from home until such time as they are unable to work (assuming that they subsequently become ill).

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