The UK Government has published an update to the Treasury Direction previously issued on 15 April. The changes to the Direction are, for the most part helpful. However, they do make a number of significant alterations to the rules that were previously understood to apply.
Indeed the first point to note about the Direction is that it raises the possibility that there are going to be multiple Directions applicable, depending on the period for which the employer is submitting a claim. This Direction applies up to 31 July 2020. However, according to section 16, it implicitly accepts that it is taking a different approach to the 15 April Direction. As such, this second Direction applies automatically to any claims submitted after the date of publication (which is Wednesday 20 May 2020). However, in respect of claims submitted before that date, employers effectively get a second bite of the cherry. A claim under the Government Furlough Scheme submitted prior to 20 May 2020 will be valid either if it is valid under the Direction/Guidance published at the time or if it is valid according to this second Direction.
The Direction attempts to address the issue of whether employers could furlough staff who were sick at the point they were furloughed. Employers had struggled to understand the clear disparity between the Government's Furlough Guidance Notes issued to employers, and the Direction as originally published. The Guidance Notes provide "Short term illness/self-isolation should not be a consideration in deciding whether to furlough an employee. If, however, employers want to furlough employees for business reasons and they are currently off sick, they are eligible to do so, as with other employees. In these cases the employee should no longer receive sick pay and will be classified as a furloughed employee". It is clearly accepted then that sick employees could be furloughed. The Direction, in its original format, said precisely the opposite. HMRC refused to accept that there was in fact any inconsistency between the Direction and the Guidance, which was implausible.
In the latest iteration of the Direction, this section has now been updated so that it provides: "Where Statutory Sick Pay is in payment or due to be paid in respect of an employee at the time when the instruction…is given… [i.e. the instruction to go on furlough], then the furlough period ‘does not begin until immediately after the end of the period of incapacity for work for which the Statutory Sick Pay is in payment or due to be paid (provided that the time of the end of that period of incapacity for work is determined by an agreement between the employer and employee)’." This is pretty opaque. However, it would seem that HMRC is moving to narrow the gap between the Direction and the Guidance Note. It appears that an employer and employee can agree that an employee will come off sick leave, and be treated as being on furlough from that point on. We will look below at what the current Direction says about the need for consent before an individual is furloughed. However, as a matter of logic, if an individual is entitled to sick pay, there is nothing particularly surprising in the Government saying that that individual should have to give their consent before being moved off sick pay onto the Furlough Scheme. Otherwise the reference to the agreement of the employee to ending the period of sick leave makes no sense. Individuals end their period of sick leave when, as a matter of fact, they have recovered sufficiently to be able to return to work. However, if the reference to an agreement is understood to mean an agreement to move an employee who is otherwise eligible to remain on Statutory Sick Pay onto the Furlough Scheme, then it becomes clearer.
The scope of work which can be undertaken by individuals who are on furlough has been clarified helpfully. There are three basic situations where we now have further guidance.
We have known for some time that company directors can be put on furlough. However, the Direction confirms that it is permissible for directors to be involved in filing a Furlough Scheme claim, on behalf of their company, without rendering themselves ineligible for the Furlough Scheme. Similarly, if the director is involved in making payment of wages to employees that does not take the director outside the Furlough Scheme.
Secondly, employees who are Pension Trustees can now carry out duties without being in breach of the Furlough Scheme. This applies provided the work undertaken by the furloughed employee is for "the sole purpose" of fulfilling their duties as a Trustee or Manager of a pension scheme. However, this does not permit independent trustees of the scheme to carry out their duties.
Finally, there is extended guidance on the sort of study which can be done by an employee on furlough without rendering themselves ineligible. If the study is for the purpose of improving the "employee's effectiveness in the employer's business or the performance of the employer's business" then this is permitted. Presumably the concern was that training that was directly related to such matters might be seen as providing a service to the employer or undertaking the business activities of the employer. However, this sort of training is now expressly permitted. Otherwise, any other type of training is permitted provided it is not directly providing a service to the employer or its business activities or contributing to the business activities of the employer or generating income or profit for the employer. Also it must not directly contribute to any significant degree in the production of goods that the employer intends to supply or the supply of services.
We have further rules on the sort of payments which are capable of being included in any calculation of sums reclaimable under the Furlough Scheme, although the drafting is fairly unclear. The basic rule now is that the only payments which can be included are those which are "regular salary or wages". The employer cannot claim for the costs of providing anything in respect of benefits in kind or anything provided or made available in lieu of a cash payment. This includes salary sacrifice schemes.
A payment is a "regular" payment of salary and wages if it is paid according to a legally enforceable agreement, and it cannot vary according to “a relevant matter” save where the payment which is variable is a "non-discretionary payment". The list of relevant matters (which takes payments made by reference to those outside the scheme) has not changed. So payments which vary according to the performance of the business or any part of it, or by the contribution made by the employee to the performance of a business or the performance by the employee of any duties of employment or any similar considerations or that are otherwise payable at the discretion of the employer, are generally not permitted.
However, they are permitted if the payment is not a discretionary one and is in respect of "overtime, fees commissions or a piece rate, is made in recognition of the employee undertaking additional or exceptional responsibilities, or is made in recognition of the circumstances in which the employee undertakes the employee's duties or time when they are undertaken…". There is then a general provision that says that payments which are in recognition of matters analogous to this list may also be included within the furlough scheme calculations. Boiling this down, we have a more detailed statement that essentially says that non-variable payments which the employer is obliged to pay can be included as can variable payments such as overtime, shift allowances, and sales bonuses, provided that they are contractual and not discretionary.
Finally we come to the issue of consent. It has been a bone of contention for employers that HMRC and the Furlough Guidance Notes did not speak with one voice. Was it necessary for the employee to consent to being furloughed? If an employer furloughed an employee without consent, was that invalid for the purposes of the Furlough Scheme? There are probably millions of pounds resting on the answer to this question, and it is therefore frustrating that the disparity between the Guidance Note and the Direction went uncorrected. However, the good news is we do now have some progress. It is probably worth setting this out in full.
The Guidance Note provides "Employers should discuss with their staff and make any changes to the employment contract by agreement. When employers are making decisions in relation to the process, including deciding who to offer furlough to, equality and discrimination laws will apply in the usual way.
To be eligible for the grant employers must confirm in writing to their employee confirming that they have been furloughed (sic). If this is done in a way that is consistent with employment law, that consent is valid for the purpose of claiming through the Scheme. Collective agreement reached between employer and a Trade Union is also acceptable for the purpose of such a claim. There needs to be a written record but the employee does not have to provide a written response. A record of the communication must be kept for five years."
By contrast the Direction originally provided that the employer and employee had to "have agreed in writing" that the individual would be furloughed. Helpfully that wording in the Direction has now been changed.
The Direction says that the employee needs to be instructed by the employer to cease all work in relation to their employment. The revised wording of section 6.7 deals with the definition of when an employee has been instructed by the employer to cease all work. This section provides "An employee has been instructed by the employer to cease all work in relation to their employment only if the employer and employee have agreed that the employee will cease all work in relation to their employment (such agreement may be made by means of a collective agreement between the employer and a Trade Union) and the agreement specifies the main terms and conditions upon which the employee will cease all work in relation to their employment and is incorporated (expressly or impliedly into the employees contract) and is made in writing or confirmed in writing by the employer (such agreement or confirmation may be made in an electronic form such an email)".
In line with the guidance the relevant document needs to be kept until 30 June 2025.
From this we can see that any requirement in the first Direction, that the employee has agreed in writing to being furloughed has now been dropped. The employer and employee have to have agreed that the individual will be furloughed. However, the revised wording does seem to leave it open to the employer to say that the instruction to furlough the employee was based on the pre-existing contract of employment, and therefore the agreement was obtained when the individual signed up to the contract. It would seem likely that the new requirement that the written document "specifies the main terms and conditions upon which the employee will cease all work" is going to be relatively light touch. An employee who has been furloughed on full pay and with no other terms or conditions changing, will probably have had the simplest of letters, merely recording that there are other terms ongoing but that they are to be furloughed. There may be some further detail in relation to an employee who has agreed to accept a pay cut during the furlough period. Equally, it is likely that the letter instructing the individual to do things which amount to a variation of the contract will be taken to be incorporated, expressly or impliedly into the contract. We think it is unlikely that many employers will have furloughed individuals with letters which expressly state that they do not form part of the contract.
Therefore, although the Guidance Note does not exactly close the door on the argument that the employee had to agree to being furloughed, it is probably moving in that direction. It can be placed alongside the unequivocal statement from the Guidance Note that if the instruction is "done in a way that is consistent with employment law, then consent is valid for the purpose of claiming through the Scheme". This means that provided the instruction was neither a breach of contract, nor was objected to by the employee at the time (so that the employer cannot rely on a fall back argument that by accepting the payments whilst on furlough the employee consented to being furloughed or waived any claims as to breach of contract) then employers can rest easy on this issue. Probably. Or until the Third Direction comes along.