Update for employers: Coronavirus Job Retention Scheme

aat comment

The UK’s Coronavirus Job Retention Scheme has been extended until the end of October 2020.

The scheme is designed to help employers retain staff during the coronavirus pandemic, even if they are forced to temporarily shut their business. Employers will be able to claim a grant from HMRC to cover most of the wages of their workforce who remain on the payroll but who are temporarily not working during the coronavirus outbreak.

Which businesses are eligible?

Any employer in the country is eligible for the scheme, provided that it had a PAYE scheme in operation on 19 March 2020.

Where are the rules of the scheme set out?

The legal basis for the scheme is contained in a UK Treasury direction  (12-page / 243KB PDF). HM Revenue and Customs (HMRC) has published guidance on the operation of the scheme.

The Treasury direction differs from the guidance which employers have relied on from the opening of the scheme in some important respects, and should in theory take precedence over the guidance. However, as HMRC issued revised guidance after the Treasury direction was issued, and as HMRC’s online portal requires a declaration that employers have complied with the guidance rather than the direction, it seems clear that HMRC intends to act on the basis of the guidance, and it views the guidance as being in line with the Treasury direction.

What does the grant cover?

Employers may claim 80% of the normal pay of furloughed employees up to a cap of £2,500, plus the employer’s National Insurance contributions and minimum auto-enrollment employer pension contributions on that 80%.

The grant does not cover the cost of providing benefits-in-kind, and all sums received must be paid to employees in the form of money. No administration fee can be charged.

The expectation is that employers will need to continue to pay furloughed employees on their normal payroll dates, and will not wait for receipt of the grant before making payments. This pay must be taxed as normal.

Which employees are eligible?

The scheme will apply to people who have been designated by their employers as ‘furloughed employees’ for at least three weeks. An employee is a furloughed employee if three conditions are satisfied:

  • the employee has been instructed by the employer to cease all work in relation to their employment;
  • the period for which the employee has ceased, or will have ceased, all work for the employer is 21 calendar days or more; and
  • the instruction is given by reasons of circumstances arising as a result of coronavirus or coronavirus disease.

Employees who have had their hours reduced but who are still working will not be eligible, although this is likely to change from August onwards (see ‘what changes are expected?’, below). However, employees may carry out training and voluntary work provided that they do not provide services to or generate revenue for their employer or any linked entities. If they undertake training, they must be paid at least the National Minimum Wage for the training time.

Employers should ensure they have objective reasons for selecting who is furloughed and who is not. If the scheme permits them to alternate furloughed status between individuals, they should give serious consideration to doing that.

All employees who were in employment on 19 March 2020 are potentially eligible provided that the employer has notified HMRC of them on an RTI submission on or before that date. For employers which pay towards the end of the month, the RTI condition is likely to mean that no person recruited in March is eligible, and it may even mean that some people who were in employment on 28 February – the previously communicated eligibility date – are ruled out.

Those who started after 19 March or who had not featured on an RTI submission on or before that date are not eligible, subject to the TUPE point below. Where employers have no work for new starters to do, they will need to agree to defer the start date or pay notice to cancel the contract.

HMRC has confirmed that employees who transfer to a new employer under TUPE after 28 February 2020 are eligible and may be furloughed.

The scheme applies to all employees whether full-time, part-time or on zero-hours contracts. Apprentices are also covered. The scheme also applies to any other person paid via PAYE, including company directors and agency workers (if the agency pays them via PAYE, in which case it would be the agency who could furlough them).

The self-employed are covered by an alternative Self-employed Income Support Scheme.

What changes are expected?

The government recently announced that the scheme will be further extended until the end of October, but it could take until end of May for further details to emerge. The scheme will continue as at present until the end of July.

From August – October, the following changes are anticipated:

  • all sectors will still be able to access the scheme;
  • part-time work will be possible;
  • businesses will have to start “sharing the cost” of furlough, but employees will continue to receive 80% of their wages. The proportion that employers will be required to contribute is yet to be confirmed.

How does an employer make an employee furloughed?

An employer can only claim the grant in respect of furloughed employees. The employer must notify the employee in writing that they are furloughed, and must keep a copy of that communication for at least six years.

The Treasury direction provides that, to be furloughed, an employee must have been instructed by their employer to cease work, and that this is the case “only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment”. This appears to mean that only those employees who have consented in writing to cease all work are eligible under the scheme. This requirement was not included in the original guidance, and many employers have furloughed on the basis of deemed consent – especially where they are paying full pay – or relied on a contractual lay-off clause or agreement with a trade union.

It remains to be seen whether HMRC will decline claims from employers which do not have express written consent from employees, particularly as such action could be subject to judicial review on the basis that employers had a legitimate expectation based on HMRC’s guidance that express consent was not required. As indicated above, HMRC seems to intend to rely on the guidance even though, strictly speaking, the Treasury direction takes legal precedence.

Consent is also strongly recommended from an employment law point of view. As well as addressing the eligibility concern, this would guard against the risk that employees on whom furloughing is imposed could claim a sum equivalent to the reduction in pay through an unlawful deduction from wages claim as well as the risk of an additional PAYE liability.

Can employees on other types of leave be redesignated as furloughed?

This is an area in which specific advice will be needed. The guidance indicates that those who are self-isolating or ‘shielding’ may be furloughed “for business reasons”, but not simply because they are sick or self-isolating. The Treasury direction, however, appears to take a harder line and provides that those eligible for statutory sick pay (SSP) may not be furloughed, unless and until the SSP has expired.

Finally, the guidance confirms that employees who are unable to work due to caring responsibilities, such as childcare, can be furloughed.

Can employees take annual leave during furlough?

The Treasury direction has failed to clarify how furlough interacts with annual leave, but the latest guidance confirms that leave can be taken during furlough. Holiday pay must be paid at the “usual” holiday pay rate.

On 13 May, the government issued additional guidance on holiday entitlement and pay during coronavirus. Employers will also want to take note of the ACAS guidance on holiday pay, as employment tribunals will take that into account.

Annual leave

It is clear that annual leave will continue to accrue during furlough, confirming what was stated in the HMRC guidance. There remains ongoing debate about whether an employer can require an employee to take leave, as well as the employee being able to choose to take leave.

As per the ACAS guidance, employers should first seek to encourage employees to take holiday. Many employees receiving 80% of pay on furlough would be happy to take holiday, as 100% of holiday pay is paid. On balance, our view is that employers may be able to mandate that leave be taken. The guidance does indicate that is a valid point, but it also encourages employers to take account of factors such as shielding.

Bank holidays

Where a bank holiday would normally have been taken as annual leave, the employer can either assign the bank holiday as a day of annual leave or defer the bank holiday and allow the employee to take that day at another time.


The government guidance envisages calculation and payment of holiday pay in accordance with current legislation: see the government’s general guidance on holiday entitlement.

Carrying leave forward into future holiday years

The guidance sets out a number of factors to be considered when assessing whether it was reasonably practicable for an employee to take leave in the current holiday year. These are indicative, and there may well be additional factors for your business. The guidance also notes that employers should do everything they can to ensure leave is taken in the current year.

Notwithstanding that the position with regards to the grant of leave has been clarified, there are potential employment law issues about whether leave can be taken, so employers should seek legal advice. 

Can employers alternate who is furloughed?

Many employers have considered this as a fair means of introducing and managing furlough. This is permissible provided that each individual is furloughed for at least three weeks on each occasion. Alternating may also help alleviate a feeling of unfairness on the part of employees who are working, particularly where the furlough payment is 100% of usual pay.

Can furloughed employees work for someone else?

If their existing employment contracts permit them to, employees can take on new work for other employers during furlough provided that the new employer is not linked to their current employer. You will have noted the government’s very recent statements about furloughed employees helping with the harvest. Employers who are furloughing employees should make their position on alternative work clear in their communications with employees.

Can an employer re-hire and furlough employees?

The updated guidance makes it clear that employers can do this for employees who were employed on 28 February 2020, but who left before 19 March. However, employers are not obliged to do so. They could only furlough re-engaged employees if they have no work for them to do.

What counts as pay for these purposes?

For salaried employees, pay is their pay for the last pay period on or before 19 March 2020. For employees whose pay varies, their pay is the higher of the pay from the equivalent pay period last year or the average pay for the previous tax year.

Unfortunately, the Treasury direction has introduced uncertainty as to what constitutes pay. Although the guidance provides that pay does include regular payments which employers are obliged to pay their employees, such as past overtime and compulsory commission payments, the Treasury direction casts doubt on this.

It is clear that discretionary commissions and bonuses are excluded, as are benefits in kind. Where employers operate salary sacrifice, only the post-sacrifice pay may be claimed. The grant may not be used to subsidise the cost of providing benefits under the sacrifice scheme. However, HMRC has confirmed its view that the Covid-19 outbreak is a ‘life event’ which may warrant changes to the salary sacrifice scheme. Before deciding to make any change, employers will need to bear in mind that even if they do make a change then they can only claim for the salary as it was on 19 March. Employers should ensure that any such changes are implemented in accordance with employees’ contractual rights.

Employers do not need to top-up the 80% in order to qualify.

Employees earning more than £37,500 will receive less than 80% unless employers agree to top up.

How do employers claim?

The HMRC portal through which claims must be made came into operation on 20 April 2020.

Employers are only able to claim every three weeks.

Furlough letter – free template

Example letter and employee response form (consent form) to communicate to an employee that they have been assigned furlough status under the Coronavirus Job Retention Scheme..
Feedback form

What are the employment law risks?

In these circumstances, it is important not to overstate the employment law risks. The practical risk of claims must be much-reduced given the wider issues people are facing and the financial cushion provided by the scheme. The more important issue for most employers will be to ensure that they comply with the scheme rules so that they may successfully claim back employment costs.

In particular, if employers agree to top up to full pay, the risks ought to be negligible. Nevertheless, employers need to at least be aware of the potential claims they may face.

The scheme must be implemented in accordance with employment law. There will be no statutory right to designate an individual as furloughed.

Where there is a contractual lay-off clause, employers are in a strong position to benefit from the scheme. They must use objective criteria for deciding who should be furloughed.

Where there is no contractual lay-off clause, employers will still need an individual’s consent to being furloughed. Without that consent, an individual could claim breach of contract or unlawful deduction from wages to recover the lost income if the employer does not top up to full pay; constructive dismissal; and potentially a protective award for failure to consult in the run-up to dismissal. The individual may also be ineligible for the scheme.

Given that the scheme only has limited time left to run, imposing the change through dismissal and re-engagement is unlikely to be an attractive option save for people with very short service. It would also attract negative PR.

Therefore, employers should consider how they could obtain consent to reduce the legal risks. The most obvious route is to run a voluntary scheme and perhaps to offer some form of top up to the scheme payment. Where employers have collective bargaining, they should talk to the union first before launching the scheme.

With people increasingly nervous about leaving home, and many now facing childcare difficulties, voluntary schemes should be successful. If anything, the issue may be that they are over-subscribed.

Employers should ensure they have objective reasons for selecting who is furloughed and who is not. If the scheme permits them to alternate furloughed status between individuals, they should give serious consideration to doing that. In theory an employer could face breach of trust and confidence or discrimination claims from people who are not furloughed but who want to be, or from those that are and who miss out on pay (because the employer is not topping-up). An objective selection process should provide a strong defence to such claims.

If employers still want to implement redundancies, care should be taken to consider whether the option to furlough is a reasonable alternative to dismissal, in order to reduce the risk of unfair dismissal claims.

Further risks arise in the context of disciplinary and grievance handling during the period of furlough. 

Our guide, Coronavirus: advice for UK HR professionals, contains more information about ACAS guidance on this topic and further issues to consider for businesses.

What should employers do now?

Employers should consider furloughing as soon as possible – the sooner they furlough, the sooner wage costs will be covered by the grant.

We strongly recommend that employers seek written consent for furloughing.

If furloughing will mean selecting some people in the same role to come to work and some to stay at home, employers should devise fair criteria to select who falls into each group. Where too many people volunteer for furlough, we believe it would be lawful to give preference to those who are vulnerable.

Employers must retain a copy of the furlough notice and consent for at least six years.

They should also consider what position they wish to take in relation to annual leave.

Finally, employers should consider the impact of the reduction in pay on salary-related benefits. For example they should check the terms of life insurance schemes to see whether this would impact on cover.

About the author

Jon Fisher is a partner at Pinsent Masons. This article is reproduced with permission from Pinsent Masons’ website.

Get the latest on the Covid-19 situation:

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

Related articles