NOTE: Because the COVID-19 situation is dynamic, with new governmental measures each day, employers should consult with counsel for the latest developments and updated guidance on this topic.

On March 20, 2020, Chancellor Rishi Sunak announced an unprecedented package of measures to help workers and employers in the UK, including a Coronavirus Job Retention Scheme (CJRS). This article summarises the grant, which is available to all UK employers, and is based on detailed guidance published by HM Revenue & Customs (HMRC) on March 26, 2020 and updated on April 4, April 9, April 15, April 17, and April 20.

Warning: The UK Treasury has also issued a legal direction to HMRC on April 15, 2020, which will be binding on the HMRC in respect of how it administers the CJRS. We have made allowance for any major Treasury rule requirements in these FAQs. In some cases, the HMRC’s guidance does not conform entirely to the Treasury Direction, which may lead to confusion.

Employers should bear in mind that the situation is fast-moving and the guidance has changed on a number of occasions. The number of employers choosing to furlough under the scheme has been more extensive than envisaged by the Treasury, and the guidance may change with little or no notice. This article summarises the scheme based on the guidance issued through April 15, 2020, including the Treasury Direction to HMRC.

With these basic principles in mind, we turn to some frequently asked questions about the scheme. Employers with additional questions about the scheme or appropriate wording for a furlough letter should consult with experienced employment counsel.

Q1:      Can an employee work for the employer who has furloughed them during furlough?

No. The guidance states that employees cannot do any work that makes money for your organisation or provides services for your organisation (or for any linked organisation).

The latest government guidance states that a furloughed employee can take part in volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of your business.

The guidance also says that if workers are required to complete online training courses whilst they are furloughed, then they must be paid at least the minimum wage for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

Although the guidance does not expressly deal with it, we do not see any likely issue with an employee logging-on to check HR emails or attending calls with HR by way of “keeping in touch” with the business whilst they are on furlough – but employees should not perform any substantive work. Similarly, there should be no objection to taking the occasional short call from colleagues to ensure continuity of work being undertaken by others. Employers should strive to make this clear when placing employees on furlough.

Q2:      Can an employee work for another employer during furlough, or get a new job? 

Yes, provided the other employer is not related to the furloughed employer. If the employee gets a new job, the employee can start work for the new employer (again, provided the new employer is unrelated to the “furlough” employer).

Q3:      *UPDATED* How is the monthly wage calculated? 

There is now dedicated guidance on how to calculate the monthly wage of a furloughed employee, including a calculation tool – see here.

For salaried employees (full-time or part-time), the government’s employer guidance is that the monthly wage is calculated by reference to the employee’s “salary” for the last pay period prior to March 19, 2020 (previously as at February 28, 2020) and the payments addressed in Q4 below.

For salaried employees who are returning from a period of statutory absence (such as family-related leave) and are furloughed, the general principle is that employers use their salary, before tax, and not the pay they received whilst on statutory absence. Although the guidance does not provide a specific date against which to measure salary, presumably it would be the employee’s salary as of the date they returned.

There is also a saving provision in the latest rules, which states that if an employer relied on the earlier rules and used February 28 instead of March 19, the employer can still use the salary as at that date instead for its first furlough reimbursement claim.

For employees with variable incomes, including “zero-hour” employees, the situation is more complicated. For employees with variable incomes who have been employed for a full year, employers will be able to claim the higher of either:

• the amount the employee earned in the same month in 2019; and
• an average of their monthly earnings for the 2019-20 tax year.

For employees with variable incomes who have been employed for less than a year, employers will be able to claim for an average of the regular monthly wages since they started work and until they are furloughed.

For employees with variable incomes who only started work in February 2020, the wages will need to be pro-rated from that month.

Q4:      What payments to employees does their monthly wage cover?

As referred to above, there is now dedicated guidance on how to calculate the monthly wage of a furloughed employee, including a calculation tool – see here.

An employer can claim for any “regular” payments it is obliged to pay its employees. This figure includes wages, past overtime, compulsory fees and compulsory commission payments. However, any discretionary bonus (including tips) and commission payments, any “irregular” or conditional payments, and any non-cash payments or benefits-in-kind should be excluded.

Q5:      What about pension and other benefits?

Employers have a statutory obligation to automatically enrol employees in a workplace pension and there are no powers in place to vary that obligation. Employers will continue to have to make these payments.

The government has said that its scheme will cover the minimum pension contribution under the auto-enrolment rules. In other words, the scheme will cover 3% of the employee’s qualifying earnings based on their furlough payment of up to £2,500 per calendar month.

The scheme rules as of April 9, 2020 state that any pension payment to a business must be paid into the employee’s pension account in full (i.e., without any deductions at all). The UK Pensions Regulator has also issued new guidance on auto-enrolment compliance during furlough (see here).

Employees continue to be entitled to all their other benefit rights under their employment contracts unless they are varied – so employees will be entitled to bonus, commission, healthcare, etc.

Varying these rights may or may not require consent depending on the terms of the employment contract. Employees who are furloughed may agree to forgo these benefits.

Q6:      *UPDATED* What about holiday accrual, taking holidays and holiday pay? 

There are various related questions here. Below, we set out the current position as we best understand it, however the relationship between furlough (which is governed by the Treasury/HMRC scheme rules) and holiday entitlement (which is governed by the Working Time Regulations 1999) will need to be dealt with by the courts/tribunals (i.e., it is not just a matter for HMRC to provide guidance on).

• Does holiday continue to accrue during furlough? The general view is that the answer is yes for statutory holiday entitlement accrual. It will also normally be yes for extra holiday entitlement provided by employers (i.e., in excess of the statutory minimum), unless the employee’s furlough agreement/letter specifically provides to the contrary.
   
• Is an employee allowed to take a holiday during furlough or is this legally prohibited? Yes (and this is the current view of HMRC), however: (1) the employer may not be able to force the employee to take a holiday; and (2) it may mean the employer cannot claim under the government’s furlough scheme (see below).

• Can an employer force an employee to take holiday during furlough? Ordinarily, the Working Time Regulations allow an employer to require an employee to take their holiday on specific dates by notice. However, in the context of furlough leave, there currently is no clear answer. 

• Does taking a holiday break the Government’s furlough scheme “3 week” rule (and mean the employer cannot claim for reimbursement under the scheme)? No.

• What about holiday pay? This also remains unclear. Based on views shared by HMRC and ACAS, if a salaried employee takes a holiday then they are entitled to be paid at their “normal” rate (i.e., their pre-furlough pay) unless they have agreed to a permanent reduction in their normal salary (not just a temporary reduction during the furlough period). The courts may need to look at this question in particular because it involves interpreting the Working Time Regulations. For employees who are not salaried but have variable pay, the position is more complicated; we recommend employers speak with an employment law adviser to discuss this open issue. HMRC also indicated that this rule applies to bank holidays that an employee would normally take as a holiday day (i.e., to be paid at the employee’s “normal” rate), but not bank holidays the employee would normally be working (which can remain at the “furlough” rate).

• What are the new rules on carry-over? The Working Time Regulations have been amended so that employees can carry over up to four weeks’ holiday to the next and subsequent holiday years where it was not reasonably practicable for the employee to take their holiday accrual "as a result of the effects of the coronavirus (including on the worker, the employer or the wider economy or society)”.

Q7:      What about employment rights?

Employees will continue to accrue continuous service whilst on furlough. Thus, some employees who do not yet have the two years’ service required to claim a statutory redundancy payment and to bring an unfair dismissal claim may acquire these rights whilst on furlough.

Q8:      What about tax, national insurance and other deductions?

Payments made by the employer will be subject to the usual deductions for income tax and national insurance. Employers are also able to reclaim the employer’s national insurance (subject to the financial limits discussed above).

Payments are also subject to other deductions, such as employee pension contributions and student loan repayments.

Q9:      Do employers have to pay employees who are not able to work at the moment?

Yes, whilst employers probably have the right to send employees home and/or to not require performance in these exceptional times, employees have the right to be paid provided that they are ready, willing and able to work.

Apparent exceptions would be if the employment contract expressly permitted lay off without pay or if the employee agreed to any pay reduction as part of a furlough arrangement.

Q10:    *UPDATED* What is the position of employees who have already been made redundant or otherwise stopped working?

Employees who were on payroll on February 28, 2020 and then made redundant or otherwise stopped working are eligible if they are re-employed and placed on furlough instead (even if this occurs after March 19). This can be done only by their immediate last employer if the employee was working for one employer at a time.

In other words, if an employee was made redundant by employer 1 but found a new job with employer 2 (even if that job was later lost), employer 1 could not re-employ the employee to place them on furlough (assuming the dates all worked out). On the other hand, if an employee was employed by employer 1 and employer 2 at the same time, and was made redundant by employer 1, in that case, employer 1 should be able to re-employ the employee and place them on furlough (again, assuming the dates work out).

Please note that this rule permitting reinstatement and furlough does not appear to apply to employees who were first on payroll after February 28, 2020.

Finally, a specific rule now applies in relation to employees who were on fixed-term contracts, and whose contract has now come to an end. Fixed-term employees can have their contracts extended or renewed before they would “naturally” end, and be placed on furlough. Once a fixed-term employee’s contract has “naturally” ended, however, that employee cannot be re-hired and placed on furlough.

Q11:    What is the position of employees with whom employers have already agreed to reduced hours or reduced salaries?

The guidance states that employees who remain working but with reduced hours/pay, will not be eligible for the scheme.

Q12:    What is the position of employees who are currently on notice of termination (but working through their notice period)?

There is no objection for an employer to rescind those notices, to furlough and to reassess their  position when the scheme ends.

Q13:    What is the position of employees who are contracted to join us but have not done so?

The scheme only covers employees who were “on the payroll” on March 19, 2020 (note: previously February 28). “On the payroll” means that a payroll record has been set up and submitted under HMRC’s real time information (RTI) system for that employee.

Q14:    Can an employee who is furloughed return to work and be furloughed again?

Yes, although there appears to be a minimum furlough period of 3 consecutive weeks. Also, special rules apply to fixed-term employees (see above, Q10).

Q15:    Are directors eligible?

Executive directors (i.e., those with an employment contract) are eligible. Non-executive directors are also eligible if they are remunerated by PAYE.

Furloughed directors can carry out duties to fulfil statutory obligations so long as they do no more than would be judged reasonably necessary for those purposes. Directors should be careful not to overstep this limit at the potential risk of prejudicing a grant application. The new Treasury rules, which will now bind the HMRC, state that statutory obligations for these purposes mean work undertaken by a director to fulfil a duty or other obligation arising by or under legislation relating to: (1) the filing of company accounts; or (2) the provision of other information relating to the administration of the company.

Finally, it is worth noting that the scheme rules state that any furlough arrangements applying to directors must be adopted formally as a decision of the company (presumably, by a board resolution).

Q16:    Are partners eligible?

Most partners and LLP members are self-employed and so will be outside the scope of the scheme.

However, members of LLPs who are designated as employees for tax purposes (“salaried members”) are eligible to be furloughed, although amendment of the LLP agreement may be required.

On March 26, 2020, the government announced a scheme for the self-employed, but this applies only to those with profits of less than £50,000.

Finally, it is worth noting that the scheme rules state that any furlough arrangements applying to LLP members must be adopted formally as a decision of the LLP (presumably, by a resolution).

Q17:    Are zero hours employees and agency workers eligible?

Yes, assuming that they are paid through PAYE.

Q18:    Can employees who are currently absent on sick leave (including those self-isolating in accordance with government advice) instead be furloughed? 

It is not clear, as different government sources are contradictory. In the current guidance, the government has said that employees can move between sick leave and furlough leave, provided employers are not doing so to abuse the system. The Treasury Direction, however, seems to suggest that an employee cannot be furloughed until they cease to be eligible for SSP – potentially meaning an employee cannot be furloughed until they are fit for work. We expect this contradiction to be resolved when guidance is updated.

Remember that the SSP has been modified so that with effect from March 13 2020, employees can claim from their first day of incapacity and, with effect from March 14, 2020, employers with less than 250 employees can reclaim SSP paid in respect of the first 14 days of COVID-19-related sickness absence.

Q19:    Can employees who are at home looking after children or others be furloughed?

Yes.

Q20:    Do employers have to follow a redundancy or any other process before designating employees as furloughed workers?

There is no mandatory process. Employers should try to ensure there is a clear business rationale for decisions about who to furlough in order to avoid allegations of discrimination and further arguments around the unfairness of any subsequent redundancies. This consideration is especially important where there are a number of employees carrying out a similar role and only some of those employees are to be furloughed.

Informal consultation in a manner appropriate to the business in question is recommended.

Q21:    What about sponsored workers?

The scheme rules issued on April 9, 2020 state that “you can furlough employees on all categories of visa.”

The Home Office has now confirmed (in a separate statement) that the scheme can be used for sponsored migrants. They have to meet the same payroll date eligibility requirements as other employees (see above Q10). Some sponsored workers – especially some Tier 2 (Intra-company Transfer) migrants – will not qualify because they are not on PAYE.

It has also been clarified that sponsors can temporarily reduce the salaries of sponsored migrant workers to 80% of their salary or £2,500 per month, whichever is the lower. Any reductions must be part of a company-wide policy to avoid redundancies and in which all workers are treated the same. Pay must be returned to normal once these arrangements have ended. Sponsors must report on the SMS that a worker has been furloughed and report the reduction in salary. Employers should confer with immigration counsel for specific advice.

Q22:    Does an employer’s decision to furlough trigger collective consultation obligations?

No, not in relation to the decision to furlough, but collective consultation may still be required if redundancies are proposed, even if they will not take effect until the end of the furlough period.

Where an employer goes beyond contemplating the possibility of redundancies, to making a proposal to dismiss as redundant 20 or more employees at any establishment within a 90-day period then collective consultation obligations are triggered. Such consultation must begin in good time and for a minimum period of 30 days (45 if more than 100 redundancies are contemplated). This process requires consultation with any recognised trade union or, if no other appropriate representatives, employee representatives who are elected for this purpose.

For these purposes, proposing to “dismiss” an employee is deemed to include a situation where the employee proposes to dismiss them under their current contract of employment and offer them new employment on a different (less costly) contract.

Many employers that do not wish to top up salary to 100% of pay will require employee consent to agree to the reduction in pay. When seeking such agreement, employers should be careful not to inadvertently trigger the collective consultation obligations by suggesting that there are  firm proposals to make redundancies.

Even if collective consultation obligations are triggered, failure to consult awards can be made only to those individuals who are actually dismissed. If the expectation is that every employee will consent to be furloughed now rather than to be made redundant after a minimum 30/45-day consultation period, then theoretically, there will be no aggrieved person.

In certain situations, it may be sensible for employers to start collective consultation, as they can be in a position to implement any necessary redundancies once the scheme comes to a close. Employers faced with potential redundancies should check with an adviser.

Q23:    Can employers carry out redundancy consultation whilst employees are furloughed?

The guidance does not explicitly address this question. In theory, being “consulted” arguably is not “work,” but HMRC could adopt a different position. This issue may become significant because some employers may want to be positioned to potentially implement redundancies if things don’t improve once the government grant concludes.

Just to recap:

• individual redundancy consultation -- is required in all cases, where employees have acquired 2 years continuous service.

• collective redundancy consultation -- is required in all cases where an employer proposes to dismiss as redundant 20 or more employees at any one establishment in a 90-day period. 

As another reminder, union representatives and employee representatives have the right to paid time off for carrying out their duties. Depending on the circumstances, it may be necessary to “top up” their salaries for those days that they are carrying out their duties. It is also unclear whether performing these duties would be considered “work,” endangering a claim for furlough payments.

Q24:    Will being placed on furlough impact an employee’s a redundancy payment or a payment in lieu of notice (PILON)?

Taking each in turn:

• Statutory redundancy pay: This may be an issue for those earning less than £525 a week on furlough. For this group, by accepting a reduction to salary whilst on furlough, their statutory redundancy payments will be based either on their furlough wages or on the average earnings in the prior 12 weeks. We expect that the government will legislate to close this anomaly.

• PILON: This will depend on the drafting of the furlough letter, but we would expect an employee terminated at the end of the furlough period will receive a PILON by reference to their normal salary.

When seeking consent to reduce salary levels, employers may wish to give comfort to employees that they will not be disadvantaged as a result of accepting a reduced salary although doing so may impact the tax treatment of any “top up” payments. 

Q25:    Can we give notice of termination of employment now and furlough an employee for the duration of the scheme?

This is a difficult question, and the answer has fluctuated with the HMRC guidance.

The original policy intent of the scheme is to avoid redundancies. Based upon the guidance published on March 26, 2020, it was a requirement of the scheme that the furloughed worker would otherwise have been made redundant. However, nothing in the earlier guidance would appear to specifically prohibit an employee being given notice of termination and then furloughed during their notice period.

The current guidance reiterates that the scheme was “designed to help employers whose operations have been severely affected by coronavirus (COVID-19) to retain their employees and protect the UK economy. However all employers are eligible to claim under the scheme…”

The updated guidance issued on April 9, 2020 states that “[g]rants cannot be used to substitute redundancy payments. HMRC will continue to monitor business after the scheme as closed.” It is not clear what the term “redundancy payments” is intended to mean, however.

In light of the shifting sands and open questions, employers should ensure that they keep their decision to make redundancies under review for the duration of the furlough period and seek specific advice from experienced employment counsel.

Q26:    How will the scheme be policed?

We expect that the grant application will include a simple “check box” declaration. It is expected that HMRC will have extensive enforcement powers to audit applications after the fact in order to prevent fraud and abuse. Successive iterations of the guidance and the Treasury Direction have placed increasing emphasis on the intention to police perceived abuse of the scheme.

In recent days, there has also been a growing public criticism of profit-making businesses (especially larger businesses) using the CJRS to short up their own profits, at the expense of the taxpayer.

Q27:    When will payments be made?

Payments to employers are expected be made “before the end of April” although some believe that that is optimistic. Employers will need to pay and therefore fund salary costs in the meantime and may be eligible for a Coronavirus Business Interruption Loan.

An employer could reach agreement with employees so that furlough payments are instead made on receipt of the payment by HMRC. 

Q28:    What should employers include in furlough communications? What paperwork do we need?

Ideally, employers should secure a written letter or agreement (including by email) showing the agreement of each relevant employee to be furloughed. More details on this option follow below.

Originally, the HMRC guidance required only that an employee be designated and notified as a furloughed worked and asked to stop working. There was no requirement to obtain the employee’s agreement; however. for normal employment law reasons. an employee’s agreement would usually be required to reduce their pay or working hours.

In the Treasury Direction to HMRC, the Treasury stated that in order to be eligible for a grant, an employer has to show that the employer and the employee have a written agreement (including email) that the employee will cease all work for the employer.

In response to the Treasury Direction, the HMRC guidelines have been updated. They now state that to be eligible for a grant “employers must confirm in writing to their employee confirming that they have been furloughed. If this is done in a way that is consistent with employment law, that consent is valid for the purposes of claiming the CJRS. There needs to be a written record, but the employee does not have to provide a written response.”

It is not clear yet whether the Treasury will accept the HMRC’s slightly more relaxed approach to what constitutes a “written agreement.”

In light of the updated and somewhat divergent guidance, employers should seek to obtain their employees’ agreement in writing (including by email) prior to placing them on furlough. Employers might confer with counsel for options if this step was not taken previously.

This letter/agreement/email should be retained on file. Topics to consider include:

• Whether there will be a reduction to basic salary whilst on furlough;

• When the furlough period will end and the employer’s right to require the employee to return to work early;

• Any impact on any benefits (life assurance, etc.) that are impacted by the change to salary;

• The duration of furlough and ability of the employer to end furlough leave early; and

• The fact that employees should not work (perhaps otherwise than checking emails for HR updates). 

Employers may also wish to encourage employees to explore training and to consider undertaking volunteer work in support of the wider community while on furlough. 

Q29:    Are there any record-keeping obligations?

Yes. The April 4, 2020 guidance update states that furlough records including the furlough letters (i.e., designating employees as furloughed) must be kept for at least 5 years.

Note that the furlough period starts form the date that employees ceased working rather than date of the furlough letter. As a result, if furlough letters have not yet been issued, they should be issued as soon as possible.

Q30:    *UPDATED* Are there any other practicalities to be aware of?

We understand that the scheme will only pay out to businesses that have a UK bank account and are registered with HMRC’s online RTI PAYE system in respect of a furloughed employee, on or before March 19, 2020. The CJRS online portal commenced operation on April 20, 2020, as planned, and the first payments are still due to be made by April 30, 2020. As of the time of writing, the portal is suffering some “teething” issues related to the number of applications being made.

Employers should be prepared to complete declarations that furloughed workers have not been working. This step will be easy for some employers but less easy for employers with employees who can operate remotely. Employers will wish to ensure that the “no work” rules are understood by line management and appropriately policed. 

A number of employers in the UK have been criticised for furloughing staff and have subsequently decided to reverse those decisions as a result of adverse coverage. Organizations that furlough and claim government subsidy should expect their operations to be open to public/press/parliamentary scrutiny. 

Q31:    Are nannies and other domestic workers eligible?

Yes, provided that they are paid through PAYE.

Q32:    What about employees who transferred into our business because of TUPE, after February 28, 2020?

The latest scheme rules specifically state that these employees will be covered. (Based on our understanding of the rules, we assume employees are covered if they were on the previous employer’s payroll as at March 19, 2020 (previously February 28).)

Q33:    What about employees who are on unpaid leave?

If an employee was on unpaid leave before February 28, 2020, the employer should wait for them to come back to work according to their previously-agreed schedule, before furloughing them. The relevant salary for furlough reasons will be 80% of their salary had they been on paid leave instead of unpaid leave.

If an employee was placed on unpaid leave after February 28, 2020, they can be furloughed instead.

Q34:    Are there any implications for employers that operate share incentive plans?

This question, though frequently asked, is not addressed in the government’s furlough scheme at all.

EMI options are the most tax-advantaged – and therefore the most popular – of all UK employee share incentives, but the favourable tax treatment ceases if a “disqualifying event” occurs in relation to an EMI option. One such event is if the holder of the option ceases to be required to work for their employer for at least 25 hours per week or, if less, 75% of their total working time. If option holders are furloughed, they presumably would fail to meet this requirement during the furlough period.

There can be no real doubt that the government will not want the tax status of furloughed employees to be tarnished as a result of having been furloughed. HMRC are aware of the problem and are promising to issue guidance in the very near future. While this guidance will no doubt be intended to be helpful to taxpayers, we cannot offer any insight until we have read their solution.

We also understand that valuations agreed with HMRC for the grant of EMI options, which until now have been valid for 90 days (increased last year from 60 days) will now be valid for 120 days. This is subject to the usual caveat if there are material developments affecting the company’s value.

There should be no significant implications for share plans other than EMI.

Q35:     What about employees with salary sacrifice arrangements?

An employee who has reduced their base salary as part of a salary-sacrifice arrangement will have their furlough payments calculated by reference to 80% of their new base salary, not their “notional” or “reference” salary (up to the monthly cap of £2,500).

The HMRC guidance states that HMRC will consider COVID-19 as a “life event” allowing an existing salary-sacrifice arrangement to be changed, without upsetting the tax treatment of a prior arrangement.

Employees who have a salary sacrifice arrangement “reversed” and whose base salary increases as a result, however, should still have their CJRS grant amount determined by reference to the normal timing rules (see above, Q3).