Covid-19: Furlough and job retention: Key issues for Employment Lawyers (UPDATED 11.04.2020)

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11 Apr

UPDATED 11.04.2020: Covid-19: Furlough and job retention: Key issues for Employment Lawyers

By Daniel Dyal

Employers are making difficult choicesat this time in situations which have never affected their workplaces before.As fresh guidance is issued and new headlines emerge, the next legal queriesevolve. This blog by Daniel Dyal examines the interplay between the workplace and the coronavirus. It hasbeen updated in light of the further guidance issued on 9 April 2020.

In this blog, Daniel addresses some ofthe implications ofThe HealthProtection (Coronavirus) Regulations 2020including: Howshould an employer choose which employees to ‘furlough’ when there is some workthat needs to be done? What are the legal implications if an employer isunwilling to ‘furlough’ staff? What if businesses go insolvent during a periodof ‘furlough’? These important issues are analysed here.

Introduction

The Health Protection (Coronavirus) Regulations 2020contains sweeping lockdown measures, in response to the Covid-19 crisis, thathave closed or curtailed businesses and workplaces on a scale that would beunimaginable if we had to imagine it rather than live through it.

On 9 April 2020, the Government furtherupdated the details of the Coronavirus Job Retention Scheme (‘Scheme’) with afurther guide. The Scheme is a central part of theeffort to mitigate the profound economic impact of lockdown.

In short, the Scheme is intended toincentivise businesses to ‘furlough’ redundant workers instead of dismissingthem, thus avoiding redundancies on a colossal scale the nation has never seenbefore. In this context ‘furlough’ simply means putting on paid leave duringwhich the worker cannot carry out work for the employer.

No legislation has been published asyet in relation to the Scheme and it is starting to look as though none willbe. It seems that the Scheme might simply be operated by HMRC pursuant to thevery general powers contained in sections 76 and 86 Coronavirus Act 2020.Section 86 simply permits government departments and public authorities to givefinancial assistance to persons as a result of coronavirus. Section 76 givesthe Treasury the power to direct HMRC’s functions in relation to coronavirus.This in itself is a remarkable sign of the times. It is astonishing that ascheme, which will cost billions of pounds, might be operated without a singleset of regulations underpinning and guiding it.

The guide, then, may be as good as ourunderstanding of the scheme is going to get until it starts to actuallyoperate. The current estimate is that it will go live in late April.

Basic features of the Scheme

The Scheme works by enabling businessesto apply to HMRC for a grant that covers 80% of furloughed workers’ wages,capped at £2,500 (gross) per month s employer’s NICs and minimum pensioncontributions. The worker is then paid their wages by the employer through itspayroll.

The Scheme applies:

from1 March 2020 onwards for at least three months;
onlyto workers who are on a PAYE payroll and then only to workers who were on thepayroll as at 28 February 2020;
ifa worker was made redundant on or after 28 February 2020 the Scheme applies tothem but only if they have been rehired by their employer (and they canbe rehired in order to be furloughed);
thereare additional provisions dealing with variable pay and employees on leave ofvarious kinds (including maternity).

Previous versions of HMRC guidance,which were not very technical, oscillated between using the term ‘employee’ andthe term ‘worker’. They did so in a way that suggested that the legaldistinction between those terms was not intended (or perhaps understood).However, the impression was very much that the Scheme would apply broadlyrather than narrowly. In essence, to anyone who falls into the category ofpeople that employment lawyers would identify as a ‘worker’ (within the meaningof either limb of s.230(3) Employment Rights Act 1996) and who was onthe payroll.

The current version of the guidance confirmsthat both employees and workers (including ‘limb b’ workers) are covered underthe scheme. So too are:

Agencyworkers, including those who supply their services via an umbrella company;
Officeholders, including company directors who are salaried. It would also seem toinclude the fee-paid judiciary most of whom have received no work (and thus nopay) since lockdown began and some of whom rely upon judicial work as theirprimary income;
SalariedLLP members who are classified as employees for tax purposes;
Apprentices;
Workerson fixed term contracts. Such contracts can be renewed or extended during thefurlough period without breaching the rules of the scheme.

When the Scheme was firstpublished, it appeared that it would not apply to those who TUPE transferred toa new employer after 28 February 2020. However, the updated guidance makes theposition clear: the scheme does apply to those who are furloughed from employmentwhich commenced before 28 February 2020 and subsequently TUPE transferred to anew employer.

Thus the scheme has a broad coverage.However, one group that is left unprotected are those who started newemployment on or after 1 March 2020. Those workers cannot be furloughedpursuant to the Scheme. This is discussed further below.

General relationship with employmentlaw

A fundamental point of importance isthat the Scheme will operate within the parameters of existing employment lawrather than varying or suspending parts of it. It is thus not the panacea thatbusiness and the general public might imagine it to be from reading headlines.

So, for example, the headline is thatthe government will pay 80% of wages up to £2,500 which the employer can choosewhether or not to top-up. However, that headline overlooks real complexity.While it is true that the employer will not be obliged to top-up wages by theScheme the Scheme is not the only source of employers’ obligations. Theemployer will often be obliged to pay normal pay, not because the Schemedemands it but because the contract of employment does. (Many contracts willnot permit the employer to pay anything less than full wages; many will,especially if pay is based upon time worked or pieces produced.) If thecontract obliges full pay, it will be no answer to a breach of contract orunauthorised deduction of wages claim to say that the grant from HMRC did notcover full wages.

If follows that in many cases therewill need to be a specific furlough agreement (whether a stand-alone agreementor one that varies another contract) to deal with the furlough period.Contracts can, of course, be varied but this can only be done lawfully inparticular ways that employment lawyers are accustomed to advising upon. And ifa consensual variation cannot be achieved dismissal with an offer ofre-engagement is another familiar scenario. These are difficult matters thatare fraught with pitfalls and in respect of which specific advice should beobtained including, for instance, in respect of collective consultationobligations (which the guide recognises may apply).

It remains to be seen whether aprecondition of entitlement to a claim under the Scheme will be that theemployee would otherwise be made redundant. If so, then, the interrelationshipbetween the law of redundancy, especially its collective consultationobligations, and the Scheme will be all the more important.

Further, there is already a body ofemployment law that deals with lay-off, short-time working and guaranteepayments. It is unclear currently how the Scheme will fit in with the existinglaw.

There are also many equalityimplications arising out of the Scheme. The guidance makes clear that theemployer must apply the Scheme in a way that is consistent with equality law.Some of these implications are obvious and simple: it would be unlawful todismiss rather than furlough an employee because he is of a particular race.But others are complex and difficult. For instance, if furloughing decisionstake into account the number of hours particular employees are able to offer incurrent circumstances that could easily engage indirect sex discrimination considerations,which would need to be carefully thought through. Likewise furloughingdecisions may need to take into account what tasks particular employees can doand from where. They will often then engage challenging disabilitydiscrimination issues, particularly in respect of reasonable adjustments,indirect discrimination and discrimination arising from disability.

There are tricky issues in respect ofannual leave. Does it continue to accrue during the furlough period? Can it betaken during the furlough period? If so can the worker be forced to take itduring the furlough period? If it is taken, how should holiday pay becalculated? Does the answer to the foregoing differ depending on the type ofannual leave in issue? There are three types: firstly, leave mandated by theWorking Time Directive and given effect by reg.13 Working Time Regulations 1998(four weeks p/a), the further leave mandated by reg.13A of the Working TimeRegulations 1998 which has no basis in EC Law (1.6 weeks p/a), and leave thathas no basis other than contract. ACAS has published some advice on annual leave and furlough. It iswell worth a read but it has no legal force and does not grapple with what isalmost always the most difficult issue: holiday pay. Further guidance from thegovernment is expected on annual leave issues in the week commencing 13 April2020 (and this blog will be updated in light of it, so do check back).

The guidance deals with statutoryfamily related leave (maternity, paternity, adoption, shared parental leave)extremely briefly. The explanation is so short that it is confusing. It appearsthat:

Statutoryentitlements to pay (which are of course very limited) cannot be enhanced bythe Scheme. So, imagine a woman on week 40 of her maternity leave. She hasexhausted statutory entitlement to pay and assume she has no contractualenhancement. The employer cannot use the Scheme to obtain and pay 80% of hersalary (subject to the £2,500 cap) whilst she remains on maternity leave.However, there does not seem to be anything stopping the woman from ending hermaternity leave earlier than planned. If she does that, her right to payreturns to normal and so she and her employer it seems would be able to takefull advantage of the Scheme if she moved from maternity leave to furlough.
Contractualenhancements to statutory pay for those on family related leave are coveredby the Scheme. Thus, imagine a woman who is contractually entitled to full paywhilst on maternity leave. The employer can claim against the Scheme in theusual way for a grant to assist with 80% (subject to the £2,500 cap) of thosewages.

It’s all or nothing and that’s aproblem (or a lot of problems)

Some features of the Scheme itself areproblematic and are bound to generate employee relations problems.

The employer cannot claim under theScheme if the employee is continuing to work on reduced hours or reduced pay(with very limited exceptions – volunteering and training). Thus it isessentially all or nothing: the worker is furloughed or they are not. Thereason for this rule, it can be assumed, is to limit the complexity of theScheme given the sheer demand for it and to avoid fraud. However, it makes theScheme rigid and unresponsive to businesses’ and workers’ needs for flexibilityin an unprecedented, fluid, situation.

It the business has some work for aworker to do, but not as much as usual, it has to choose between asking theworker to do a reduced amount of work and furloughing the worker. What itcannot do, is ask the worker to do the little work that exists, pay the workerfor that work and top up the wages to 80% using the Scheme.

In practice this means that it willoften be difficult or impossible for businesses that have some limited amountof work to do what will often be the fairest thing: divide the work equallybetween its employees. Instead it will make more sense to keep one cohort ofemployees fully occupied and another furloughed.

However, it may be that this problemcan be avoided by rotating staff. Thus for instance in any given month (orwhatever period proves to be the most appropriate) furloughing cohort 1 ofworkers and keeping cohort 2 occupied. And the following month reversing theroles. There is a minimum furlough period of three weeks so the rotation wouldhave to be at intervals of at least three weeks. Subject to that three weekrule, workers can go in and out of furlough.

While this might be a solution forbusinesses, it may not be a good solution for many workers. Schools are closed(to all but a few) and workers have their children home with them. Workers needflexibility more than ever and the best that many are able to offer givenchildcare commitments is a few hours here and there.

These are difficult waters to navigateand it is obvious to the trained eye that steering the wrong course will createemployment disputes (as indeed might steering the right course, although fewerof them one would hope and ones more likely, ultimately, to be won).

A further difficulty from an employeerelations perspective is that furlough is something of a Jekyll and Hyde. Itwill be a benefit in some cases and to some workers (e.g. if the alternative isredundancy or if the worker cannot work because they have no childcare inplace) but it will be a detriment in others (e.g. if the alternative is workwith full-pay). It needs to be approached with sensitive advice save in thevery simplest of cases.

The unwilling employer problem

As noted above, the mechanism of theScheme is to incentivise employers to forbear from redundancies by paying aproportion of the employee’s wages. However, whether that is a sufficientincentive for an employer to furlough rather than dismiss or indeed simply donothing, will vary very widely.

This is a problem because there is noindication to date of any obligation on the employer to take part in theScheme. And, if the employer does not take part in the Scheme there is noindication that the Scheme itself will provide any mechanism for redress forthe employee. To be clear, this is a real problem not a theoretical one. It isreasonable to predict that many employers will not take part in the Scheme:

TheScheme operates by HMRC providing the employer with a grant to cover the wagesof the furloughed employee.
However,it is the employer not HMRC that retains liability in contract law and in thelaw of protection of wages (Part II of the Employment Rights Act 1996) to theworker.
Witha Scheme of this size some employers are, realistically, bound to encounterproblems and delays using the Scheme. The employer is the one on risk for this.
Engagingwith the Scheme will take up management time. In many cases that will be timevery well spent. In other cases, the Scheme may not be the priority, for anynumber of reasons (some good some bad). For example:
- thevery survival of the business may take precedence over spending timeunderstanding the Scheme and making an application for a grant pursuant to itfor redundant employees;
  - itappears that holiday pay and potential future liabilities based upon length ofservice (e.g. redundancy pay) continue to accrue;
    - theemployer might actually want to dismiss particular employees (or allemployees) and use this crisis as a way of doings so;
      - theemployer may be content to continue employing those on zero hours contracts ortime/piece workers where there is no or almost no cost involved in doing so.

Does a worker have any remedies if theemployer does not furlough when it could?

The short answer, is that it depends onthe situation. A few examples are given here. But there are also some otherpotential creative solutions that might be offered to help incentivise theemployer to furlough.

If the worker is an employee withqualifying service to complain of unfair dismissal and if they are is dismissedwhen they could have been furloughed then that will often be a good basis foran unfair dismissal claim. Furloughing is an alternative to dismissal. It iswell established that, in all but exceptional cases, the employer will need toconsider alternatives to dismissal in order to act fairly. Furloughing is justthat; an alternative to dismissal.

Imagine a worker that has a zero hourscontract who in practice, prior to the current crisis, worked regularly.Imagine that there is now no work but that the employer does not bother furloughingthe employee because they are no cost to the business. If the employer didfurlough them, under the Scheme the wages would be calculated as the higher ofthe same month’s earning from the previous year and average monthly earningsfrom the 2019-20 tax year. So in our example the worker would be entitled to asignificant amount of pay if furloughed. A very interesting question arises asto whether or not there is any implied term which requires the employer tofurlough the worker if that is what the worker wants. There may not be a singleanswer to that and it may depend for instance upon whether or not the worker isan employee and many other factors such as why the employer has notfurloughed.

If there is a discriminatory reason forthe decision to furlough/not furlough as the case may be then the worker hasobvious remedies.

The insolvent business problem

Sadly many businesses will fail as aresult of this crisis. This is a tragedy and it is a problem for many reasons,including that the Scheme does not look as though it is designed to assist theworkers of failed businesses save in a perfunctory way.

This Scheme operates through thepayment of wages by the business to its workers. That depends on there being abusiness and an active payroll. If there is no business and if there is nopayroll there is no grant from HMRC and there is no payment to the workers.

Does the employee of have any remedies?

The guide says this: “Where acompany is being taken under the management of an administrator, theadministrator will be able to access the Job Retention Scheme.”

No doubt this is true so far as itgoes, but without legislative intervention it will not go very far. Insolvencyarrangements for businesses can take many different forms depending upon manydifferent factors. However, the reality is that it is very typical forinsolvency practitioners, e.g. during an administration, to immediately oralmost immediately dismiss the workforce (or swiftly do it in tranches keepingon only the very most essential employees). This is done for at least threereasons. Firstly, to avoid adopting the contracts of employment. Secondly, inthe interests of creditors. Thirdly, because the employees are redundant.

Left to their own devices, it is fairto assume that insolvency practitioners will not generally prioritise thisScheme. They have their own objectives and framework to operate within thatmake widespread prioritisation of this Scheme unlikely. There is an argument atleast that some legislative intervention is needed then. But this enters yetmore complex areas of not just law but social and economic policy and indeedideology.

The concern expressed above is borneout by the guidance updated on 9 April 2020 which says this: “However, we would expect an administratorwould only access the scheme if there is a reasonable likelihood of rehiringthe workers. For instance, this could be as a result of an administration andpursuit of a sale of the business.” Administrations sometimes aim for some sortof business rescue but in huge proportion of cases that is not the aim, ratherthe aim is to achieve improved results for creditors and/or realise propertyfor distribution to secured/preferential creditors. The Scheme will not assist insuch cases which are, unfortunately, the norm.

Where a business become insolvent inmany situations workers can claim (capped) wages pursuant to part 12 of theEmployment Rights Act 1996. That will help some in respect of unpaid wagesbefore termination, but it will not help with wages thereafter.

The new starter problem

The Scheme only applies to those whowere on payroll on or before 28 February 2020. Thus workers who commenced withnew employers on or after 29 February 2020 are left almost entirely unprotectedby the Scheme.

The only option such workers have, iftheir current employer dismisses them, is to ask a previous employer (if any)to re-engage them for the purpose of being furloughed. However, this is a lotto ask and many former employers will be unwilling to re-engage former workersfor a wide range of reasons. Not least because a furloughed relationship is notnecessarily a no strings attached relationship. There are tricky issues such asholiday pay and, at the end of the furlough period, redundancy.

The Chancellor has explained that therationale for excluding new starters is the need to prevent abuse of theScheme. That is undoubtedly a very real consideration but a blanket exclusionfrom the Scheme is a very blunt way preventing abuse. That is particularly soin these circumstances in which a significant cohort of people, who have donenothing wrong but happen to have obtained new employment after 28 February2020, are left unprotected.

It is also curious that such a toughapproach is taken to protect against fraud arising out of new starters when theScheme is otherwise so permissive and (depending upon your viewpoint, unfairly)generous:

itdoes not appear to require the employer to do anything to prove that theemployee would have been made redundant but for the availability of the Scheme;
itallows workers who have been furloughed and are thus receiving wages from theiremployer, to work for another employer (so long as the two employers are notassociated). Some workers then who are able to find fresh employment alongsidetheir furloughed employment will do well out of the Scheme;
itputs the cap on the employer not the worker. The cap on pay has been wellpublicised: it is the lower of 80% of the employee’s regular wage or £2,500 permonth. What is less well known is that if the worker has more than oneemployer, the cap applies to each employment individually (or to coin a phrase,the employers rather than the workers wear the caps). Which means that if theemployee has two jobs (each with a different employer) they could be entitledto furlough payments for both and thus receive up to £5,000 per month. And ifthey have three employers, up to £7,500 per month. It is likely that there willbe a significant minority of people who will fall into this category. Inemployment lawyer’s jargon, they will be well paid ‘limb b’ workers who are onboundary with independent contractor status and provide well remuneratedservices to more than one business.

Conclusion

The coronavirus crisis has causedunprecedented shutdowns and slowdowns of businesses and workplaces across thecountry. The Coronavirus Job Retention Scheme is a central plank to mitigatethe economic damage. It is certain to raise a host of difficult employment lawissues.

Cloisters barristers are available todiscuss the many issues arising in the current COVID-19 crisis. Please contactus through our clerks in the usual way.

Updated on 11.04.2020

Daniel Dyal

Cloisters

This blog does not constitute legaladvice and you should not rely upon as if it were legal advice. If you need legaladvice please seek individual legal advice which takes into account yourspecific circumstances.

Other blogs in this series areavailable here:

Covid-19: Critical workers refusing work – What ifeveryone is being reasonable?

SchonaJolly QC

26March 2020

Covid-19: Pay for working parents forced to look aftertheir children

RachelCrasnow QC

27March 2020

Covid-19: Is Facial Recognition Technology in theworkspace the answer to social distancing or discriminatory

RobinAllen QC and Dee Masters

31 March2020

Covid-19: Legal implications of identifying immuneworkers

RachelCrasnow QC