Furlough is a new concept - tread carefully

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About payments when making furloughed staff redundant

Blog Post

Written by John Berry & Sue Berry on 28th June 2020. Revised 27th August 2020.

4 min read

Group of employeesAs the buzzing on the wires suggests, it’s certainly complicated! Furlough is a new concept – and sorting out payments for employees who might be made redundant while furloughed has no precedent. It needs reason to conclude what to do.

It’s also far from clear what the payments themselves should be.

Here are our conclusions.

At the point when an employee is dismissed – the point in time when they leave employment – statutory redundancy pay needs to be paid based on normal wages. ‘Normal wages’ has specific meaning and firms need to do the necessary research to get calculations right.

If the employment contract cites a contractual redundancy pay, then that must be paid. Contractual redundancy pay must not be less that statutory. That marks one point in time and the associated payment.

When an employee is told, at the conclusion of the redundancy process, that they they are the ones who have been selected, they benefit from a statutory notice period (or contractual notice period) before actually leaving employment. That’s a second point in time.

Since there is no going back from that point and the contract will terminate, we consider that notice pay must be made based, again, on normal wages. Notice is statutory or contractual and the same comment as above about contractual payments will apply.

If you elect to pay in lieu of notice, you can’t claim furlough payments for the notice period. Payment in lieu is a severance paid for breach of contract at the point when the employee actually leaves. But if you ask the person to work their notice, you can, in principle, furlough them for the duration and claim furlough payments from the Government.

And here lies the contention.

There is much confusion about how to handle this, with many lawyers and HR advisers arguing there is nothing in Government guidance that precludes using furlough payments to fund statutory notice pay. These practitioners argue that because there’s nothing saying you can’t claim furlough payments for an employee on notice, the practice is likely lawful.

We considered that this is wrong. We advided you to tread carefully here – we too could find nothing written to prevent furlough during redundancy notice period, but that does not make it right.

In July the government gave clarity - employers can contunue to claim the grant for those in their notice period whilst on furlough. This applies to both statutory and contractual notice. The notice pay must be based on normal pay not the reduced furlough amount.

So, we still argue the following.

  1. There is a tacit assumption, by Government in offering the support payments, and arguably accepted by the firm, that the firm intends to bring the employee back once work is available. That's why it's called the the Coronavirus Job Retention Scheme, after all. Claiming furlough payments for an employee who is on notice breaches that assumption. This assumption is an unwritten term in the agreement between Government and firm around furlough payments.

  2. Claiming furlough payments when an employee is working notice could be construed as fraud. The firm is using the payments claimed and made under the Government scheme to fund its obligations under redundancy statute. Although in a slightly differnt context, Government guidance on the CJRS says, "Grants cannot be used to substitute redundancy payments".

So, there’s the rub. We argue that it’s dangerous to claim furlough payments for someone when making them redundant. HMRC could scrutinise redundancy programmes to determine whether the employer intended to make the redundnacies and simply used the furlough scheme as way of benefiting during the consultaion.

Finally, we need to just to finish off the discussions about payment during the earlier stages in the redundancy process.

Leading up to the beginning of notice, the employee may be furloughed, off sick and on SSP, on maternity and on SMP, on reduced hours and paid accordingly, laid off or some other condition where there is a difference between what they are paid at that time and their normal wages. The employee should continue to be paid according to their existing situation while the redundancy process plays out – up to the point when notice begins. To do anything else would be cumbersome and potentially unfair (to others).

So, to summarise – pay as present leading up to the notice of redundancy, and pay both notice and redundancy pay based on normal wages. The firm is liable under statute for both notice and redundancy payments. We still believe it wrong to use Government payments intended to keep the firm afloat to meet the firm’s redundancy payment obligations.