We sent out some information previously which included some basic guidance on the Job Retention Scheme implemented by the UK Government to help protect jobs where employee’s would have otherwise been made redundant or laid off as a result of Coronavirus.
The Government have now released detailed guidance on how this will work so we have tried to set out what we know and answer as many of your questions as possible.
What is it?
This financial assistance is designed to help employers retain employees for an extended period of time, despite offering no work, and avoid lay-offs. It is called the Job Retention Scheme.
The Scheme involves employers placing their employees on ‘furlough’. This isn’t a term we use in UK employment law, and it seems to originate in the USA. It essentially means putting employees on a temporary leave of absence where they do no work and receive no pay, but they are retained on the company’s books to be brought back in when needed.
What do I have to do now?
The next step is to work out which employees can be furloughed and to agree this with each employee.
The guidance states that the ability to furlough an employee depends on their contract. It is not likely that employment contracts will include a specific right to use furlough.
However, contracts that contain a right to lay off employees on no pay already give employers the right to send employees home and not pay them for a temporary period and so can likely be used to furlough employees. The difference is that employees on lay-off will get, subject to service criteria, statutory guarantee pay (SGP) whereas furloughed employees will get 80% of their wages.
If contracts do not contain a right to unpaid layoff, employers can ask the employee to agree to furlough. Although 80% of wages may not be an initially attractive option next to full pay, it is likely to be more attractive than redundancy which may be the end result if alternative options cannot be found. It may also be useful for employees who are struggling to find childcare.
To be eligible for the subsidy, when on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue. While on furlough, the employee’s wage will be subject to usual income tax and other deductions.
If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.
Which employees can I furlough?
Theoretically, any employee can be furloughed, however, they need to be on a company’s PAYE prior to 1st March 2020 in order for that company to be able to claim the grant for their wages.
Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.
The employees can be on any type of contract, including:
- full-time employees
- part-time employees
- employees on agency contracts
- employees on flexible or zero-hour contracts
The scheme also covers employees who were made redundant since 28 February 2020, if they are rehired by their employer.
Which employers can access it?
The government has confirmed that all employers can access it; there is no restriction on size or type. The guidance outlines that employers will need to designate which of their workforce will be furloughed employees and then submit that information to HMRC, along with each employee’s earnings. Following this, they will receive the grant to cover the 80% wages.
The PAYE payroll scheme must have been in operation on or before 28 Feb 2020 and have a UK bank account.
How much can I claim back?
Employers who do this will be able to obtain a grant from the Government to cover 80% of furloughed employees’ usual wage costs, to a maximum of £2,500 per employee per month.
Employers can also claim back the associated Employer’s national insurance and minimum auto enrolment contributions.
How do I calculate “usual wage costs” for salaried employees?
For full time and part time salaried employees, the employee’s actual salary before tax, as of 28 February should be used to calculate the 80%. Fees, commission and bonuses should not be included.
What if the employee’s pay varies month to month?
If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, you can claim for the higher of either:
- the same month’s earning from the previous year
- average monthly earnings from the 2019-20 tax year
If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.
If the employee only started in February 2020, use a pro-rata for their earnings so far to claim.
What about National Living Wage / Minimum Wage?
Individuals are only entitled to the National Living Wage (NLW)/National Minimum Wage (NMW) for the hours they are working.
Therefore, furloughed workers, who are not working, must be paid the lower of 80% of their salary, or £2,500 even if, based on their usual working hours, this would be below NLW/NMW.
Do I have to top-up the 80% out of my own pocket?
Although the employer can make up the remaining 20%, they do not need to. We strongly advise taking legal / HR advice before making any changes to employee’s contracts but in essence, the employer can make an offer to the employee to reduce their wages to 80% to match the expected grant receipt.
At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month.
This means that although there will likely be a time delay between paying the wages and receiving the grant, overall the business will break even on any employee’s designated as furloughed.
How do I claim the grant?
More information is awaited from the government on the online portal to be used to submit the information and any other details that may be needed. Chancellor Rishi Sunak has stated that he hopes the first grants will be paid by the end of April 2020 and that they will be backdated to 1 March 2020.
The scheme is initially intended to run for three months but may be extended.
You can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.
So I can backdate it to 1 March?
Not necessarily! We see this is being potentially problematic and expect that you’d need to demonstrate you had already made, or intended to make, employee’s redundant before the date this measure was announced.
It is likely that the 1 March date is in there for employer’s who have already taken the decision to lay off staff or make them redundant.
So when can they be furloughed from?
Employees should document their agreement to any changes of their employment contract and can be furloughed from the date of this agreement. HMRC will be looking to ensure they did not carry out any work from this date.
What if an employee has more than one job?
If your employee has more than one employer they can be furloughed for each job. Each job is separate, and the cap applies to each employer individually.
What if an employee volunteer’s or undertakes training?
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 organisation.
Tax Treatment of the Coronavirus Job Retention Grant
Payments received by a business under the scheme are made to offset these deductible revenue costs. They must therefore be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles.
Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.
We have been working with a number of you already with particular regard to this scheme and although there is still a number of unanswered questions, we thought it would be useful to provide a bit more detail on it.