Furloughing – the legal requirements

9th April 2020

Most employers will be familiar with the Coronavirus Job Retention Scheme, but they may be less familiar with the legal requirements in respect of the scheme.   This article gives an overview of the legal issues which businesses should be mindful of.

Andrew Rayment, Partner, and Charlotte Smith, Associate, of Walker Morris’ employment team recently held a webinar in which they talk about these matters in more detail including a question and answer session.

In particular, the following key points should be noted:

• There is still no legal definition in the UK of “furlough leave”.
• The Scheme guidance states that being “furloughed” means employees who have been “placed on a leave of absence” – those who are undertaking no work at all for their employer, but who have been kept on payroll.
• The usual employment law principles still apply – meaning:
  • a contractual variation must be agreed;
  • caution must be exercised when making decisions about who to furlough in order to avoid falling foul of discrimination laws; and
  • consultation obligations could arise.

There is no mention in the scheme guidance of a requirement to submit documentary evidence of the “business case” to furlough workers, or the “financial means” of the employer to pay staff.  However, once the HMRC portal opens it could, of course, include additional requirements and, in any event, HMRC has clearly reserved the right to retrospectively audit employers who have made claims.

Employers should therefore keep clear records of the reason for placing employees on furlough leave which, in most cases, will show that there was no work that the individual could do (because, for example, the factory was shut), or there was a reduced requirement for the work that individuals could do (because, for example, there has been a down-turn in customer orders – therefore a certain number of individuals completing the same role have been selected to be placed on furlough leave).

Selection

One of the policy reasons behind the scheme is to “avoid redundancies”.  However, this does not necessarily mean that an employer must use the same selection criteria that it would for a redundancy exercise in order to select people to place on furlough leave – particularly given the time constraints.

What employers should be careful of, however, is basing selections on criteria that could potentially give rise to discrimination claims (for example, selecting all junior members of staff could give rise to age discrimination claims, or selecting all employees who have child-care responsibilities may give rise to claims for sex-discrimination).  As such, the key thing is for businesses to look at areas where the work has temporarily gone or diminished, and use objective criteria to select who to furlough.

Thought also needs to be given to how the furlough scheme inter-relates to sickness arrangements, especially those newly created categories, such as those who are “shielding”.

What needs to go in the letter?

The guidance states that to be eligible for the subsidy under the Scheme, employers should write to their employees confirming that they have been furloughed and keep a record of this communication.  As usual employment law principles still apply, this should be completed as a contractual variation.  The key points to include in the letter are as follows:

• Set out the context and the reason why the business has made the decision to furlough staff.
• Confirm that the individual is being asked for their agreement to be designated as “furloughed”.
• Make clear that it is a contractual variation to terms of employment (albeit a temporary one).
• Set out the date that the furlough period started (in theory, this date might be prior to the date of the letter if, for example, the employee has already been on leave from work and not completing any work before that date – which may be the case where there have been total business closures) and the length of time which the furlough period will last (noting that the scheme currently closes on 31 May 2020).
• Reinforce the point that the individual must undertake no work at all for the business during the furlough period.
• Clearly set out any proposed variation to their salary.
• Include any information about practical arrangements for keeping in touch.
• Confirm that other terms of the employment contract will remain the same, giving thought to what will happen to any benefits.

What if people refuse?

The usual principles relating to varying employment contracts apply.  However, we recognise that this is a time-critical matter (particularly given that the scheme is only open for an initial three month period from 1 March – 31 May 2020), which means that it is difficult to follow a full procedure.  Broadly speaking, the options are:

1. Get creative in using powers of persuasion – including setting out the likely alternatives to being furloughed.
2. Unilaterally impose the change (i.e. stop the individual from working (which could, in extreme cases, require removing them from work systems) and reduce pay where applicable) – this is highly likely to be a repudiatory breach of contract (depending on the circumstances), therefore this is a high risk strategy which could give rise to claims.
3. Consult with employees about the proposal with a view to dismissing them (for “some other substantial reason” and then offering them re-engagement on new contractual terms).
4. If the business cannot keep staff on and they will not agree to the change, commence a redundancy consultation process.
5. Note that collective consultation requirements could be engaged depending on numbers when using options 3 and 4.