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Crucial question mark over furlough and notice

30 June 2020

UPDATE: Since this article was published, the HMRC customer helpline has confirmed to us by telephone (on 2 July 2020) that employers can continue to use the scheme during both redundancy consultation and notice periods (while pointing out that the grant cannot be used for redundancy pay). This is, however, not a legally binding view and there is no written confirmation of it.

The Treasury Direction for the furlough scheme, as updated on Friday 26 June, includes new wording which may intimate that a redundancy process cannot be started, and notice of termination of employment can’t be given, while an employee is furloughed. Employers urgently need clarification to avoid claiming incorrectly and incurring penalties. 

How the issue has arisen

Unlike similar schemes in other countries, the UK’s Coronavirus Job Retention Scheme (otherwise known as furloughing) has never included a condition that employees for whom a furlough grant was claimed could not subsequently be made redundant. It was therefore assumed that redundancy consultation could be started while employees were furloughed, if the employees might be made redundant at the end of the scheme.

There was further support for this position from the fact that the HM Revenue & Customs (HMRC) guidance for employees explicitly stated that “your employer can still make you redundant while you’re on furlough or afterwards”. 

The new Treasury Direction published last Friday - the legal underpinning for the scheme - has thrown this into doubt by adding the following wording to paragraph 2.2, which sets out the purpose of the scheme:

            “Integral to the purpose…is that the amounts paid to an employer…are used by the employer to continue the employment of employees.”

The reference to the grant being used to “continue the employment of employees” has caused consternation. Does this now mean, contrary to previous understandings, that it cannot be claimed if redundancy consultation is ongoing and/or if an employee is serving notice?

The arguments about redundancy and notice

Lewis Silkin’s employment team has tweeted the HMRC’s customer support team continuously since Friday evening to seek clarification, along with a wide range of concerned employers. So far, there has been no response despite the urgent nature of the issue with businesses facing critical decisions.

In the case of redundancy consultation, employers seem to be on relatively safe ground as there is a strong argument that consultation is about continuing employment. This is particularly the case given that there is a duty to consult about ways of avoiding or reducing job losses. Also, as mentioned above, the employee guidance continues to make clear that an employee can be made redundant on furlough and, as consultation is a necessary part of a fair process, it is assumed that consultation on furlough is possible.

In relation to notice, the position is less clear, although it may still be argued that an employee who is serving notice is in continued employment (when compared to an immediate termination with a PILON payment). That is particularly the case if the employer would rescind the notice of termination if, for example, trading conditions improved more quickly. In addition, the reference to using the grant to “continue the employment of employees” does not refer to specific employees: it may be that, by using it to pay the notice of some employees, the employer can avoid having to make deeper cuts elsewhere in its organisation. 

Given that the scheme allows employers to rehire and claim for employees who had already resigned before the lockdown started, it doesn’t seem unreasonable that employers should be able to give notice to furloughed employees to end employment when the scheme ends.

Businesses may face insolvency if they cannot claim the grant while an employee is serving notice, and so must meet the whole of the notice costs. Even where the business does not face insolvency, cuts would likely need to be deeper if notice costs need to be met in full. Inevitably, that would result in more redundancies and be detrimental to the purpose of the furlough scheme.

Urgent clarification is required

Clarification from the government is particularly important given the anticipated compliance and enforcement model proposed. It is proposed that employers will have 90 days to self-report if they have made a claim that they were not entitled to make. If an employer fails to self-report, it will be liable for a penalty as well as having to repay the amount of the grant wrongly claimed. 

If, as is anticipated, this model is adopted, it is critically important that an employer can understand clearly when it is and when it is not able to make a claim. Ambiguity on an issue as critical and far-reaching as this needs immediate resolution, particularly because the amendments to the Treasury Direction have retrospective effect. This means that an employer who made a claim while an employee was on notice in April is running out of time if they need to self-report.

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