Furlough – planning an exit strategy

NOTE: Since this article was published, the furlough scheme has been further extended to 31 October 2020 – details available here.

The furlough scheme may be extended again by a further period or the government could look at transitional measures. However, despite the Confederation of British Industry continuing to press for certainty, given the time required for employers to undertake collective consultation, we may not know for a few weeks yet.

Most employers have already taken the obvious steps to reduce operating costs. In terms of staff costs, recruitment freezes are already in place, discretionary benefits (e.g. bonuses) have been cut back, contingent staff have been let go, and fixed-term contracts have not been extended. This makes the prospect of reabsorbing all payroll costs at the end of the furlough scheme even more challenging.

We consider below the possible furlough exit strategies.

Return to business as normal

End furlough and bring employees back to work on their previous terms and conditions

Who is likely to use this?

This is easiest but most expensive option. It is likely to be used by employers who anticipate that they can get back to near-normal trading conditions in the relatively short-term.

How do you do this?

There is no prescribed mechanism for bringing employees back to work, but we would anticipate giving no less than 48 hours’ written notice. In practice, most employers are likely to communicate their plans to employees no later than the middle of May, or the middle of June if the employer has taken advantage of the extended date - and probably earlier if HM Revenue & Customs (HMRC) confirms whether the furlough scheme will be extended again before then.

Reduce payroll costs without making redundancies

Extend furlough (on the same or revised terms) without benefit of the government grant

Who is likely to use this?

The Coronavirus Job Retention Scheme created a form of agreed lay off even where there was no contractual lay-off provision. The scheme does not allow employers to compel employees to be furloughed, but it enables the payment of a grant where they agree. 

As a result - and provided employees continue to agree - it would be possible to extend furlough without the government grant. It may also be possible to furlough new employees or operate some form of rotation to ensure that employees currently on furlough do not become isolated or deskilled.  

This is likely to be considered by employers who do not have enough work for everyone, but want to:

• retain trained and valued employees for when business conditions return to normal

• avoid significant redundancy costs.

How do you do this?

For many employers, it is likely to be too expensive to extend furlough without the benefit of the government grant, but employees may agree to reduced terms as an alternative to redundancy.

As with furlough, if an agreement is sought before an employer has formulated a proposal to dismiss 20 or more employees, the requirement for collective consultation will not be triggered. This means the employer must not have formulated a plan that is likely to result in dismissals if employees do not agree. If an extended furlough scheme is presented as a formal alternative to redundancy, it will require collective consultation. (See below for more on collective information and consultation.)

Assuming employees agree to an extended furlough period, this would require either a new or extended furlough agreement. (This will depend on how the terms of the existing agreement have been framed.)

Where an employer has a contractual right to lay off without pay, this could be used. Lay-off provisions are subject to the implied term of trust and confidence which means, for example, that the employer should consult with employees first and give reasonable notice of any lay off to avoid being in breach of contract.

There are specific statutory provisions which provide a right for employees who have been laid off for four or more consecutive weeks, or six weeks in any 13-week period, to claim a statutory redundancy payment in certain circumstances. The scheme requires employees to resign in order to receive their redundancy payment, which employees might be unwilling to do.

End furlough and bring employees back to work on reduced hours and pay

Who is likely to use this?

This approach will help employers who wish to retain trained employees and avoid the cash-flow challenges of redundancy costs. It is likely to be considered where:

• restrictions have eased a little to allow trading conditions to improve but a full-time commitment is not required

• a return to normal trading conditions is likely in the medium to long term

• furlough resulted in a reduced number of employees being kept in work, but now the available work can or needs to be spread more evenly across all employees.

How do you do this?

A reduction in hours and pay is a change to terms and conditions and requires employees’ agreement. If the employer recognises a trade union for collective bargaining purposes, it may be able to agree the change with the union and that can help facilitate individual agreement. If no union is recognised, individual consent should be obtained and evidenced in writing.  

In some cases, furloughed employees will be returning to a workplace where employees have already agreed a pay-cut in exchange for reduced hours. Returning employees may therefore anticipate that this is what will be expected of them and be willing to agree to a change. In other situations, a contractual change may be required across the whole business, including employees who have not been furloughed.

If an agreement is sought before an employer has formulated a proposal to dismiss 20 or more employees, collective consultation will not be triggered. This means the employer must not have formulated a plan that is likely to result in dismissals if employees do not agree. If the proposal is presented as a formal alternative to redundancy, or if a decision is made to force the change by dismiss and re-engaging anyone who does not agree, then collective consultation will be necessary. (See below for more on collective information and consultation.)

Where employees agree to a reduction in hours and pay, their consent should be recorded in writing.

Where an employer has a contractual right to impose short-time working, this could be used. A provision of this kind is subject to the implied term of trust and confidence, so the employer should consult with employees first and give reasonable notice to avoid being in breach of contract. The statutory lay-off provisions mentioned above also entitle employees who have been kept on short time for four or more consecutive weeks or six weeks in any 13-week period to resign and claim a statutory redundancy payment in certain circumstances. But again, employees might be unwilling to terminate their employment in order to receive a redundancy payment.

End furlough and bring employees back to work on reduced pay but the same hours

Who is likely to use this?

Employers are likely to use this where they anticipate being able to return to near normal trading conditions soon, but the restricted period has created cash-flow challenges making it difficult to pay employees their full pay without risking the financial security of the business.

How do you do this?

The position is essentially the same as for an employer seeking to reduce both hours and pay (see above). A reduction in pay is a change to terms and conditions and requires agreement. If the employer recognises a trade union for collective bargaining purposes, it may be able to agree the change with the union and that can help facilitate individual agreement. If no union is recognised, individual consent should be obtained and evidenced in writing.  

If an agreement to reduce pay is sought before an employer has formulated a proposal to dismiss 20 or more employees, collective consultation will not be triggered. This means the employer must not have formulated a plan that is likely to result in dismissals if employees do not agree. If the proposal is presented as a formal alternative to redundancy, or if a decision is made to force the change by dismiss and re-engaging anyone who does not agree, then collective consultation will be necessary. (See below for more on collective information and consultation.)

Where employees agree to a reduction in pay, their consent should be recorded in writing.

Offer unpaid (or part-paid) leave or sabbaticals

Who is likely to use this?

This is likely to be considered by employers who want to retain all their employees (e.g. because they are highly skilled or trained) but need to “buy some time” to allow the business return to normal trading conditions. From an employee perspective, this option might be particularly appealing to those with school-age children (assuming schools do not return before September) or those with caring responsibilities.

How do you do this?

Normally a sabbatical will be agreed on a purely voluntary basis. The employer will make it known that it will consider applications for sabbaticals and reserve the right to decline requests (for example, if someone is in a business-critical role).  

If a sabbatical is agreed, its terms and the employee’s consent to them should be recorded in writing.

Make redundancies/headcount reductions

There are unfortunately likely to be many employers who, in the absence of any extension to the furlough scheme on the same or similar terms to those currently applying, will see no other option but to reduce headcount by implementing redundancies. This will trigger individual and possibly collective consultation obligations.  

Start redundancy consultation during the furlough period

Who is likely to use this?

The HMRC furlough guidance for employees says that “your employer can still make you redundant while you’re on furlough or afterwards”. This has led people to question whether the furlough period can be used for collective consultation. Neither the employee guidance nor the guidance for employers explicitly states that collective or individual redundancy consultation can be carried out during furlough or whether that would count as “work” – but on the basis that it is not making money for the employer or providing services, we would hope that a sensible approach would be taken.

Assuming collective consultation can be undertaken during the furlough period, this is likely to be used by employers who:

• know they need to make redundancies, but could reduce the number of necessary redundancies by using the furlough scheme to absorb part of the cost of consultation

• want to push for other changes as an alternative to redundancies (see above) but need to be able to act quickly if employees do not agree.

How do you do this?

Collective consultation is required where an employer proposes to dismiss 20 or more employees “at one establishment” in a 90-day period. If fewer than 20 redundancies are anticipated, only individual consultation is required.

Collective consultation requires an employer to consult employee representatives about various matters, including ways of:

• avoiding the dismissals

• reducing the number of dismissals

• mitigating their consequences.

Consultation must start “in good time” to allow the relevant discussions to take place and a minimum period before the first of the dismissals takes effect. The minimum periods are:

• 30 days, where between 20 and 99 employees are to be dismissed

• 45 days, where 100 or more employees are to be dismissed.

The minimum consultation periods can be dispensed with where “special circumstances” apply. While the test of what constitutes a special circumstance is a tough one to meet, the current situation is such that this may be possible in some cases. Even if the test can be met, the employer must still engage in collective consultation so far as it can best do so in the circumstances.

Collective consultation must take place with “appropriate” representatives of the affected employees. If the employer recognises a trade union in respect of the affected employees, it must consult with the union representatives. Otherwise, employers can choose whether to consult with:

• existing employee representatives who have the authority to be consulted about such matters (e.g. a staff consultative forum)

• representatives elected specifically for the purposes of the consultation.

The employer must give the representatives certain information, including:

• the reasons for the proposals

• the numbers and descriptions of employees the employer is proposing to dismiss

• the total number of such employees at the workplace

• the proposed selection method

• the proposed method of carrying out the dismissals

• the proposed method of calculating any enhanced redundancy payment

• certain information regarding the use of agency workers.

Consultation must take place “with a view to reaching agreement”, although there is no obligation on the parties to reach an agreement. The employer should explain the business case for the proposed redundancies and listen to the representatives’ views. The representatives may accept the business rationale, in which case consultation can quickly move on to other issues, such as alternative employment and any redundancy package on offer.

The current circumstances present various logistical challenges in terms of the consultation process, particularly where large numbers of the workforce are furloughed and so not attending work. Employers will need to think about the impact on timescales and potential creative solutions to these challenges (e.g. digital election of representatives, videocall briefings).

Getting the collective consultation requirements wrong can expose the employer to significant financial liabilities, including a “protective award” of up to 90 days’ pay per affected employee.

At the end of collective consultation, individual consultation is required - the HMRC furlough guidance makes it clear that the ordinary redundancy principles apply during this time. In order to avoid a successful claim for unfair dismissal arising out of a redundancy situation, there must be: 

• a genuine redundancy situation (most likely to be satisfied in these circumstances)

• adequate warning and consultation of affected employees

• a fair “pooling” and selection process

• consideration of alternative employment

• a fair procedure.

An employee must have two years’ service in order to claim unfair dismissal, although no period of service is needed if they assert, for example, that their selection was discriminatory.

Employees who leave at the end of such a process will be entitled to notice, statutory redundancy pay and whatever enhanced redundancy pay the employer may provide.

Start redundancy consultation at the end of furlough

Who is likely to use this?

This is likely to be used either because it transpires that collective consultation during the furlough period amounts to “work” (and so is not allowed), or where the employer does not formulate its proposals until after the end of the furlough period.

How do you do this?

The details of the consultation process and period are as set out above. If this approach is followed and assuming consultation starts on 1 July 2020, dismissals could not take effect until 1 August or 16 August at the earliest (depending on the number of employees involved).

Multi-jurisdictional redundancy exercises

As coronavirus is a global pandemic, it is important that employers take a coordinated international approach to redundancies where relevant and obtain the necessary advice to ensure that more draconian sanctions in some other European countries are avoided. As a minimum, the involvement of European Works Councils (EWCs) will be required, which may mean that the UK collective consultation periods identified above become longer.  

How we can help

With the furlough scheme currently set to end on 30 June, employers need to start planning their next steps quickly. The options described above might give employers some additional time to allow normal trading conditions to return but, if there is a long-term economic downturn, many will find it difficult to avoid making job cuts or even exploring some form of insolvency proceedings.

We can help by:

• working with you to forecast future staffing requirements against your cost base

• helping identify options to reduce or defer staffing costs in the short, medium or longer term

• identifying the legal and other risks attaching to each option

• advising on EWCs and providing international support

• assisting with implementation and providing you with the required documentation

• supporting you if you need to consider insolvency proceedings.

We can also help with your non-legal needs, for example by providing HR consultants to support meetings and assisting with negotiation with trade unions and worker representative bodies.