Furloughing during the COVID-19 crisis

May 2020 | SPOTLIGHT | LABOUR & EMPLOYMENT

Financier Worldwide Magazine

May 2020 Issue

The world is on lockdown fighting an invisible enemy in the form of coronavirus (COVID-19). What is not so invisible, unfortunately, is the effect that this battle is having on global economies and a wide range of industries. Governments around the world have been pumping billions into markets and businesses.

In the UK, the chancellor of the exchequer, Rishi Sunak, has launched a number of unprecedented schemes to prevent a raft of businesses going under and a tsunami of redundancies due to COVID-19. He and the government have pumped billions into businesses through loans, grants and tax deferrals. At the outset of the crisis, businesses were urged to keep their staff. They were promised that everything necessary would be done to ensure job retention. On 20 March, the Coronavirus Job Retention Scheme (CJRS), designed to prevent the loss of thousands of jobs, was announced.

The CJRS is a temporary scheme. It operates for at least three months starting from 1 March 2020 and is open to all UK employers. The scheme is designed to support businesses whose operations have been affected by the pandemic. In essence, it allows these employers to put staff on temporary leave, otherwise known as furloughing, during the crisis. Through the scheme, employers are able to claim a grant from HMRC covering 80 percent of these furloughed employees’ monthly wage costs, up to £2500 a month, the associated employer national insurance contributions and the minimum employer pension contributions on that wage. Employers can choose to top up employees’ packages to their usual level or look to agree a temporary pay cut during furlough. Employees may not perform any work for their employer while on furlough but may participate in training or volunteering activities.

At the time of writing, no draft legislation implementing the scheme has been published, but government guidance to employers indicates that it applies where potential job losses are due to COVID-19. Employers should exercise caution and take advice where they are considering furloughing employees in place of redundancies which would have been due to unrelated factors, such as a business line which was unprofitable prior to COVID-19. In due course, HMRC will audit furlough grants and may seek to recoup those it feels were not properly claimed.

A huge number of businesses waited to hear what the chancellor and the government meant by ‘doing everything necessary’ for businesses before making tough decisions about employees’ jobs. For others, however, time was of the essence; they could not survive without taking drastic action and they moved swiftly. Many have already made the job cuts which they believed to be the only viable option to stay afloat during this crisis, and organisations contemplating larger scale redundancies commenced the required consultation processes.

Now that the scale of financial aid being offered is clear, are these businesses able to press pause on the process – or indeed re-hire staff – and place affected employees on furlough? The short answer is yes, in principle: as long as the employees were on the payroll on 28 February 2020, their jobs were lost or at risk due to the COVID-19 pandemic and they were terminated on or after 1 March 2020. The longer answer is, in practice, it may depend, and furlough may not always be attractive to highly paid employees in the finance industry.

It is important to bear in mind that although on the surface furloughing staff may seem like the best option and a win-win situation for all – a degree of job security for many at the same time as financially viable for the employer, which can recoup salary costs from HMRC while not handing out redundancy packages – digging deeper shows some challenges.

It is true that for the majority of junior and mid-level employees, remaining in – or returning to – employment and being furloughed will be a welcome relief which allows them to retain both their employment and a regular income. However, for very senior people with more generous employment packages and severance deals, the prospect may be less attractive.

Some senior employees will have received, or be eligible to receive, generous redundancy packages. These often include garden leave or payment in lieu of a lengthy notice period on full pay and a substantial settlement sum. Going on furlough would require these financial gains to be forfeited, and if they have already left the business, to be rehired the ex-employee would have to return their termination payment. Those who have been in the industry since the 2007-08 crisis know from experience that exit packages can become less attractive the longer a crisis continues, and may fear that the same terms will not be available in any future restructuring.

If employers are only able, or willing, to pay these senior staff the £2500 covered by the government grant during furlough, this will also represent a very substantial cut in their monthly income. Despite the uncertainty of the current market, highly skilled individuals may be reluctant to remain on these terms, and employers will have to consider whether they are willing and able to improve them.

These are unprecedented times. Each business will need to adapt to what works best for them, but they should not forget that no business exists without its staff. Showing respect and empathy towards employees through a time of crisis may stand them in good stead when we come out the other end.

Florence Brocklesby is the founder of Bellevue Law. She can be contacted on +44 (0)20 3432 2110 or by email: florence@bellevuelaw.co.uk.

Florence Brocklesby

Bellevue Law