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The Treasury Direction: Answers or more Questions?


David Reade QC and Daniel Northall examine the implications of the much awaited Treasury Direction which sets the legal framework for the Coronavirus Job Retention Scheme.

On the afternoon of Wednesday, 15 April 2020, the Chancellor of the Exchequer the Right Honourable Rishi Sunak MP made a Treasury Direction which, in the words of the Government announcement which accompanied it, “sets out the legal framework for the [Cornonavirus Job Retention] Scheme.”

Much like the Smarties in our half-eaten Easter eggs, the Direction and the revised Guidance have a few hidden surprises, although arguably not as welcome. In the short time we have had to review the Direction we have compiled a list of the more significant points which are likely to tax anyone charged with understanding the Scheme, its implementation and the rights conferred by it. We do not claim that the list is comprehensive and we are confident that more ambiguities and problem areas will creep out on further reflection.

Is this the end (for now)?

Paragraph 14.2 of the Direction contemplates the possibility of further amending Directions. However, it seems likely that this is the Government’s and HMRC’s final word on the detail of the scheme, at least until the launch of the application portal, which HMRC has promised will go live this coming Monday, 20 April. We should therefore not expect any further instruction or guidance before then, other than in relation to the mechanics of the portal itself.

If that’s right, there remain some significant unanswered questions, arguably the biggest of which concerns the relationship between furlough and annual leave. For reasons we explore below, we suspect these are questions that will be answered by the courts, not by the Government.

What is a Treasury Direction?

Those of us used to reading and interpreting Acts of Parliament and Statutory Instruments may be unfamiliar with the form and content of the Direction.

The Direction is a short, 3 paragraph instruction, with the rules of the Scheme contained in an appended schedule.

Its form is dictated by the provisions of Section 76 of the Coronavirus Act 2020, which provides that:

Her Majesty’s Revenue and Customs are to have such functions as the Treasury may direct in relation to coronavirus or coronavirus disease.

Does the Treasury Direction have any different standing to a Statutory Instrument, the ordinary means by which Ministers fill out the detail of broad provisions contained in an Act?

Since the Direction does not identify itself as a Statutory Instrument or that it should be treated as such, the provisions of the Statutory Instruments Act 1946 probably do not apply. Nonetheless, the Direction is an exercise of ministerial authority conferred by an Act of Parliament and is legislative in its nature. Therefore, if validly made, the Direction has the full force and effect of an Act and is subject to the ordinary rules of statutory interpretation.

Qualifying employers

The Direction and the updated Guidance revise the date on which a furloughed employee must be registered on the employer’s PAYE payroll for the employer to be eligible to recover the employee’s wage costs through the Scheme. The date is revised from 28 February to 19 March 2019.

The underlying rationale for the change is tolerably clear – it brings as many employees as possible within the scope of the scheme, but at the same time minimises the opportunity for fraudulent claims. (The Scheme was first announced on 20 March 2020 and so only the clairvoyant could have fraudulently added employees to payroll on 19 March).

However, there is a sting in the tail. Paragraph 3.2 of the Direction states that the employer’s PAYE scheme must be registered on HMRC’s real time information system for PAYE as at 19 March 2020. The revised Guidance goes on to state that an employer can only claim for the wage costs of furloughed employees who were on the employer’s payroll on or before 19 March and which were notified to HMRC on an RTI submission on or before 19 March 2020.

For the uninitiated, real time information (or RTI) is a means through which information about tax and other deductions under the PAYE system is transmitted to HMRC by the employer every time an employee is paid.

However, making eligibility contingent on the existence of an RTI submission for the furloughed employee may have unintended consequences. For example, there may be no RTI submission for employees put onto payroll in late February 2020 if their pay was not processed for the first time until the March payroll. On the assumption the March payroll was processed at or around the end of the month, the RTI submission is likely to fall after the cut-off of 19 March. Similarly, new directors whose payroll is processed annually may have an RTI submission falling after 19 March.

This raises the question of whether HMRC is entitled to ‘shift the goalposts’ on the operation of the Scheme after the publication of earlier guidance on which employers, employees and their advisers have relied. There may be employees whom an employer did not furlough thinking them ineligible. There may be others who were made redundant based on their perceived ineligibility. The issue of shifting goalposts is especially acute in relation to obtaining agreement to furlough, which we discuss below.

It is beyond the scope of this note to dive too deeply into public law. However, if earlier guidance gave rise to a legitimate expectation that the scheme would be implemented on the same or similar terms, it Is arguable that the subsequent Direction should not thwart the expectation.

Conspicuous by its absence in the Direction is any reference to the exclusion of public sector or publicly funded employers. The apparent exclusion (which we discussed in our update published on 30 March and which can be found on the Littleton website) was a consistent feature in the Guidance from its first iteration. Its absence from the Direction begs the question: if the exclusion does not have the status of law, what status does it have? If it is merely relegated to the Guidance, it is arguably no more than an encouragement to public sector and publicly funded employers not to draw on public funds through applying to the scheme. However, although there may be sound public policy reasons for HMRC adopting that position, it does not avoid the fact that on the black letter of the Direction, public sector and publicly funded employers are just as eligible to apply to the scheme as any other employer. This throws into flux the earlier decisions of such employers not to furlough staff (even those shielding or with caring responsibilities) on the ground that they were simply ineligible.

Furloughed employees

Paragraph 6.1 of the Direction defines a “furloughed employee”. An employee qualifies if furlough occurs “by reason of circumstances arising as a result of coronavirus or coronavirus disease.” Although the Guidance progressively moved away from a need for an underlying redundancy situation, or threatened redundancy, the Direction now puts the matter beyond doubt. Indeed, the definition is now so broad as to encompass, for example, the employee who refuses to attend work due to fears over their health and safety. If the employer elects to furlough the employee, it would seem they would be eligible to claim the employee’s wage costs recoverable under the Scheme.

The definition of a “furloughed employee” is also contingent on there being an instruction by the employer to the employee to cease all work in relation to their employment. Paragraph 6.7 of the Direction further qualifies what is meant by an “instruction” by providing that:

An employee has been instructed by the employer to cease all work in relation to their employment only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment.

This requirement is of considerable importance. Firstly, as drafted, an employer may only furlough an employee validly (and hence claim their recoverable wage costs under the Scheme) where the cessation of work is agreed in writing between employer and employee.

If correct, it renders otiose the analysis of Snowden J in Re Carluccio’s concerning implied agreement by conduct. Non-objection on the part of the employee is simply irrelevant if the employee has not signified his agreement in writing.

The requirement is also at odds with the Guidance, even in its most recent form. There, the only matter required to be in writing is the employer’s confirmation that the employee has been furloughed, not the earlier agreement. Yet it is the Direction that has the status of law, not the Guidance.

We understand that there are many employers who did not attempt to seek the agreement of the employees it furloughed, on the premise that it would continue to pay the relevant employees their full wages. It would then recoup the relevant proportion of those wage costs through the Scheme and meet the balance from its own funds. There will be others, like the administrators in Re Carluccio’s, who attempted to obtain the agreement of all affected staff, but did not receive a response from everyone. Are such employers precluded from recovering wage costs under the Scheme where it does not have the employee’s agreement in writing? On the face of the Direction the answer would appear to be yes, if it is to be applied in accordance with its terms.

A possible argument is that if the employment contract itself had included a power of lay off  then it was the written agreement under which the employee had agreed they would cease all work. Even more broadly if the contract could be read as an agreement that an order to remain at home would be a lawful order, thus there was no need to change terms and conditions. Again the argument being that the contract itself was the written agreement. That would be consistent with the existing Guidance which suggests that employee consent is only required if only required if there are variations to terms and conditions. Both of these arguments do not sit easily with the language of 6.7.

There may be one saving grace. There is no requirement within the Direction for the agreement in writing to predate the period of furlough. Therefore it is open to employers to seek, or to continue to seek, the written agreement of the furloughed employees. Provided the agreement is forthcoming and in writing, there should be no barrier to accessing the scheme.

Paragraph 6.3 of the Direction concerns the relationship between furlough and sick pay. The Guidance saw a progressive softening of the position in terms of an employer’s ability to furlough an employee who is sick and entitled to SSP. The most recent Guidance indicates that the Scheme was not intended for employees on short-term sickness absence, but nonetheless goes on to state that “if, however, employers want to furlough employees for business reasons and they are currently off sick, they are eligible to do so, as with other employees.” Under the Guidance, an employer could choose whether to continue to furlough employees who fell sick during the period of furlough, rather than pay SSP.

In contrast, the Direction appears to reintroduce a more hard line position. Paragraph 6.3 is not the easiest provision to follow, but it indicates that, where the employer gives the instruction to cease work at a time when SSP is payable or liable to be payable to the employee, the period of furlough cannot commence until the actual or deemed period of SSP has ended. That is so irrespective of whether the employer has claimed SSP.

Paragraph 6.3 goes on to state that “ any subsequent entitlement to Statutory Sick Pay by virtue of the employee becoming unfit for work again after the original SSP has ended must be disregarded”. This qualification is, at best, ambiguous. It appears to indicate that a further period of sickness leading to an entitlement to SSP does not break the period of furlough, but the use of the word “again” suggests that this qualification only applies where there has been an earlier sickness which delayed the start of furlough. But what of the situation dealt with in the Guidance in which an employee falls sick for the first time during furlough?

Qualifying costs

Consistent with the Guidance, paragraph 7.3 of the Direction confirms that an employee’s reference salary is limited to his regular wages or salary.

However, “regular” in this context is given a somewhat opaque meaning in paragraph 7.4. Especially problematic is subparagraph (b) which states that wages or salary are not “regular” if they are “conditional on any matter”.

It is unclear what the draftsman sought to exclude through this part of the definition. Taken to its extreme, it leads to absurd results. All payments of wages are “conditional on a matter” in the sense that the employee’s work is a condition of payment. Some online commentary has suggested that furlough pay made conditional on receipt of the grant through the scheme would be disqualified. We disagree with that analysis since paragraph 7.4(b) of the Direction concerns the definition of “regular” for the purpose of assessing the employee’s reference salary. By its nature and as defined under the Direction, an employee’s reference salary concerns their pre-furlough pay.

What then of overtime pay, which is only paid where the employee meets the condition of working beyond their contractual hours. It surely cannot be intended to exclude regular overtime payments from the calculation of pay. The Guidance takes a clear contrary position. Regrettably it has to be observed that 7.4(b) introduces uncertainty into the calculation of the regular salary or wages.

Succession to a business

Paragraph 9 of the Direction primarily concerns the transfer of employees into new employment and the new employer’s ability to claim under the Scheme for the transferred employees. (Sticklers for formatting may appreciate the wayward paragraph numbering from 9.3 onwards. Paragraphs 9.4 – 9.9 appear to have disappeared entirely, perhaps an indication of the speed with which the Direction was produced).

The upshot of these provisions is that, on the face of the Direction, employees only qualify under the Scheme where the transfer to the new employer takes place after 19 March 2020. This is a shift in the position recorded in earlier Guidance to the effect that a transfer after 28 February would permit an application to the Scheme.

There has been some commentary that this creates a problem where employees transferred between 28th February and 19th March 2020. There clearly could be the problem noted above that their RTI submission may not have been notified to HMRC before 19th March 2020. This could leave them lost in the middle ground with neither the previous employer nor the present employer being able to meet the condition.

There is also the problem of the predecessor’s actions and whether they met the conditions as modified. Suppose an employee transferred on 10th April 2020, it appears clear that the transferee can furlough the employees from that date. The transferor would also be able to claim for the period of furlough before that date, as the 19th March Condition is met, subject to the issue of consent above. In passing it should be noted they would not be if the transfer occurred before the 19th March and they appear to have lost the ability to backdate any furlough claim to the 1st March 2020. However, the transferee appears not to be able to claim for the earlier period prior to the date of the transfer.

And what about holiday?

The Direction, much like the Guidance which preceded it, says absolutely nothing about the relationship between furlough and annual leave. We do not find that surprising. The Direction is simply putting the Scheme on a legal footing. It does not deal with how furlough interacts with existing legal rights. Unfortunately, we do not expect any meaningful guidance to be forthcoming and anticipate that it is a matter that will have to be resolved by the courts.

David Reade QC

Daniel Northall


16 April 2020

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