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David Reade QC and Daniel Northall examine some of the legal and practical challenges which employers face in connection with the Government’s Coronavirus Job Retention

26.03.20

Furlough: the challenges ahead

David and Daniel examine some of the legal and practical challenges which employers face in connection with the Government’s Coronavirus Job Retention Scheme.

The Coronavirus Job Retention Scheme was part of the Government’s answer to an urgent question: as the Covid-19 crisis gripped the nation, how could economic catastrophe be avoided as businesses closed at alarming speed?

The basic provision under the proposed scheme is now well known: through an HMRC administered scheme, the state will underwrite 80% of the wages of staff who are “furloughed”, but remain employed, up to a monthly limit of £2,500.

In this article we attempt to distil and discuss some of the practical and legal issues which have emerged from discussions we have had in recent days with solicitors and clients. We emphasise that the detail of the scheme is yet to be published and our views will need to be revisited once the terms of the scheme and any accompanying legislation become known.

To whom does the scheme apply?

Presently, there is no definitive answer. The Chancellor’s announcement of the scheme referred repeatedly to “workers”. The Government’s COVID-19: support for businesses webpage states that it applies to “employees”. In response to questions following the announcement, the Chancellor stated that it applied to those individuals on PAYE. This appears to be reinforced by the webpage, which states that the scheme can be accessed by “employers with a PAYE scheme”.

Given these indications we anticipate that the scheme, when published, will apply to staff whose wages are processed by the employer through PAYE. This bright line rule will be welcomed by employers, who then do not have to grapple with technical distinctions between employees, workers and those in business on their own account. (At the time of writing, the Government is proposing a separate scheme for the self-employed).

There is obvious sense to limiting the scheme to those on PAYE. It enables objective and readily available proof of the level of wages which the state will then underwrite. It also provides evidence of historic wages in the event the scheme compensates staff with variable hours based on an average of pay.

A means of avoiding redundancy

It seems clear that the scheme is only available to those who remain employed. The effect of furlough is to suspend temporarily some of the key obligations in the employment contract, relating to pay and the provision and performance of work, in the expectation that these obligations resume once the period of furlough ends.

Since furlough is a significant change to fundamental terms of the employment contract, it gives rise to the question of whether employee consent is required. We address this subject below.

Since continued employment is necessary for access to the scheme, it places those staff already made redundant into a difficult position. In the early stages of the COVID-19 crisis, many business, particularly those in the hospitality sector, took the difficult decision to cease trading and make staff redundant in response to dwindling custom. Those staff will have the benefit of their existing statutory rights, but they will not have access to the job retention scheme. Nor do we think employers are legally obliged to re-employ staff made redundant merely to allow access to the scheme.

Furlough distinct from lay-off and short-time working

Lay off and short-time working are means by which the employer reduces the working hours of some or all of its staff in response to reduced demand or output. It is found in limited industry sectors, such as manufacturing. We do not propose to set out the somewhat technical rules which apply to lay-off and short-time working save to note that it is only normally allowed where contracts of employment expressly permit it.

Subject to the published terms of the scheme, we do not believe employers will be precluded from accessing the scheme merely because they have the contractual right to lay-off staff or place them on short-time working. The position is slightly more complicated where an employer wishes to lay-off staff rather than access the job retention scheme. A laid-off employee who receives no pay (other than a possible statutory guarantee payment), rather than the more generous terms of the job

retention scheme, may legitimately complain that their trust and confidence has thereby been undermined. However, on the assumption that a period of lay-off may last at least 4 weeks (as seems likely in the current circumstances) lay-off does not seem an attractive alternative to accessing the scheme. Employers would then expose themselves to claims for redundancy payments and the complex procedure contained in ss.147-154 ERA.

Consent

Can an employer place staff into furlough at its election, or does it require the consent of the individual affected? Early indications are that it is the latter. The Government’s COVID-19: support for businesses webpage states that in relation to the scheme: “changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation”. This appears to recognise the basic contractual position that changes to terms of the employment contract requires the agreement of the employee. It also implies that a period of furlough will not operate as a statutory imposition, removing the need to obtain individual consent.

The need to obtain consent is likely to be the biggest practical challenge faced by employers accessing the scheme. A particular difficulty arises from the fact that many employees are no longer in the workplace, either as a consequence of self-isolation, home-working or through Government mandated closure of the business. Communicating effectively with staff, or sufficiently effectively to obtain their agreement to enter furlough, has therefore become more impractical.

The difficulties of communication poses an important question: can an employer rely on an employee’s implied consent to enter furlough?

Courts and tribunals are usually slow to infer consent to a contractual change in the absence of express agreement, especially where the change is to the detriment of the employee. However, we predict that they will take a more pragmatic view in these unique circumstances. If the employer effectively communicates the proposal to place an employee into furlough, ideally in writing with a deadline for objection, a lack of response on the employee’s part should be enough to imply consent if they then receive and accept pay under the scheme without objection. However, we emphasise that each case will turn on its own facts.

Where there is a trade union recognised to conduct pay bargaining, an employer may wish to consult collectively with the union as a means of obtaining the consent of the bargaining unit.

Choosing whom to furlough

It may not be the case that an employer wishes to place all of its workforce into furlough. It may have a real business need to place only a proportion of its staff if it is continuing to trade, albeit with reduced capacity. The employer is then required to choose whom it places into furlough.

We do not believe the employer is required to undertake a quasi-redundancy selection exercise involving selecting criteria and scoring matrices, since staff placed into furlough are not being dismissed. The employer should be entitled to choose at its election, provided its decision is not discriminatory or for some other unlawful reason, such as the making of a protected disclosure. We would add one qualification. If the employer undertakes a redundancy exercise at the end of the furlough period, it should not show any bias towards those staff who remained in work unless their selection to do so was based on the fair application of objective criteria.

We have heard anecdotally that employers are offering enhanced pay to incentivise staff to remain in work rather than enter furlough. Employers should be careful to ensure that any increase in pay is capable of objective justification in the circumstances, since it is arguable that such an offer disparately impacts upon disabled persons and women, who may be less able to put themselves forward to continue working. Some disabilities are more likely to require self-isolation due to the effects of coronavirus. Further, with schools closed, many women have taken on a greater responsibility for childcare which prevents them from working their contracted hours.

Furlough and collective consultation

If the underlying rational for furlough is the avoidance of redundancies, it follows that this was the alternative fate for the workforce, or at least a part of it. It may be  that  the proposed HMRC portal requires confirmation that the employees would otherwise have been made redundant for furlough to be engaged. If that is the case the issue of collective consultation under S.188 Trade Union and Labour Relations (Consolidation) Act 1992 may be engaged. If the employer was proposing 20 or more redundancies within a period of 90 days or less the obligation to consult would arise.

It may not be a simple answer to that issue that the employer was in fact proposing to place 20 or more workers on furlough; as that requires the employees’ agreement, see above. Consequently, the employer cannot know that this would be achieved. However, if the alternative route would be redundancy then that is clearly proposed, even if it is hoped that it will be avoided. A parallel may be drawn with the decision in Hardy v  Tourism South East [2005] IRLR 242, EAT in which it was held that the hope that there would be agreement to proposals, such that the actual number of redundancies would be below 20, did not avoid the engagement of the duty.

Clearly time is, at the moment, of the essence and whilst it may be possible to engage with a recognised trade union, as the appropriate representatives, trying to elect representatives for the purposes of a consultation is likely to be impractical. Since the workforce has already been sent home, it may not be a simple matter to facilitate the election of representatives. Further in the real world one wonders if there would be any employees who would not, faced with the alternative of redundancy, agree to being placed on furlough. Unless perhaps they enjoyed particularly favourable contractual redundancy terms and this was an opportunity they had been hoping for to take those terms.  The impracticality of electing representatives in the present crisis should not however detract from the fact that if there is a recognised trade union, or a mandated existing consultative forum, it should be consulted on the proposals.

The current situation does raise the possibility of a “special circumstances” defence to any failure to consult on collective redundancies; although in this respect the existence of furlough may pose a specific issue. Section 188(7) sets out the special circumstances defence:

(7)     If in any case there are special circumstances which render it not reasonably practicable for the employer to comply with a requirement of subsection [(1A), (2) or (4)], the employer shall take all such steps towards compliance with that requirement as are reasonably practicable in those circumstances.

The present crisis and the resultant decisions  to close down workplaces have constituted  a sudden and unexpected disaster for many businesses. This was language used in Keeping Kids Company v Smith and the Secretary of State [2018] IRLR 484 to

describe the type of situation which may amount to special circumstances, echoing the earlier decision in The Bakers’ Union v Clarks of Hove Ltd [1978] IRLR 366 CA.

Absent furlough, the suddenness of the crisis and the consequent immediate closure of a business might then amount to special circumstances which rendered it not reasonably practicable for the consultation obligations to be fully complied with. But the presence of furlough makes the argument more difficult for an employer; even if redundancy is proposed, offering employees the choice of furlough would enable their employment status to be maintained whilst a consultation process was followed. Although once they agreed to furlough they presumably would not be at risk of redundancy.

Stepping back then the correct approach for an employer whose proposal is to seek 20 or employees at an establishment to agree to furlough, and for whom the alternative is redundancy, should set out that position at the start of the process of seeking agreement to furlough. A HR1 form should be completed and filed, a covering letter that the proposal was to seek agreement to furlough rather than compel redundancies should accompany the form. If there are existing employee representatives, such as a recognised trade union, they should be consulted in accordance with the S.188 duty. If not, the letter should make clear that if employees are not willing to agree to furlough then redundancies are proposed and the nomination of employee representatives for election is invited, but only in respect of whom it is proposed to make redundant. The letter should make clear that it is not presently proposed to make redundant any employee who agrees to being furloughed.

Relevant Members
David Reade QC Daniel Northall
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