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Notice pay for furloughed employees

Whilst the government’s Coronavirus Job Retention Scheme (or ‘furlough’) has been a valuable lifeline to businesses during the pandemic, it is clear that for some business’ redundancies are a reality to ensure financial survival.

Firstly, employees on furlough can be made redundant, and can engage with the consultation process whilst on furlough. There is no change to employment law and so every redundancy dismissal must be fair, and in line with legislation, including equality laws.

Over the past few weeks there has been much debate in legal circles around notice pay payable to those employees who are furloughed. The question has arisen because furloughed employees will have agreed to being furloughed and many will have accepted a variation to contract to reduce their salary to 80% (up to £2,500 per month).

So, having undertaken a fair selection process and confirmed the furloughed employee will be made redundant, how do you treat their notice pay?

The rules on statutory notice are complex.

By way of high-level explanation, if an employee’s contractual notice period is at least one week longer than the statutory minimum, the employee will be entitled to their contractual notice pay. This may be reduced (furloughed rate) or full pay, depending on the wording of the employment contract or furlough agreement.

Alternatively, if the contractual notice period is the statutory minimum, or under a week more than the statutory minimum, they may be entitled to statutory minimum notice pay based on a week’s pay.

There are specific criteria that an employee must meet to qualify for such statutory protection, relating to whether they are capable and ready and willing to work, but we must assume that furloughed employees are ‘ready and willing to work’.

How to calculate notice pay for furloughed employees

The first step is to establish the contractual notice the employee is due and the statutory minimum notice the employee is entitled to receive.

The rules (Section 88(1) Employment Rights Act 1996) state:

  • (A) An employee who is entitled to only statutory notice from their employer (or less than one week more than statutory notice) will be entitled to their normal remuneration for their normal hours. This is the case even if they are on furlough and therefore on reduced pay at the time notice is served, as long as they are ready and willing to work

  • (B) An employee with normal working hours who is entitled to at least one week more than statutory notice from their employer does not benefit from (A) above. Their statutory notice pay will be based on the pay that they are contractually entitled to (which will be their reduced furlough pay if they remain on furlough) for the duration of their notice.

Where the employee works variable hours, the same principles apply, but notice pay would be calculated based on average hours worked over the relevant period.

Some examples:

Bob has 4.5 years’ service, this means he is entitled to statutory notice of 4 weeks. His contract states the employer must give 4 weeks’ notice. As this is not one week more than statutory minimum, he must be paid at his usual 100% pay for the 4 week notice period.

Jane has 10 years’ service, this means she is entitled to statutory notice of 10 weeks. Her contract states the employer must give 3 months’ notice (12.

8 weeks). As this is one week more than statutory minimum, she can be paid at the furlough rate for the period of the 3 months’ notice.

Should employers reduce notice pay for furloughed staff?

A People Management recently suggested that given that the spirit of the furlough scheme is to preserve employment, it would seem counterintuitive to allow employers to give notice to terminate furloughed employees and be able to pay reduced notice pay.

If employers do pay reduced notice pay they may end up being liable to make up the shortfall and possibly face a breach of contract claim. Further, it may be possible for an employee to argue that the reduction in notice pay could amount to a breach of trust and confidence if it was not pointed out clearly when the furlough arrangement commenced.

Employers should therefore think carefully about whether they should pay full notice pay, even if they technically can reduce it. Ultimately, employment tribunals will likely imply that notice pay should be 100% so that employees aren’t disadvantaged by agreeing to be furloughed.

Notice pay and the Coronavirus Job Retention Scheme?

The most recent update to a Treasury Direction led to questions about whether businesses could legitimately claim notice pay using the Scheme.

HMRC have indicated that claims for furloughed employees, under notice of redundancy dismissal, can still be made. Whilst many employers have a pay in lieu of notice (PILON) clause, to make claims for an employee using the Scheme the employee has to remain employed, so it is more cost effective to keep employees on furlough during their notice and continue to claim a proportion of an employee’s salary towards the cost of notice pay.

HMRC have been clear however that the Scheme cannot be used to pay any redundancy compensation or other termination payments.

As you can see the issue of notice pay can be a complex one. It is important that this is treated correctly and your business is protected against any claims of this nature. I’d be happy to answer any questions or queries about this issue.

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