Last week the government announced that it would be providing support for businesses through the ‘Coronavirus Job Retention Scheme’. Under this scheme, all UK employers will be able to access support to continue paying part of their employees’ salaries for those employees that would otherwise have been laid off due to the crisis.
As at the time of writing, guidance on the scheme remains limited – particularly in relation to its administration – but this briefing covers some questions you may have at this stage. We will update in due course as we know more.
What support is available?
Under this scheme, all UK businesses will be able to claim back from the government up to 80% of the salary of each affected employee on the payroll at 28 February 2020, up to a cap of £2,500 per month (not including employer’s National Insurance contributions (NIC). While employers remain liable for employer’s NIC and auto-enrolment pension contributions, they can also claim for these amounts on top of the cap. The amount the employee receives will still be subject to income tax, National Insurance, and any other deductions.
The scheme is open to all UK-based businesses, including charities, not-for-profits, and single director companies. It will also be open to individuals who employ other individuals, such as domestic workers and gardeners, as long as they are paid through PAYE.
The current guidance states that employers must also be registered for PAYE Online. However, this will cause difficulties for employers who outsource their payroll, as agents cannot access PAYE Online on behalf of their clients. In addition, the registration process usually takes up to 10 days and requires a code to be received in the post, so even for those who administer their own payroll may find that this is a difficult process due to the current limitations of the postal system and the fact that they may not be working at their usual office address. We understand that representations are being made to HMRC on this point by numerous professional bodies, and we hope that this requirement will be relaxed to allow agents to make these claims on behalf of their clients.
The scheme is currently expected to run for at least 3 months from 1 March 2020, but the government have stated that this will be extended if necessary.
Do employers have to pay the remaining 20% of salary?
Employers can join the scheme without needing to pay the remaining salary, although they may choose to do so – or pay additional sums in excess of the remaining 20% – on a voluntary basis. Depending on the employment contracts in place, legal advice may be appropriate.
If employers do decide to pay the remaining 20% of salary or more, they will not be able to claim for employer’s NIC and auto-enrolment pension contributions on this amount.
Which employees are affected?
The payments are only for affected employees, which will be ones who would have been laid off or made redundant because of the crisis. In order to claim, employers must designate these employees as ‘furloughed workers’.
For the purposes of this scheme, office holders (including directors if they are salaried), salaried members of LLPs, agency workers, and limb (b) workers (also known as dependent contractors).
Employees who are unable to work because they are shielding in line with Government guidance, or those who are unable to work because of caring responsibilities, are able to be furloughed.
How can employees be furloughed?
Changing an employee’s status is still subject to existing employment law provisions. Employers will need to get the agreement of their staff before placing them on furlough, unless their contracts allow for them to be laid off. It is unclear at this stage whether the scheme will apply to employees where the employer has a contractual right to lay off employees.
While it is likely that employees will agree to be furloughed if the alternative is redundancy, their agreement must still be obtained. If employees refuse to be furloughed, then usual redundancy procedures must be followed.
Where the furloughed individual is a company director, the company will need to consider whether it is compatible with the statutory duties of that director to be furloughed. Where it is compatible and decided by the board, this must be formally adopted as a decision of the company, noted in the company records, and communicated in writing to the director concerned.
Where the furloughed individual is a member of an LLP, the furlough arrangements will need to be adopted formally as a decision of the company LLP, to reflect that the member will be doing no work for the LLP in that period and to confirm the effect on their remuneration accordingly.
Can employees still work while on furlough?
Employees will not be able to undertake any work for or on behalf of their employer while they are furloughed, so this scheme will not apply to any employees who have been put on part time or limited working. Employees can undertake volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of, the employer.
Furloughed directors may carry out duties to fulfil their statutory obligations owed to the company, but they must not do more than would be “reasonably be judged necessary for that purpose”. This would exclude any work carried out to generate commercial revenue or provide services to or on behalf of their company.
If employees are required to undertake training while they are furloughed, such as online courses, they must be paid at least the National Minimum Wage/National Living Wage for the time spent on the training courses, even if this exceeds the 80% of their subsidised wage.
If an employee has more than one employer, they can be furloughed by one and continue to work for the other, if this is permitted by their employment contract.
What about employees who have already been laid off?
The retention scheme payments will be backdated to 1 March 2020, so if you have laid off staff prior to the scheme being announced, employers will be able to claim for them if they withdraw their dismissal and reinstate them (on the basis that they agree to be treated as furloughed from the date they were dismissed). While usually it is unlawful for an employer to unilaterally withdraw a dismissal, it is unlikely that employees will object in these circumstances.
If employers have paid laid-off employees redundancy pay and notice pay, the repayment of these amounts to the employer should be made a condition of reinstatement.
Can furloughed employees be brought back?
While this is yet to be clarified in guidance, early indications are that the scheme is being designed with flexibility to bring back furloughed staff if needed (such as to cover those still working who fall ill). It is possible that a minimum period of furlough leave may be built into the scheme requirements to curtail abuse of the scheme.
Does the scheme apply in relation to directors who take income as dividends?
It is common for director-shareholders of owner managed companies to pay a small salary and then take the balance of income as dividends. For the purposes of this scheme, only the salary paid is relevant.
How are ‘monthly earnings’ calculated?
For full time and part time salaried employees, the employee’s actual salary before tax, as of 28 February should be used to calculate their monthly earnings for the scheme.
Where employee pay varies from month to month, the calculation is different:
- For individuals who have been employed (or engaged by an employment business in the case of agency workers), employers can claim for the higher of the amount they earned in the same month last year, or an average of their monthly earnings from the last year, up to the £2,500 cap.
- For employees who have been employed for less than a year, employers can claim for the average monthly earnings since work started. This is also the case if monthly pay varies due to the employee being on a zero-hour contract.
- For employees who started in February 2020, earnings will be pro-rated for that month.
Discretionary bonuses, non-compulsory commission payments and non-cash payments are not included as part of monthly earnings. However, you can claim for any regular payments you are obliged to pay your employees which includes wages, past overtime, fees and compulsory commission payments.
For salaried members of an LLP, their reference salary for this scheme is their profit allocation, excluding any amounts determined by the performance of the member or the LLP.
How are Salary sacrifice and benefits paid to employees treated?
The amount of monthly earnings should not include the cost of non-monetary benefits or benefits provided through salary sacrifice schemes provided to the employee. If an employer continues to provide benefits to furloughed employees, this must be in addition to the wages paid under the terms of this scheme.
HMRC have agreed that coronavirus can be treated as an eligible ‘life event’ for making changes to salary sacrifice schemes, if an employee wishes to make changes to their benefit selection in this period.
What if the calculated monthly earnings are below the minimum wage?
Employees are only entitled to the National Living Wage/National Minimum Wage for the hours they are working. Therefore, as furloughed employees will not be working, they must be paid the lower of 80% of their monthly earnings or £2,500 based on their usual working hours, even if this would be below NLW/NMW.
Will this affect employees who are EMI option holders?
At this stage, it is not clear how any period of furlough might affect the rights of EMI option holders, who are required to work at least 25 hours for their employer or, of less, for at least 75% of their working time. We await further guidance and hope that HMRC would take a reasonable approach here.
What should employers do if they do not currently have the funds to pay?
As the reimbursement scheme is not yet active, employers may be struggling with cash flow and unable to pay. If employers need extra short term cash flow support, they have been advised that they may be eligible for a Coronavirus Business Interruption Loan.
How is receipt of the grant treated in the hands of the employer for tax purposes?
Any grant under this scheme received by an employer should be treated as taxable income for income tax/corporation tax purposes. Employers can claim a deduction for employment costs as usual when calculating their taxable profits for income tax/corporation tax.