COVID-19: Notice pay and redundancy pay for employees on furlough - new regulations

COVID-19: Notice pay and redundancy pay for employees on furlough - new regulations

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The Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020 (the ‘Regulations’) came into force on 31 July 2020. The Regulations amend the calculation of various statutory entitlements that arise on the termination of employment, including notice pay and redundancy pay for an employee on furlough.

These Regulations follow an announcement from the Department for Business, Energy and Industrial Strategy that, where an employer makes a furloughed employee redundant, the employer will need to make statutory calculations with reference to the employee's regular pay rather than their furlough pay.

The Regulations apply to the following types of payments:

  • statutory notice pay
  • statutory redundancy pay
  • pay for time off to look for work or arrange training
  • compensation for failure to provide written particulars of employment
  • compensation for failure to comply with an order for an reinstatement or re-engagement
  • compensation for unfair dismissal

The Regulations themselves are complex, but broadly they mean that these statutory payments should be based on 100% of an employee’s normal pay, not on their reduced furlough pay.

Complications for notice pay

Although the announcement of these Regulations gives the impression that all furloughed employees’ notice pay should now, under law, be based on full normal pay, this is not legally the case. The Regulations only apply in circumstances where the employee is entitled to statutory minimum notice only or to a notice period which is less than a week more than the statutory minimum notice period. A brief and simplified summary of the complicated topic of statutory minimum notice pay is set out below.

The Employment Rights Act 1996 (‘ERA’) provides for a minimum period of notice, based on length of service. If an employee is only entitled to that statutory minimum notice period (or less than one week more than that minimum), there are provisions in the ERA to ensure that notice pay is based on normal pay. The mechanics of the calculation for normal pay depends on whether the employee has normal working hours and whether their remuneration varies according to the amount of work done or the time that work is done. These provisions tend to come into play when an employee has been on sick leave or family leave before notice is served and is on reduced pay. For those with these relatively short notice periods, they would not be entitled to this reduced pay for their notice, but to full normal pay.

Rather arbitrarily, those employees with a notice period of at least one week more than the statutory minimum notice period are not entitled to this enhanced notice pay. So, for example, an employee who have been employed for two years, but who has a three month notice period will fall under this category. They are simply entitled to the notice pay set out in their contract of employment and therefore may only be entitled to reduced notice pay if they are on reduced pay, such as due to sickness or family leave.

The same issue applies in the case of furloughed employees as employees on furlough will usually be on reduced pay. If they have a statutory minimum notice period (or less than one week more than that minimum), the ERA and the Regulations kick in to entitle them to normal pay. The Regulations make it clear that employers must disregard any reduction in the amount payable as a result of the employee being furloughed.

For those with a notice period which is at least one week more than the statutory minimum notice, neither the ERA nor the Regulations apply. Employers will need to look carefully at the contract of employment in such cases, to see if the contract and the furlough agreement makes it clear that the employee will be entitled to furlough pay during notice.

Having said all this, HMRC have confirmed to us on their web-chat service that employers must top up all furloughed employee’s notice pay to 100%. All the government messaging on this also seems to give the impression to all employees that they will not have their notice pay reduced because of furlough. This is likely to lead to the situation where furloughed employees expect to receive full pay for notice.

If financially possible, it would be safest to pay full pay to all furloughed employees on notice, regardless of the rules under the ERA and the Regulations. Doing otherwise leaves employers with a two tier workforce in terms of notice pay and could therefore be divisive. It may also risk an argument from HMRC that any grant claimed under the Coronavirus Job Retention Scheme is not compliant.

Redundancy pay

The statutory redundancy pay calculation is based on the employee's length of service, age and week's pay. The week’s pay is calculated in accordance with the same provisions in the ERA as for notice. In the case of redundancy pay, however, a week’s pay is subject to a statutory cap. The current cap is £538 (applied to the gross figure). In many cases, it is unnecessary to come to a precise calculation of a week's pay, because the figure will be in excess of the statutory cap, and so the cap will apply. However, for employees earning less than the current cap, it will be necessary to calculate the correct figure as at the calculation date. Under the ERA and the Regulations, normal pay is now used to calculate a week’s pay in these circumstances where the employee is on furlough.

Relevant dates

There is nothing in the Regulations that gives it retrospective effect, so it seems likely that these new rules will not apply to any redundancy or notice payments made prior to 31 July 2020.

Contact our experts for further advice

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