Furlough and notice pay - another CJRS dog's dinner?

UPDATE: Government guidance has been updated on 17 July 2020 to confirm that an employer can continue to claim a grant under the Coronavirus Job Retention Scheme for a furloughed employee who is serving a statutory or contractual notice period.

Can a CJRS grant be claimed once an employee has been given notice?

It had been assumed until 25 June that employers could consult about redundancies, put employees on notice and pay them notice, all whilst the employee was on furlough leave. Queries have now been raised as to whether this is indeed the case due to wording added to the third Treasury Direction issued on 25 June. Paragraph 2.2 of the Treasury Direction says “Integral to the purpose…is that the amounts paid to an employer…are used by the employer to continue the employment of employees.”

The Treasury Direction is the legal basis for the Coronavirus Job Retention Scheme (“CJRS”) and so employers ignore this at their peril. But what does it really mean?

On its most strict interpretation, this wording would suggest that the CJRS funds cannot be lawfully claimed for an employee who is working out their notice. They have been given notice that their employment will terminate on a certain date, so in that sense their employment is not continuing. It appears that the third Treasury Direction is intended to have retrospective effect. If this interpretation is correct, employers who have already given notice to employees whilst on furlough and claimed under the CJRS for this amount would potentially be liable to repay such amounts.

However, in our view, this interpretation is unlikely to be the correct one for a number of reasons:

1. HMRC web-chat has informally confirmed that employers can claim for employees serving out their notice period on furlough, up to the point of termination of employment.
2. In our view, an employee serving out their notice is still continuing their employment, albeit for a finite period.
3. Government guidance on the CJRS states that, “Your employer can still make you redundant while you’re on furlough or afterwards.” This drafting was retained in the updated guidance issued on 1 July 2020, after the third Treasury Direction had been issued. This strongly indicates that employees can be on notice (of redundancy) whilst on furlough.
4. The exact wording of paragraph 2.2 of the Treasury Direction refers to 'employees' in general. It could, therefore, be interpreted to apply to the other employees of the employer whose employment is able to continue because the employer is accessing the CJRS in order to fund the notice pay of some employees (i.e. by accessing the CJRS for this purpose, the employer avoids making other employees redundant).
5. HMRC has not been explicit in either the guidance or the third Treasury Direction in relation to whether the CJRS grant can be used to fund notice pay. It seems likely that, if their intention was to prohibit use of the CJRS grant to fund notice pay, they would have been clearer.
6. Updated guidance confirms that employers may still furlough employees whom they previously made redundant or who otherwise stopped working for the employer on or after 28 February 2020, provided the employer re-employed and placed such individuals on furlough by 10 June 2020 at the latest for a minimum of three consecutive weeks. Arguably, given that the employment of such individuals had already been terminated prior to the establishment of the CJRS, it is unlikely that the act of re-employing and then furloughing them will serve to continue their employment beyond the end of the CJRS. Regardless, the updated guidance confirms that such individuals may continue to be furloughed under the CJRS.

So, it is not without risk to claim in respect of those serving out their notice whilst on furlough, but it seems relatively unlikely, based on the information currently available, that HMRC will be seeking repayment of such amounts or issuing penalties for a failure to self-report or repay.

What should the correct pay be whilst an employee serves out their notice on furlough leave?

There is another complication in relation to furlough and notice pay. Under the Employment Rights Act 1996, notice pay entitlement varies according to the length of the employee’s notice period and the type of working hours. Some employees may, therefore, be entitled to furlough pay during their notice period and some may be entitled to full pay.

HMRC has informally confirmed that although employers can claim 80% of wage costs up to the last day of employment (subject to the monthly cap), employers must top up the remaining wage costs and pay employees 100% of their salary during their notice period. This suggests that HMRC’s view is that all employees are entitled to 100% of normal pay during their notice period. Therefore, failing to pay an employee 100% of their normal pay during their notice period potentially risks claims of unlawful deduction of wages and breach of contract and, in a worst-case scenario, also risks a fine from HMRC for inappropriate use of the CJRS fund.