UK: Treasury Direction sets out legal framework for Coronavirus Job Retention Scheme

22 May update: a further Treasury Direction dated 20 May was published on 22 May, attaching a revised Schedule applicable to claims made under the CJRS after 22 May.  For details, see our blog post here.

On 15 April the Treasury issued a Direction to HMRC pursuant to powers conferred by the Coronavirus Act 2020, requiring it to make payments under the terms of the Coronavirus Job Retention Scheme (CJRS) as set out in the Schedule to the Direction.  This provides the legal framework for the scheme set out so far only in HMRC Guidance (the latest version of which is covered in our blog post here).  It is expected that employers will be able to upload claims under the CJRS from 20 April.

The Schedule does shed some light on the issue of whether employers can only access the scheme if their business has been adversely affected and/or they would otherwise need to make redundancies.  It states that the purpose of the scheme is "to provide for payments to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease".  It goes on to provide that no claim may be made "if it is abusive or is otherwise contrary to the exceptional purpose" of the scheme.

Claims can only be made for a furloughed employee, defined as an employee who has been instructed by the employer to cease all work in relation to their employment, who has or will have ceased all work for the employer (directly or indirectly, or for a person connected with the employer) for at least 21 calendar days, and where the instruction is given "by reason of circumstances arising as a result of coronavirus or coronavirus disease".

It seems therefore that the decision to furlough must be causally connected with circumstances arising due to the pandemic, but it is not a condition that furloughed employees would otherwise have been made redundant. This confirms the position as now set out in the Guidance, that employers can furlough employees who are shielding (subject to a wrinkle discussed below) or caring for shielding employees, or parents struggling to provide childcare while working from home, even if there would be work available for those employees to do.  It would seemingly also allow an employer to furlough an employee who refuses to attend work due to health and safety fears.

Less helpfully, the Schedule states that an employee will be treated as having been instructed by the employer to cease all work in relation to their employment (which is a condition of reimbursement) "only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment".  This could cause problems where employees have already been furloughed but no written record of the agreed terms put in place (perhaps because the furlough is on 100% salary and benefits and it was deemed unnecessary to agree a variation of the employment contract, or because the employer was exercising a pre-existing contractual right not to provide the employee with work and pay).  To date the Guidance simply requires that, to be eligible for their grant, employers must confirm in writing to their employees that they have been furloughed and keep a record of the communication for five years (although Acas's guidance on the scheme updated on 15 April now states that a written agreement is needed).  The terms of the Schedule clearly increase the risk of reimbursement claims being rejected in the absence of formal agreement to cessation of work from the employee.  Employers who have already furloughed staff without this agreement should consider whether it is practical and worthwhile seeking from affected employees a written agreement agreeing to cessation of work for the period of furlough and confirming (if true) that this was also impliedly agreed from the time the employees were placed on furlough. It may be that future iterations of the Guidance will clarify this point.

Other areas of inconsistency / uncertainty

There remain a number of unanswered questions as well as some apparent inconsistencies between the Schedule and the latest version of the Guidance, which introduce uncertainty for employers.  Some of these are highlighted below.

Calculation of reference salary

The Schedule now makes clear that employees will be treated as on variable pay for the purposes of calculating their "reference salary" (80% of which can be reclaimed, subject to the £2,500 per month cap) unless they are a "fixed-rate employee".  A "fixed-rate employee" is defined as an employee entitled under their contract to be paid an annual salary (and no other payment) in respect of basic hours determined by the contract, paid in equal instalments per pay period (of a number of weeks or a month) regardless of the number of hours worked in that period, and where the basic hours do not normally vary according to business, economic or agricultural seasonal considerations.  (For variable pay employees, the employer can claim the higher of the employee's earnings in the same month the previous year or the employee's average monthly earnings for the 2019/2020 tax year;  for fixed-rate employees the reference salary is the rate as at the last pay period before 19 March 2020.)

Whether on fixed-rate or variable pay, the reference salary only includes "regular" salary or wages.  This excludes "conditional payments" and benefits in kind, and only includes payments which arise from "a legally enforceable agreement, understanding, scheme, transaction or series of transactions".  It can include pay that varies according to the business's performance, the employee's contribution to the business's performance, the employee's performance of employment duties, or otherwise at the employer's discretion only where pursuant to such a legally enforceable arrangement.

Unfortunately it is not entirely clear from this definition whether it is intended to exclude regular overtime payments (which are "conditional" on working in excess of contractual hours), particularly if the overtime is not compulsory or guaranteed.  The Guidance states that any regular payments the employer is obliged to pay employees, including "past overtime", are included.

Interaction with sick leave

There are some complex provisions in the Schedule concerning the interplay between furlough and sick leave and pay, which do not appear to accord with the latest Guidance.

For example, the Guidance states that employers can decide to furlough employees who are already on sick leave by moving them off statutory sick pay (SSP) and onto furlough wages (in respect of which a claim to reimbursement can be made). In contrast, the Schedule provides that the furlough period for which a claim can be made will only start once the employee's eligibility for statutory sick pay (SSP) has ended.  That is the case whether or not a claim to SSP is made (and whether or not the employer is a small employer able to recoup SSP).

The discrepancy will be particularly relevant in relation to extremely vulnerable employees who have been advised to shield for 12 weeks, as pursuant to amending regulations in force from 16 April these individuals are now deemed to be sick for the purposes of SSP if they are unable to work as a result of shielding.  It is notable that the Explanatory Memorandum to the amending regulations assumes that these individuals can still be furloughed, as it states that the extension of SSP entitlement "is intended as a safety net for individuals, in cases where their employer chooses not to furlough them under the Coronavirus Job Retention Scheme and does not have other suitable policies in place (e.g. the ability to work from home, or the provision of special leave)".  However, it may be that the position is different where an employee becomes 'sick' after being placed on furlough (as will be the case for shielding employees who have already been furloughed and only become eligible for SSP from 16 April).

However, here again there is inconsistency between the Schedule and the Guidance. The Schedule does seem to envisage that, for those who become 'sick' after being placed on furlough, they could remain on furlough and sick leave simultaneously.  It states that any SSP entitlement starting after being furloughed is to be disregarded when assessing whether the furlough will last for at least 21 days (which, although not entirely clear, presumably is intended to mean sickness would not stop the days counting as furlough).  The Schedule goes on to provide that a claim under the scheme for reimbursement of wages for any furlough period must be net of the amount of any entitlement to SSP during that period (whether or not the entitlement is actually claimed).  In contrast, the Guidance suggests that if employers keep a furloughed employee who becomes sick on the furloughed rate, rather than moving them onto SSP, they could claim for the full furlough rate without deduction of the SSP rate.  This may be picked up in further iterations of the Guidance.

Of course in reality, employees who have been furloughed may see no benefit in declaring their actual or deemed sickness if there is no incentive to do so (ie, there is no entitlement to contractual enhanced sick pay during furlough - and employers with contractual schemes that could apply may wish to seek to agree with the employee that they will not apply during furlough as part of the furlough agreement).

The 19 March cut-off

Both the Guidance and Schedule clearly provide that an employer can only claim for furloughed employees who were on their payroll as at 19 March 2020 and notified to HMRC on a real time information (RTI) submission on or before 19 March 2020. Employees put on payroll in late February 2020 may not have their pay processed for the first time until the March payroll which could be at or around the end of March and may therefore still be excluded from the scheme.

Where there has been a TUPE transfer after 19 March 2020, the Schedule permits the transferee to claim for furloughed employees despite the above payroll and RTI submission requirement not being satisfied, and subject to the RTI submission point above, the transferor would be able to claim for furlough periods prior to the transfer.  However, where the transfer took place before 19 March 2020, the transferor would not be eligible to claim for pre-transfer periods of furlough (on or after 1 March 2020) where it did not have a PAYE scheme registered on HMRC's RTI system as at 19 March.

Scope of prohibition on work for employer

The Schedule makes clear that the requirement for an employee to have ceased work for an employer includes a prohibition on working for a person connected with the employer or otherwise working indirectly for the employer.  It also states that a director carrying out statutory duties relating to the filing of company accounts or other information is permitted.  Unfortunately the Schedule does not take the opportunity to confirm that employees' participation in information and consultation processes, eg for collective redundancy consultation, is permitted.

Publicly funded employers

The Schedule does not contain any reference to the exclusion of public sector or publicly funded employers set out in the Guidance.

Annual leave

The Schedule does not address the interaction of furlough and annual leave.

The Direction does contemplate the possibility of further amending Directions but this may be unlikely before the scheme goes live on 20 April.