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What is furlough?

Prior to the current economic climate, many people had not heard of the term furlough but this term has been spoken about a number of times over the last week.

The term furlough means a leave of absence, so in reference to the Coronavirus crisis, this means instead of laying off staff during this troubling period, employers have the option of ‘furloughing’ staff. This is advocated by the government and their Coronavirus Job Retention Scheme has been set up to support employers during this time. Here’s some more information:

What is the scheme?

The Coronavirus Job Retention Scheme allows all UK employers to access financial support to continue paying part of their employees salary that would otherwise have been laid off due to Covid-19. It prevents against layoffs and redundancies.

Who is eligible?

All UK companies with a PAYE scheme are eligible: limited companies, sole traders who employee people, LLPs, partnerships, charities.

How does it work?

  • The employer must designate affected employees as furloughed workers.
  • They should notify the employee that they have been marked as Furlough. Agreement from the employee may be required.
  • HMRC must be notified of the employee designated as furloughed workers as well as details of their earnings. This is done through an online portal (not currently set up).
  • HMRC will reimburse 80% of furloughed workers wage costs, based on their February earnings, up to a cap of £2,500 per month. This is a grant, not a loan, and we will paid to the employer through the online portal that is being built.
  • Employees remain employed but they must not work during this period
  • Employer may choose to top-up the other 20% of salary. If they don’t top-up the 20% it will be a deduction in wages.
  • The scheme will cover the cost of wages backdated to 1 March and is initially open for 3 months, but will be extended if necessary.

What are the employment issues?

Changing the status of employees to a furloughed worker remains subject to existing employment law. Generally, where an employee’s contract contains a layoff or short term clause employers should be able to place employees on furlough leave. Where there is no such clause, it is best advised to get agreement from the employee.

Additionally, a 20% reduction in salary will be a change in terms and conditions of employment. Where employers are not topping up the government payment, they should also seek agreement from the employee.

Given the current situation and the alternatives for those employees should they not agree, one can expect that most employees will agree. That said, prudent employers will seek to get their employees agreement as part of their furlough leave process.

An illustration

The ICAEW website provides this example to show how the calculations work:

X Ltd employs Mr A at an annual salary of £24,000, so £2,000 per month. Mr A has opted out of auto enrolment.

Each month, Mr A currently receives net pay of £1,665 which is after deducting PAYE of £191 and employees NIC of £144. On this salary, the employer pays employers’ NIC of £174.

The available grant for the employer is the lower of

(a) 80% of (£2,000 + £174), and 

(b) £2,500

So a grant of £1,739.

The cash required by X Ltd to furlough based on maintaining the existing salary is £435 per month. It is a matter for employment law whether the employer is required to pay this top up. Discussions with employees may have agreed that the employee has agreed to a different arrangement during their furlough.

Many thanks to the ICAEW for the illustration.

More information is due to be released and we will update accordingly. In the meantime, please email us at enquiries@acccountingandbeyond.co.uk if we can help you in anyway.

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