Notice pay for furloughed workers?

If employees have agreed to accept 80% of their salary while on furlough, is their notice pay also paid at 80%, or does it revert to 100% under the usual employment law rules?

As a result of the COVID-19 pandemic and the ability to furlough workers under the Coronavirus Job Retention Scheme, various legal issues have since arisen for which no government guidelines have (at least as yet) been issued. This includes the amount of notice pay an employer should provide to a furloughed worker.

With many employers now facing the difficult decision of whether to terminate employment contracts of furloughed workers, where there is little indication of their business resuming normal operations, the following guide looks at the impact of furloughing on employee notice periods and pay.

Can a furloughed worker be dismissed?

A furloughed worker refers to someone who is on a temporary leave of absence, although that individual remains employed and under the contract of employment, they do not carry out any work for their employer for the period of furlough.

In response to the crisis, UK employers have been able to furlough their workers, whilst claiming under the Government’s Coronavirus Job Retention Scheme to subsidise up to 80% of their wages, capped at £2,500 per month per worker.

In some cases, employers may have agreed to make up the balance of wages for a furloughed worker. In other cases, agreement may have been reached for the furloughed worker to accept a reduction in wages in accordance with the amount that the employer can recoup from HMRC.

The basis of being furloughed is intended to be only a temporary arrangement, where workers will usually be able to return to their jobs in due course.

In some instances, however, where the impact of the COVID-19 pandemic has been significant on a business, employers are entitled to give notice of termination to employees who are on furlough. As long as the reason is genuine and valid (whether on the grounds of redundancy or otherwise such as misconduct or poor performance), and a fair procedure is followed, an employer can still lawfully dismiss a worker during a period of furlough.

What are the furlough notice periods?

The notice period to which a furloughed worker is entitled will depend on their employment status as either an employee or worker, how long they have worked for you and what their contract says about any notice entitlement.

There are two types of notice: statutory and contractual. Statutory notice is the legal minimum notice, where employees are entitled to at least one week’s notice if employed between one month and 2 years, and one week’s notice for each year if employed between 2 and 12 years, up to a maximum of 12 weeks.

However, unlike employees who have greater statutory rights, workers are not usually entitled to any statutory minimum notice period on termination of their employment, and will be reliant on the terms of their contract.

What notice pay is a furloughed worker entitled to?

The amount of notice pay that an employee is entitled to receive during furlough will usually be determined by their contract of employment and whether certain statutory minimum notice payment rights are engaged.

If the employee is entitled to at least one week’s greater notice under their contract than the statutory minimum notice period, the right to minimum pay during statutory notice does not apply.

This means that, unless the furlough agreement or employment contract provides otherwise, the logical conclusion is that an employee is only entitled to the agreed furlough pay during their contractual notice period.

Example

A furloughed employee has worked for their employer for a period of just over 2 years, where they are contractually entitled to one months’ notice. Under the furlough agreement, the employee has agreed to accept a reduction in wages to 80% of their normal pay. As the contractual notice period is at least one week more than the statutory minimum of 2 weeks, the employee will not be entitled to statutory minimum notice pay. This means that their notice entitlement while on furlough will be one month at their current reduced contractual entitlement.

If, on the other hand, the employee is only entitled to the statutory minimum notice, or no more than a week’s notice above the statutory minimum, as long as they are classed as ready and willing to work, s/he will gain the benefit of minimum guaranteed notice pay rights.

How is notice pay for a furloughed worker calculated?

Where an employee qualifies for the minimum guaranteed notice pay rights, how their notice pay is calculated will depend on whether their remuneration varies with the amount of work done, based on the employee receiving a ‘week’s pay’.

For employees with normal working hours, where their salary doesn’t vary with the amount of work done, a ‘week’s pay’ is the amount of contractual pay due on the calculation date. For those whose salary does vary, a ‘week’s pay’ is the average earnings over the 12 weeks before notice was given.

The net effect is that for some employees on furlough, the contractual pay due on the day before notice was given will be normal furlough pay, assuming they have agreed to reduce their contractual salary requirement. For other employees, depending on the length of the notice period, it means that you may need to average out some non-furlough weeks at 100% and furlough weeks at 80%.

Legal issues relating to furloughed workers’ notice pay

The question of furlough notice periods and how much notice pay you should give an employee, although a little complicated, appears to be fairly straight-forward when adopting a strict statutory approach. Unfortunately, however, this involves a more complex legal analysis for which there is no clear-cut answer.

Even where an employee has agreed to accept a reduced monthly wage, it does not necessarily follow that they are also agreeing to be paid only 80% of their pay for any notice period where their contract is terminated while on furlough.

It is open to legal interpretation that the Coronavirus Job Retention Scheme only applies when an employee is not under notice, or that a term should be implied that an employee’s agreement to reduce their salary to 80% does not extend to any notice period. The point of the scheme is to preserve not remove jobs, and does not give rise to any directly enforceable contractual rights in itself.

In short, until the courts or tribunals have had an opportunity to address this tricky issue of pay and furlough notice periods, employers may want to err on the side of caution by topping up the 80% subsidy received through the scheme.