In the current COVID-19 pandemic that is affecting individuals and employers worldwide, Cintra has put together this document to enable the payroll profession to understand the new terminology that is set to become common in the payroll lexicon – that of furloughed employees going on furloughed leave

This supersedes the document that was sent to clients following the initial announcement of the Coronavirus Job Retention Scheme (CJRS). Since that time, further details have been announced by HMRC on how this will work in practice on 26 March 2020. This changes some of the guidance that we have previously released.

Please consider that this is an evolving situation and this white paper represents the situation as at 30 March 2020.

Where does the term ‘furlough’ come from?

Not a term used in the UK but more in the United States, a furlough is derived from the Dutch ‘verlof’ meaning a temporary leave of absence due to the needs of the company.

That is how it should be regarded with the introduction of furloughed employees that are put into furlough leave.

Headline Changes

The headline changes to our previous analysis of the CJRS and clarifications are as follows:
• The scheme will apply to UK employers that had created and started a PAYE payroll scheme on or before 28 February 2020.

• The scheme will cover 80% of furloughed employees’ usual monthly wage costs, up to £2,500 a month, plus the associated employer National Insurance Contributions (NICs) and minimum automatic enrolment employer pension contributions

• Where an employee has variable pay, for example zero-hour contracts, the scheme covers the higher of the same month’s earnings from the previous year or average monthly earnings from the 2019/20 tax year (plus the associated employer National Insurance Contributions (NICs) and minimum automatic enrolment employer pension contributions)

• Employees hired after 28 February 2020 cannot be furloughed

• Employees on unpaid leave cannot be furloughed, unless unpaid leave started after 28 February 2020

• Employees on sick leave or self-isolating as a result of guidance must be paid Statutory Sick Pay (SSP), however, they can be furloughed after this period of sickness / self-isolation. This does not apply if they started employment after 28 February 2020 and then became eligible for SSP

• Employees who are shielding can be placed on furloughed leave

• Employees on maternity leave (and other parental leave such as Statutory Adoption Leave / Paternity Leave) are bound by the normal rules of those leave and pay conditions

• The minimum length of time that an employee can be furloughed is 3 weeks

When the CJRS is ended by the UK Government, employers will have to consider whether they are in a position to allow the employee to return to their duties or terminate the employment through redundancy

The Announcement

The economic crisis that will affect employees and employers was addressed in a speech on 20 March 2020 by the Chancellor of the Exchequer Rishi Sunak. As part of the UK Government’s ‘Plan for People’s Jobs and Incomes’ he made two announcements:

1. Government grants will cover 80% of the salary of retained workers up to a total of £2,500 a month

2. The Coronavirus Job Retention Scheme will cover the cost of wages backdated to 01 March 2020

Point 1 is not the way that this is outlined in the UK Government’s guidance, issued by the Department of Business, Energy and Industrial Strategy (BEIS) and Public Health England (PHE). When it was originally published, this said:

HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month. HMRC are working urgently to set up a system for reimbursement.

As at 30 March 2020, it now says:

HMRC will reimburse 80% of their wages, up to £2,500 per month. This is to safeguard workers from being made redundant.

Whether or not his referred to wages or wage costs, from both statements, we assumed that the intention was clear that there would be an upper cap of £2,500 per furloughed employee per month. It is clear from HMRC’s guidance that this is not the case. The CJRS will reimburse employers the lower of:

• 80% of the regular wage or £2,500 per month

Plus, the employer’s NICs on this lower value and the employer’s pension contributions as if they were in a minimum contribution scheme

1. There is no provision for employers making a reclaim of any Apprenticeship Levy cost

2. There is no indication of how the employer’s NICs reclaim will interact with the Employment Allowance

3. Employers will have to consider pension contributions as if they were participating in a minimum contributions scheme, where contributions are calculated at minimum percentages between the lower and upper Qualifying Earnings Bands (QEBS)

Purpose

Before pursuing the administrative considerations for payroll and HR departments, it is necessary to consider the purpose of furloughing employees, i.e. placing them on a temporary leave of absence.

Why?

It is absolutely vital to understand and remember the UK Government’s intention at this time. With workers being laid off or under the threat of being laid off in all sectors, the UK

Government wants to do all it can to mitigate these circumstances and the ultimate one where employers are forced to make staff redundant.

Therefore, the overall intention is to protect employees’ jobs whilst, at the same time, recognising that employers will have significant costs.  It’s about supporting employees and employers.

How long?

Mr Sunak said the Coronavirus Job Retention Scheme (CJRS) will be open for a period of 3 months, i.e. from the start of March to the end of May 2020. However, he has pledged to extend the scheme, if necessary.

We believe it is worthwhile pointing out HMRC’s statement on the end of the scheme:

When the government ends the scheme, you must make a decision, depending on your circumstances, as to whether employees can return to their duties. If not, it may be necessary to consider termination of employment (redundancy).

The Essential Points

Now that we have guidance, we are more certain in our advice that the employer will be able to access the CJRS and receive a grant directly from HMRC (this is not a loan that has to be repaid at a later date). So:

• The employer will retain the employee, however, reclassify them as a furloughed employee and place them on furloughed leave

• The employer will pay the furloughed employee on the payroll (as now)

• They will make the deductions for things like Income Tax and National Insurance (as now)

• They will pay the net pay to the furloughed employee (as now)

• They will return the information to HMRC via Real Time Information on the Full Payment Submission (as now)

• They will remit their liabilities to HMRC and continue to submit the Employer Payment Summary (as now)

• Then, via a portal yet to be designed, they will manually request the CJRS grant from HMRC for the furloughed employees that they have paid for the maximum that is allowable. Note that the maximum that can be claimed as a grant for HMRC may not be the same as the actual costs that the employer has incurred in retaining the employee on the payroll.

Terminology

We have used the following terminology throughout this white paper. Whilst we believe that this is covered and correct, it is worthwhile covering these new payroll / HR department terms that have been brought into our lexicon:

Furloughed Employees

This is an individual under a contract of employment meeting the criterion discussed below. A furloughed employee is one who has negotiated and agreed a contractual change with their employer, changing their employment status from employee to furloughed employee.

The sole intention of furloughing employees is to retain them under existing terms and conditions rather than making them unemployed. Furloughing employees is designed to help employees (retain jobs) and support employers (by covering part of their costs).

It is important for the employer to realise that only the wage costs for furloughed employees can be reclaimed as a grant from HMRC. An employee who continues to perform work under their contract of employment is not a furloughed employee and the employer cannot claim a grant from HMRC for employees.

Furloughed Leave

This is the period of time during which an employer will ask his furloughed employees to stay away from the workplace. When a furloughed employee is placed on furloughed leave, they will perform no work under their contract of employment. It is, essentially, a paid leave of absence.

The minimum length of time that an employee can be furloughed is 3 weeks.

Employers need to remember that furloughed employees remain subject to the terms and conditions as if they were still an employee. Furloughing is a contractual change that must be mutually agreed – the employee cannot demand it and the employer cannot impose it.

Whilst on furloughed leave and, possibly, suffering a reduction in wages, the furloughed employee may be eligible for support via Universal Credit and / or contribution-based Employment Support Allowance (ESA).

Which Employers?

The Gov.UK guidance says that the Coronavirus Job Retention Scheme (CJRS) will support all UK employers, enabling them to retain and pay staff that would otherwise have been laid off.

Rishi Sunak’s speech (also on Gov.UK) says:

‘Any employer in the country – small or large, charitable or non-profit – will be eligible for the scheme.’
The HMRC guidance confirms this and says:

Any UK organisation with employees can apply, including:

• businesses

• charities

• recruitment agencies (agency workers paid through PAYE)

• public authorities It is worthwhile pointing to the HMRC guidance which says:

You must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account.

HMRC will be able to monitor the employers who have been allocated a PAYE reference number and made RTI submissions under this reference. Although, it will not be able to monitor the instances where a PAYE reference has been created yet no RTI submission has been made, possibly as a result of the employer first making payments to the new employees in the new company in March, backdated to February.

Public Sector?

The guidance indicates that these employers are eligible, though many of them continue to operate as normal given that the employees are key workers.

Importantly, the guidance says that where the public sector employer is receiving public funds for staff costs, it expects those employers to retain staff as now and not furlough employees.

In Administration?

HMRC’s guidance indicates that a company in administration will be able to access the CJRS via the administrator.

Which Employees?

We have received more clarification on this with the HMRC guidance. This says that furloughed employees can be working under any type of employment contract including:

• full-time employees

• part-time employees

• employees on agency contracts

• employees on flexible or zero-hour contracts

What is important is that they ‘must have been on your PAYE payroll on 28 February 2020’. As above, HMRC will be able to monitor this by looking at RTI submissions.

Although, they will not be able to justify the employees that were employed on or before 28 February 2020 but were not paid in that month, possibly as a result of them starting after payroll cut-off for the February 2020 payroll.

Also, note that there is a discrepancy between the deadline date 28 February 2020 and the scheme start date 01 March 2020. This is Sunday 29 February 2020.

It is possible that some employees would have been employed on this date and there is a question as what happens with these individuals.

We believe that 28 March 2020 was chosen because this is the same as the date chosen for employer eligibility for reclaiming SSP for 14 days. However, this does not disguise the fact that there were 29 days in February in 2020.

Workers?

The CJRS does not cover workers. It is only for employees employed under a contract of employment rather than a contract of engagement.

Leaver Employees post-28 February 2020?

If an employee left the employment of their own volition, the indications are that these employees would not be covered.

For example:

On 18 March 2020, the Prime Minister advised the avoidance of unnecessary gatherings (in places such as restaurants). Many restaurants decided to close, adhering to this advice. An employee working in a restaurant that closed, employed to wait on tables would not have been able to perform these duties.

A waiter in a restaurant left on 16 March 2020 to take employment at another restaurant. This employee left the employment through choice and would not have been laid off with the potential for redundancy – employers only lay off or select for redundancy the employees that are actually employed.

Leavers through redundancy post-28 February 2020?

If the above restaurant terminated the employment as a result of the Prime Minister’s announcement, however, this would be treated differently and this is confirmed in guidance. This is so long as the employee was laid off / terminated / made redundant as a result of the announcement meaning that there was no work for the employee to perform under the contract of employment.

If the employer who laid off / terminated / made redundant an employee post-28 February 2020, the HMRC guidance confirms that they can be re-hired and the CJRS would apply to this employee. This is in line with the intentions of the scheme in the first place which is to retain in employment (furloughed employment) as many people as possible.

This means undoing the leaver process in the software and effectively ignoring the fact that the employee was laid off / terminated / made redundant.

However, according to the guidance, the employee had to have been in employment on 28 February 2020. Therefore, employers are going to have to be careful about rehires.

For example

An employee was hired in the above restaurant on 02 March 2020. Following the Prime Minister’s announcement on 18 March 2020, the employee was laid off / terminated / made redundant. If the employee was subsequently re-hired and then placed on furloughed leave, the costs of furloughed employment would not be covered by the scheme. The simple reason for this is that there were not on the PAYE payroll as at 28 February 2020.

What about starters after 28 February 2020?

We previously assumed that there seemed to be no reason why new employees could not be moved from being an employee to a furloughed employee.

However, as per the warning above, employers need to be mindful that the wage costs will not be covered under the CJRS. This is confirmed in the guidance as follows:

Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.

What about agency workers?

As stated in the guidance, employers of agency workers could contractually change them to being a furloughed employee and placing them on furlough leave. This is subject to the above statement that costs will not be recoverable under the CJRS if they were hired after 28 February 2020.

Of course, where the CJRS grant will be paid by HMRC depends on who the actual employer is – maybe they are employed through an agency, in which case, that agency is the employer.

What about Fixed Term Contract (FTC) Workers?

As we indicated in our initial guidance, the policy intention is to retain and pay staff that would otherwise have been laid off or made redundant.

A FTC is in a slightly different situation you would imagine. By nature of the contract, they are employed for a fixed term, at the end of which there is no employment. It is our understanding that for the time that they are under the FTC, we do not see why they cannot be made a furloughed employee and placed on furlough leave. However, at the end of the contract (which would have ended anyway), we do not see how HMRC can issue a grant for someone who wouldn’t have normally been employed anyway.

Of course, this is subject to the statements that:

• ‘Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme’ and

• The minimum length of furlough leave is 3 weeks

For example

An employee was employed on a FTC from 01 January to 30 April 2020 in the above restaurant. On 18 March 2020, the restaurant closes as a result of UK Government advice. Our opinion remains that for the remainder of the FTC up to and including 30 April 2020, the employer can enter into a contractual agreement with the FTC for them to be classed as a furloughed employee. They are immediately placed on furlough leave, as there are at least 3 weeks between 18 March and 30 April 2020.

However, furloughed employment and furloughed leave cannot continue beyond 30 April 2020, as this is the date when employment would have ended anyway.

What about part-time / variably paid employees?

As we suggested in our original communication, HMRC guidance now confirms that that part-time / variably paid employees are included in the CJRS.  After all, it would be discriminatory to exclude them.

See the below about calculating an earnings period to be able to make a claim through the CJRS for a grant for retaining these employees on the payroll.

Of course, as above, this is subject to the statement that ‘employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme’.

What about deemed employees?

The limited guidance makes no mention of deemed workers (i.e. IR35 workers who are deemed to be employees for the purposes and Income Tax, National Insurance Contributions and Apprenticeship Levy).  They do not have employment rights and, therefore, do not fall within the scope of the CJRS.  If they are not employees under a contract of employment, they cannot be furloughed, as only employees can be furloughed.

What about owner / managed companies?

In these organisations, the directors often pay small salaries to themselves with the remainder in dividends.  My understanding is that the CJRS will only extend to the costs of employment and the dividend payment looks to fall outside of scope.

Employment Law Considerations

Employers very much need to consider that they may have two different sets of employees in their workforce and on their payroll:

  • Employees and
  • Furloughed employees

We have tried to demonstrate the important difference, however, note that there is no difference with regards treatment in respect of terms and conditions, accrual of holiday pay, pension rights etc.  A furloughed employee is simply one that is temporarily on a paid leave of absence due to the fact that their services are not required given the current COVID-19 pandemic:

Employees

These are people who are performing the work that is required under their contract of employment.  The CJRS is not available to employees.

Furloughed employees

These are people who are not performing work under their contact of employment.  For example, the waiter that is unable to wait on tables because the restaurant has been advised to close.  The CJRS is available to the employers of furloughed employees.

In most organisations, increasingly, we will see our workforce made-up of these two sets of employees.  Therefore, organisations are going to have to decide how they are going to differentiate between the two – maybe a manual spreadsheet, maybe a new cost code etc.

Remember
  • HMRC’s grant will only be paid to employers who are contracted as furloughed employees, i.e. employees that they would normally have laid off because there is no work under their contract of employment
  • It is more than probable that an employer will have employees and furloughed employees on their payroll
  • Just because an employee is furloughed in one employment does not mean that they cannot undertake work elsewhere under another contract of employment, for example the waiter may decide whilst they are on furlough leave from the restaurant to work for a supermarket. This is only the same as an employee having a second job

However, employers very much need to consider that they cannot impose a contract change on an employee.  Most employment contracts do not contain the necessary permission for an employer to change employment status and / or potentially reduce pay. This has to be mutually-agreed.  There are also considerations of the Trade Union and Labour Relations (Consolidation) Act 1992 which require employers to consult the appropriate employee representatives and notify the Secretary of State using form HR1 in certain circumstances.

Therefore
  • Employers need to assess their workforce and decide which employees they can no longer provide work under the contract of employment – though maybe the work under the contract can be changed, though this has to be by mutual consent
  • Employers need to explain what a change from employee to furloughed employee means in reality and
  • Employers need to get mutual consent to amend their employment status. Preferably, this should be in writing

Then, whilst employed (or furlough employed), no work should be done for that employer.  It can be likened very much with garden leave, the practice where an employer asks the employee to stay at home whilst they are still paid a wage.  The differences are that only employees can be placed on garden leave and HMRC will not issue a grant under the CJRS for employees.

Similar but not when it comes to employer costs
What if an employee requests furloughed leave?

It is possible that employees faced with being laid off and / or redundancy will make a request to be placed on furloughed leave.  Furloughed leave only applies to furloughed employees, therefore, they will have to change their employment status.

Importantly, employment law says that any contractual change must be mutually agreed.  So, whilst the employee may request it, the employer does not have to grant it.

However, remember the UK Government’s intention is to save the number of people being laid off and / or made redundant.  Therefore, given the CJRS incentive, hopefully employers will see the benefits and grant the employee’s request to be changed to furloughed and put on furloughed leave.

Payroll Considerations

There are some points in HMRC’s guidance that are worth noting before we continue this section.  Some of these have been covered before, however, are worth repeating for the purposes of emphasis:

An employee with more than one job

There is nothing to prevent an employee having more than one job, just as the same as there is nothing to stop a furloughed employee having more than one job.  Just because they are furloughed in one employment (and prevented from performing work under their contract of employment) does not mean that they are necessarily furloughed in the other employment.

For example

Rachel was employed as a waitress in a bar which was ordered to close.  Rachel and her employer mutually-agree to change her status from employee to furloughed employee and she is placed on furloughed leave.

Rachel has a second job in a supermarket.  This employers considers her to be essential and she is retained as an employee.  She will perform work under her contract of employment at the supermarket but will not perform any work at the bar.

Parental Leave / Sick Leave

HMRC’s guidance is specific in that the normal rules for parental leave and pay and sickness leave are unaltered by furloughed leave.

With regards sickness, it is important to remember that the employee is deemed to be incapable and unavailable for work and this should continue to be paid as normal.  An employee who is on sick leave cannot have a contractual change to furloughed employee.  If they started employment after 28 February 2020 and then went to sick leave, they will not be able to be transferred to furloughed employee status, even if there is a mutual agreement.  Therefore, the options for the employer when the employee does become well enough to be available for work are to lay-off the employee / make them redundant if there is no work for them to do under the contract of employment.

This guidance is especially true when it comes to Compulsory Maternity Leave (the 2 weeks following the birth of a baby, extended to 4 weeks if the woman works in a factory environment)

Therefore, if an employee is currently on parental leave (and pay), this should continue as normal, i.e. 39 weeks for SMP etc.

If the employer pays enhanced / occupational sickness and parental leave payments, HMRC’s guidance says that this can be regarded as wages costs and, therefore, falls within scope of the CJRS.

We query the workings of this comment in the guidance about occupational / company sickness and parental leave payments being regarded as falling within scope of the CJRS.  The guidance is specific in the fact that it says that the periods of sickness and parental leave are expected to be continued as normal.  There is the expectation that, say, 39 weeks of SMP will be paid.

In this instance, the guidance reads as if the woman can be furloughed after the period of Compulsory Maternity Leave, the SMP continues (with reclaim from HMRC at least at 92%) and reclaim of occupational maternity under the CJRS.

As the terms and conditions of an employee and a furloughed employee are identical, employers who wish to furlough this employee on paid maternity leave should act as follows:

  • Ensure no work is done during the period of Compulsory Maternity Leave (this applies to employees and furloughed employees)
  • Therefore, if the employee is a candidate for furloughing, consider this contract change immediately
  • SMP will be paid as normal with the normal reclaim
  • Occupational / company maternity would be eligible for reclaim under the CJRS. Remember that reclaim can only be made if the employee is changed to being a furloughed employee
Employees on unpaid leave

If an employee is on unpaid leave and this period of unpaid leave started on 28 February 2020 or before, they cannot be furloughed.  The implication of this statement in the guidance suggests that when the employee returns then they must return as an employee under the terms and conditions that applied before the unpaid leave.  Or, if there is no work under the contract of employment the only alternative is lay off / redundancy.

Employees and volunteer work

There is nothing to prevent a furloughed employee performing voluntary work for the organisation.  However, the work must not be work that they would usually perform under their contract of employment and they must not ‘provide services to or generate revenue for’ the employer.

For example

Rachel is a waitress in a bar which has closed.  She is expected to serve customers and be ‘front of house’.  Whilst on furloughed leave, her employer asks her whether she would volunteer to serve meals the vulnerable in the local area.

These are new services that are being provided.  In our opinion, therefore, this volunteer work does not meet the criterion that provide services to or generating revenue for the employer.  This is so long as the meals are provided free of charge, otherwise, this is revenue for the bar.

National Minimum / Living Wage

It is worthwhile noting that it has been confirmed that the increases to these rates will apply from the first full pay reference period on or after 01 April 2020.

Then follows somewhat conflicting guidance.  Firstly, it says that workers are only entitled to the National Living Wage (NLW) / National Minimum Wage (NMW) when they are working.  We totally agree with this.

Then the guidance says:

Therefore, furloughed workers, who are not working, must be paid the lower of 80% of their salary, or £2,500 even if, based on their usual working hours, this would be below NLW/NMW.

In the first instance, workers cannot be furloughed so we believe the above statement to be confusing.  We believe that it means that employees paid at the NMW / MLW can be paid at 80% of this rate (less Income Tax, NICs and employee pension), even if that means that, based on normal working hours they will be paid at less than the NMW / NLW rates.

However, if the NMW / NLW rates only apply to working hours and the employee is not working, is there any obligation to pay at all?  However, see below regarding ‘variable pay’.

Can employers top-up to full pay?

There is nothing to stop employers and employees / furloughed employees paying normal salary, even if some of this cannot be reclaimed under the CJRS.

Holiday pay and leave

There will be employees / furloughed employees who want to take their holiday pay and leave.  This will be particularly the case where employees are furloughed and may be suffering a reduction in pay.  Here are some pointers:

  • Furloughed employees continue to accrue holiday entitlement during their furlough leave period
  • Consider that the overriding purpose of holiday leave is to give the employee the necessary rest and relaxation away from the workplace. This is a health and safety consideration
  • Employers should also consider that employees / furloughed employees may cancel pre-booked holiday arrangements. This is particularly true when they are sick / self-isolating etc.
  • If the employee is sick and cannot use their holiday entitlement as a result, the employer should cancel their planned holiday and ‘refund’ the leave days and add this back to their outstanding entitlement for the year
  • The UK Government has recently announced an amendment to the Working Time Regulations in Great Britain via The Working Time (Coronavirus) (Amendment) Regulations 2020. This means that the statutory 4 weeks ‘Euroleave’ that is lost at the end of the year if not taken can be carried forward into the next two leave years.  The additional 1.6 weeks’ annual leave can be carried forward anyway into the next leave year if there is a written agreement that allows for this.  This also applies if the employer grants any additional leave on top of the Euroleave (20 days for a full-time worker) and 1.6 weeks (8 days)
  • Whilst an employer cannot force an employee to take holiday pay if they are sick (maternity / paternity etc), they can impose the employee of furloughed employee to take leave. This is as long as the employer provides the required notice – twice the amount of the days that they are forcing the employee / furloughed employee to take
  • Strictly, and as per the Working Time Regulations 1998, the only time that an employer can make a payment in lieu of holiday is when someone is terminated from employment. This does not apply when someone is moved from being an employee to furloughed employee.  This is not a termination but is a contract change.  Therefore, holiday pay should be paid at the value of a normal week’s pay at the time when an employee takes their holiday leave
  • Employers need to consider whether payments in lieu are breaking the law if they are not allowing employees or furloughed employees to take their holiday leave for the necessary health and safety, rest and relaxation purposes
Pay Eligibility under the CRJS

This is, perhaps, the most important consideration for most employers.  It concerns the amount that can be recovered under the UK Government’s Coronavirus Job Retention Scheme (CJRS).

There are some preliminary considerations

  • Consider which employees can and cannot be furloughed. If they cannot be furloughed, the employer needs to consider their options (lay-offs, unpaid leave, redundancy etc)
  • The eligible employee must have had a mutually-agreed contractual change, moving them from being an employee (performing work under their contract of employment) to a furloughed employee (NOT performing work under their contract of employment)
What can be claimed?

The HMRC guidance contradicts previous statements about the scheme which all said ‘up to £2,500’.  This gave the impression and led to the assumptions that employment costs could be recovered as a grant from HMRC but they would always be capped at £2,500.

HMRC’s guidance is clearer.  It says that employers can recover:

  • The lower of 80% of an employee’s regular wage or £2,500 per month, excluding fees, commissions and bonuses
  • PLUS employer’s National Insurance Contributions (on the wage or cap of £2,500 per month)
  • PLUS employer’s pension contributions (on the wage or cap of £2,500 per month)

This is based on the employee’s actual salary as at 28 February 2020 (excluding fees, commission and bonuses).  The reason for the retrospective date is, we assume, to prevent some employers who may be encouraged to ‘take advantage’ of the scheme and contractually agree higher salaries, thereby increasing the grant payable by HMRC (giving a grant that is higher than costs that would have been incurred anyway).

Note that the grant from HMRC regarding pension contributions will only cover employer costs as if they had been calculated under a minimum contributions auto-enrolment scheme.  This is regardless of the scheme that is operated by the employer.

An auto-enrolment minimum contributions scheme operates on qualifying earnings above the value of the Lower Qualifying Earnings Band (QEB).  For 2019/20 this is aligned to the Lower Earnings Limit for National Insurance Contributions.  The minimum employer contribution is 3%.  Therefore, the calculation is as follows:

Qualifying earnings less Lower QEB x 3%

So, for simplicity, assuming that an employee is on £2,000 per month, this would be calculated as follows:

£2,000 less £512 x 3% = £44.64

What is the maximum that can be claimed?

As Cintra understands and interprets the situation at the moment, the maximum that can be claimed is:

  • Salary costs £2,500.00
  • Employer National Insurance Contributions on £2,500.00 = £245.78
  • Employer auto-enrolment minimum contributions on £2,500.00 = £59.64

Therefore, the maximum for 2019/20 is £2,805.42.

This contrasts very differently to the guidance for employees issued by the Department for Business, Energy and Industrial Strategy (BEIS) and Public Health England (PHE) on 24 March 2020 which originally said:

This will allow your employer to claim a grant of up to 80% of your wage for all employment costs, up to a cap of £2,500 per month.

The BEIS and PHE guidance has been updated and this line has been replaced without acknowledgement as:

You could get paid 80% of your wages, up to a monthly cap of £2,500.

In Cintra’s first guidance to clients, we indicated that guidance was unclear and contradictory in places.  We speculated that ‘all employment costs’ could include the Apprenticeship Levy.  This is not the case based on the latest guidance.

Full and Part-time Employees

HMRCs guidance says that for full and part-time salaried employees:

The employee’s actual salary before tax, as of 28 February should be used to calculate the 80%. Fees, commission and bonuses should not be included.

For example (1)

An employee is on a salary of £12,000 per annum.  This equates to £1,000 per month and the employer continues to pay this once the employee has agreed to transfer to being a furloughed employee.  The pension scheme calculates contributions for the employer at 5% of pay received.

The payroll costs in 2019/20 (in terms of salary, employer’s National Insurance Contributions on category A and pension) are as follows:

  • Salary £1,000.00
  • Employer National Insurance Contributions on £1,000.00 = £38.78
  • Employer pension contributions on £1,000.00 = £50.00

Total costs of employment = £1,088.78

As Cintra understands and interprets the situation at the moment, under the CJRS, the employer is able to apply for grant from HMRC as follows:

Salary costs £800.00 (80%)

Employer National Insurance Contributions on £800.00 = £11.18

Employer auto-enrolment minimum contributions on £800.00 = £8.64

Therefore, for this furloughed employee, the employer can claim a grant for 2019/20 is £819.82.

The actual cost of retaining this furloughed employee is £268.96 to the employer.  This is the cost of the salary that cannot be claimed (£200), the cost of employer National Insurance Contributions that cannot be reclaimed (£27.60) and the cost of the pension contributions that cannot be reclaimed (£41.36).

For example (2)

An employee is on a salary of £40,000 per annum.  This equates to £3,333.33 per month and the employer continues to pay this once the employee has agreed to transfer to being a furloughed employee.  The pension scheme uses certification under Tier 1 meaning that contributions for the employer are at 4% of pay received.

The payroll costs in 2019/20 (in terms of salary, employer’s National Insurance Contributions on category A and pension) are as follows:

  • Salary £3,333.33
  • Employer National Insurance Contributions on £3,333.33 = £360.78
  • Employer pension contributions on £3,333.33 = £133.33

Total costs of employment = £3,827.44

As Cintra understands and interprets the situation at the moment, under the CJRS, the employer is able to apply for grant from HMRC as follows:

  • Salary costs £2,500.00 (the cap)
  • Employer National Insurance Contributions on £2,500.00 = £245.78
  • Employer auto-enrolment minimum contributions on £2,500.00 = £59.64

Therefore, for this furloughed employee, the employer can claim a grant for 2019/20 is £2,805.42.

The actual cost of retaining this furloughed employee is £1,022.02 to the employer.  This is the cost of the salary that cannot be claimed (£833.33), the cost of employer National Insurance Contributions that cannot be reclaimed (£115.00) and the cost of the pension contributions that cannot be reclaimed (£73.69).

Can employers only pay 80% of salary then?

As we have said before, in practice, unless the employment contract allows, employers cannot just reduce the salary that is paid.  However, they can mutually agree with the furloughed employee that whilst on furlough leave they will be paid less than they received as an employee.

HMRC guidance says that:

At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month. An employer can also choose to top up an employee’s salary beyond this but is not obliged to under this scheme.

Therefore, the answer to the question is ‘yes, employers can pay 80% of salary’.

What the employer has to remember is that the when the salary / wage is reduced, employer’s National Insurance Contributions and minimum auto-enrolment pension contributions are similarly reduced.

Employee with variable pay

HMRC’s guidance says:

If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, you can claim for the higher of either:

  • the same month’s earning from the previous year
  • average monthly earnings from the 2019-20 tax year

The reclaim is still 80% of this calculation, capped at £2,500 plus employer National Insurance Contributions and employer auto-enrolment minimum contributions.  There is no mention about fees, commission and bonuses, however, it is implied that these are not included in this more complicated calculation.

However:

  • If the employee (now furloughed) has been employed for less than a full year, the grant is 80% of an average of their monthly earnings
  • If the employee only started in February 2020 (on or before the 28th), a pro-rata monthly calculation should be made based on the earnings to date

Once the furloughed employee’s variable pay has been calculated, the grant from HMRC is based on the employer National Insurance Contributions and employer auto-enrolment minimum contributions on that value.

Employers will have to look at the employees that have been furloughed and assess whether they are full, part-time or variably paid.  Any employee that is in receipt of elements such as overtime are, arguably, variably paid, therefore, this brings a lot of employees into this calculation.  It’s not only calculating / ascertaining a monthly average but also working out the employer’s National Insurance Contributions and the minimum auto-enrolment minimum contributions on that value.

This is, potentially, a lot of manual calculations that will be required.

Making the Reclaim through the CJRS – In Practice

Once the payment has been made to the furloughed employee, the employer will have to make a reclaim through an online portal – as yet unavailable but expected mid to late April 2020.  Gov.UK guidance ‘how to access the scheme’ previously advised:

HMRC are working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers

HMRC’s Online Portal

HMRC’s guidance issued 26 March 2020 says that the following information will be required by employers:

  • The PAYE reference number
  • The number of employees being furloughed
  • The claim period (start and end date)
  • The amount claimed (per the minimum length of furloughing of 3 weeks)
  • The employer’s bank account number and sort code
  • A contact name
  • A contact telephone number

Only one claim can be made every 3 weeks, backdated for furloughed employments from and including 01 March 2020.  Payments to the employers will be made by BACS to the employer bank details supplied.  Claims can be made based on actual values calculated or anticipated values ahead of payroll processing.

NOT RTI

Employer should not that the reclaim is not performed via Real Time Information (RTI).  It is an independent process and will not necessarily reflect any calculations that have been performed by the payroll software.

RTI, the Full Payment Submission (FPS) and the Employer Payment Summary (EPS) are all unaffected by the CRJS and are only used, as now, to report the payments made to HMRC (FPS) and any reclaims that nay be appropriate (the EPS).

From all that we have outlined, it is our understanding that the employer agrees the employment status change with the employee and then pays the furloughed employee as normal.  Then, a manual process will be in place (probably mid to late April 2020) to make the reclaim which will be issued as a grant by HMRC, essentially a refund to the employer.

When?

Keep watching for Cintra updates as to when this online portal will be available.  We reiterate the UK Government’s position that the emphasis is, again understandably, retaining staff who might otherwise have to rely on the benefits system.  So, payment first, reclaim at a later date by a mechanism to be outlined at a later date.

What about employers who cannot afford to pay?

There will be companies whose cash flow will not allow the retention of and payment to employees, contractually changed to furloughed employees.  After all, income streams will be affected badly.

The UK Government has addressed this point by establishing the Coronavirus Business Interruption Loan Scheme.  Employers are advised to look at details of this, particularly eligibility for the Scheme.

Cintra Support

In summary, we are awaiting final guidance from HMRC of the calculation process as they say:

We will issue more guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions, before the scheme becomes live.

Whilst waiting for this, we advise the following for employees that you are furloughing:

  • Ensure you have an agreement with the employee to be furloughed
  • Ensure you keep track, by employee, of the furloughing periods (remembering that the minimum is 3 weeks)
  • Ensure you keep track, by employee, if you are paying 80% or 100% of their salary

It is our understanding that you will be able to claim money back by the end of April 2020 and we will send our guidelines for calculation rules as soon as possible.

In the meantime, keep safe.

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