Hinton Abbott have put together a brief explanation of the payroll Furlough term and how it works.
Last week HMRC launched their Coronavirus Job Retention Scheme in an effort to avoid business closures. This scheme allows all UK employers a grant of up to £2,500 per employee, to cover 80% of the wages of employees where the employer cannot cover employee costs due to coronavirus and as such they have been asked to stand down but have not been made formally redundant. They are referred to as “furloughed workers”.
Furlough isn’t a term we use in UK employment law, and it seems to originate in the USA. It essentially means putting employees on a temporary leave of absence where they do no work and receive no pay, but they are retained on the company’s books to be brought back in when needed.
All UK businesses are eligible, and all employees on PAYE are covered under the Scheme.
An employee is someone who has an employment contract (full time, part time, zero hours) which was put in place when they started the role. An employment contract has the following characteristics: the right to be provided with regular work (with the exception of zero hour contracts) which the employee must do personally, PAYE and NI is handled by the employer. This does not include consultants or advisors.
The Scheme is intended to run for 3 months from the 1st March 2020 until 31 May 2020, and may be extended beyond this as the situation develops.
How much can I claim and what does it cover?
HMRC guidelines state that the scheme allows employers to claim a grant of up to 80% of an employee’s wage for all employment costs, up to a cap of £2,500 per month.
We are awaiting confirmation for HMRC on whether “all employment costs” covers only the employee’s basic salary, or further costs such as pension contributions or other benefits. We will update this article as we hear back.
What about the remaining 20%?
Employers are not obliged to top up the remaining 20% but employers can ask employees for their consent to this reduction in their wages, and it is expected that they will consent if this is considered preferable to redundancy or unpaid leave.
As an employer, what are the steps I need to take to put my employees on furlough leave?
You need to do:
- Determine your key personnel, and decide which employees to classify as furloughed employees.
Although this can be requested by the employee, the decision of whether or not to place an employee on furlough leave ultimately lies with the employer.
- Notify those employees of the intended change, and agree their new status in writing.
Discuss with your employee their change in employment status to a furloughed worker. Explain that this means that the employee is still kept on the payroll, but that they cannot undertake any work whilst classified as a furloughed worker. Not performing any work is really important. Click on the below link to download the template letter that you can adjust for your individual business and employee requirements.
In some ways, start-ups and their teams are in a better position than most other SMEs to navigate this situation. The foregoing/deferring salaries cycle is common territory for those businesses who are investment-backed with a finite cash runway. Nevertheless we get that it’s a really difficult conversation to have.
HMRC are running this scheme for at least 3 months, it would make sense to mirror this by placing all of your identified employees on furlough leave for the same initial period of time, subject to review.
- Submit information to HMRC to claim your grant
HMRC are in the process of setting up a new online portal through which employers should submit information about the employees that have been furloughed and their earnings. The COVID-19: support for businesses guidance states that HMRC will set out further details on the information required, and are working urgently to set up a system for reimbursement so that employers may claim the grant.
We are here to help you make this difficult process as easy as possible by working with you and we will update you about the portal and any other new details as soon as we receive them.