Furlough and lay-off against the background of Covid-19 / Coronavirus

Paul Nicholls QC |

A new term has entered the employment lexicon: furloughing.  What does it mean and how does it relate to the longer established concept of laying-off?  Are employers better placed to take advantage of the government’s scheme for paying furloughed employees or to consider laying off their staff or making them redundant?

The government’s scheme for ‘furloughed’ workers

The government’s Coronavirus Job Retention Scheme provides for the state to pay up to 80% of an employee’s pay subject to a maximum of £2,500 per month. But as the guidance says that is payable where the employee is kept on the employer’s pay-roll and not laid off. Such employees are instead referred to as ‘furloughed workers’. The employee therefore remains employed.  On this view, the state is merely providing funding to enable the employer to discharge part of its responsibility to pay. The guidance says that the employer may fund the shortfall between the 80% of pay which is reimbursed by the government but that it does not have to do so. It is not clear from the guidance why that obligation does not arise if the employee remains employed by the employer and therefore entitled to pay as against the employer. It may be that there will be some legislative provision which I have not yet seen to exempt the employer from what would otherwise be its contractual obligation to pay wages in full. The guidance also says that the employee should not work for the employer. It has been held in some cases that an employee had the right to be provided with work (as in William Hill v Tucker [1999] ICR 291). But even in that case it was held that the right to be provided with work was only an obligation to permit the employee to work if there was work to be done (at 299-300).

The essence of the furloughing scheme, therefore, is that the employee remains in place and there is a temporary suspension of the employee’s obligation to work while the employer is assisted in paying the employee and keeping the employee on the books.

The statutory provisions regarding lay-off

Whether that is attractive to employers may depend on a judgment about how long the effects of Covid-19 are likely to last and its impact on the employer’s ability to carry on its business. If those effects may be longer term but not permanent, the employer might consider laying off employees. The lay-off provisions may also be relevant for staff earning more than £30,000 per annum, the maximum covered by the furlough scheme. There are difficult issues, however, as to the scope of the power to lay off and costs attached to that.

The starting point is that under s 147 of ERA, an employee is treated as laid off where the employee’s pay depends on the employee being provided with work of the kind the employee is employed to do and, in a given week, the employee is not entitled to remuneration because the employer does not provide work. A second alternative is being placed on short time – where the employee’s remuneration is less than half a week’s pay because of a diminution in the work provided. The requirement that, in order to be laid off or placed on short-time, the employee must be entitled either to no pay or to reduced pay could immediately be a limiting condition. At one stage it was thought that the lay-off provisions applied only to piece workers – those paid for each piece of work they did. It is now thought that all workers are included. However, this gives rise to the same contractual question: would the employer have the contractual right to cease payment because of, for example, some interruption to the business. In the absence of such a right, the employee who was ready and willing to do such work as was available would be entitled to be paid, whether or not the employer had work that required to be done (cf. Miles v Wakefield [1987] AC 539, 561B-C, 574D-E). In that event, the conditions of s 147 would not be satisfied. In some cases there might be an express term entitling the employer not to pay if there is a reduction in business. There was in Craig v Bob Lindfield [2016] ICR 527 (para 9) but such terms are not common. It would be possible for the parties to reach an ad hoc agreement that the employee would not be paid during the downturn in work. In the absence of express agreement, it might be difficult to imply a term absolving the employer of the duty to pay since it might be difficult to see why such implication is necessary.

However, if there is no contractual right to cease pay, it appears that the employee (other than a person paid for each piece of work done) would not fall within s 147 at all because the employee, being ready and willing to work, would be entitled to be paid. In that event, the employer’s choice would be to keep the employee on the books and pay the employee or to dismiss the employee as redundant.

If the conditions as to a statutory lay-off were satisfied, the employee could then, if the lay-off lasts for 4 consecutive weeks or for 6 weeks in any 13 week period, send a notice to the employer requesting a redundancy payment. As it was put in Craig, the effect of the regime is to postpone the right to a redundancy payment for 4 weeks of lay-off and to put the employee in control of when to claim that payment.

If the employee serves a notice seeking such a payment, the employer may serve a counter-notice. Service of such a notice means that the claim must go to a tribunal. An employer will have a defence if it can show that resumption of normal working was reasonably imminent: s 152. In order to claim the payment, the employee must terminate the contract of employment by giving notice: s 150. Notice of termination must be given (usually) within 4 weeks of the employee’s notice claiming a redundancy payment. The employee will not be entitled to a redundancy payment if there is a prospect, within 4 weeks, that the employee will no longer be laid off: s 152.

As can be seen, the lay-off provisions are convoluted. They have been described as ‘the despair of all who have been concerned with the interpretation of industrial legislation since the scheme of statutory entitlement to a redundancy payment was introduced in 1965’: Kenneth MacRae & Co v Dawson [1984] IRLR 5, para 7. But they at least set out the alternative to getting to grips with ‘furlough’.

Other steps: redundancy

There remains, of course, the option of dismissing employees as redundant, but that has an effect on the ability of the employer to get going again as things pick up. Could one argue that contracts are frustrated by the virus? That is an issue for another day, but the obvious point to make is that it would be hard to say that the contracts of certain employees, but not all, were frustrated.

© Paul Nicholls QC. The author assumes no responsibility to any party in respect of this article. Specific legal advice tailored to specific problems should always be obtained.

Paul Nicholls QC

March 2020

About the Author

Paul Nicholls QC has a diverse practice in employment, commercial and public law work. He practises in the full range of tribunal work, including in particular discrimination and whistle blowing claims. He also has an extensive High Court employment law practice, often involving urgent applications for injunctions and related relief, including search and freezing orders, applications to enforce post-termination restraints, to prevent team moves and for springboard relief and orders for the interrogation of computers in order to identify and delete confidential information.