Legal

Can employers base redundancy payments on furlough wages?

15 Jul 2020 By Stephen Moore

With many employees on the job retention scheme being made redundant amid the coronavirus downturn, Stephen Moore explains how businesses should manage remuneration 

Under the coronavirus job retention scheme (CJRS), employers can reclaim 80 per cent of their employees’ wages up to £2,500 per month from the government, provided that the business has been severely affected by Covid-19. There are reports of workers receiving redundancy payments calculated on the basis of their furloughed rate of pay of 80 per cent, as opposed to their pre-furlough pay.

Once an employee has been made redundant, they are entitled to a statutory notice period based on their length of service. An employee might be required to work out this notice period or be paid in lieu of notice. In addition, provided an employee has two years’ service, they are entitled to a statutory redundancy payment of 0.5, one or 1.5 week’s pay for each full year they have worked for their employer. 

Notice pay and redundancy pay are based on a ‘normal’ week’s wages. However, with the furlough scheme meaning that many employees have agreed to a reduction in their wages, the question arises over whether this newly reduced wage could be used to represent the employee’s ‘normal’ wage for the purpose of calculating redundancy payments.

There isn’t specific government guidance on this issue. HMRC has confirmed that an employee on furlough retains the same rights to redundancy payments. This could imply that redundancy payments should be based on pre-furlough pay. Rules surrounding notice pay are more complex, and whether this pay should be based on furlough or pre-furlough amounts depends on whether the employee is entitled to statutory or contractual notice. If an employee is entitled to contractual notice and the contract provides at least one week in addition to the statutory notice amount, notice pay is based on the furlough agreement. 

If an employer were to base redundancy payments on an employee’s furlough pay, there are certainly risks in this approach. Employees could raise a grievance or bring a claim in the employment tribunal for unlawful deduction of wages or breach of contract. If it turns out that the employer has underpaid, they will be required to pay any outstanding amounts to the employee. Employees could seek to challenge the redundancy and attempt to bring an unfair dismissal claim. 

Basing an employee’s redundancy payments on their reduced furloughed pay could be said to go against the entire ‘spirit’ of the CJRS, with the aim of retaining jobs. Government guidance provides that an employee can be made redundant during or after furlough, but if an employer makes an employee redundant while using the CJRS and then bases redundancy pay on the lesser furlough sum, there is a risk that tribunals might not look favourably on this approach. 

Many businesses are likely to be experiencing significant financial difficulties at this time. But it’s also important to consider that if an employee was to bring a claim, this could require substantial time and money to defend. The safest option would be to ensure that redundancy payments are paid with reference to the employee’s pre-furlough rate of pay, excepting the more complex rules surrounding contractual notice pay. 

Employers should ensure any terms relating to redundancy pay are set out in written form to employees and agreed, to try to avoid problems later down the line.

Stephen Moore is a partner and head of employment at Ashfords 

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