Notice pay for employees on furlough

11 Jun 2020 By Rachel Kendall

Rachel Kendall explains how businesses should navigate remunerating redundant staff who are already on the job retention scheme

The government’s coronavirus job retention – or furlough – scheme has offered an invaluable lifeline to struggling businesses. However, the unfortunate situation for many is that furloughing has not provided sufficient cost savings to avoid staff cuts. For other businesses, the phased unwinding of the scheme means that future redundancies are being contemplated. 

There are no restrictions on giving a furloughed employee notice of dismissal. However, the interaction between furlough leave and notice pay is complex. In particular, where an employee has agreed to reduced remuneration (eg 80 per cent) during furlough leave, the question arises as to whether the employee’s notice period should be paid at 100 per cent or 80 per cent pay. The answer is not clear cut. Technically it is possible to reduce notice pay in certain circumstances. However, there are arguments in favour of increasing notice pay to 100 per cent, regardless of the strict statutory interpretation.

Can employers reduce notice pay for furloughed employees?

By way of high-level explanation, if an employee’s contractual notice period is at least one week longer than the statutory minimum, the employee will be entitled to their contractual notice pay. This may be reduced or full pay, depending on the wording of the employment contract or furlough agreement.  

Alternatively, if the contractual notice period is the statutory minimum, or under a week more than the statutory minimum, they may be entitled to statutory minimum notice pay based on a week’s pay. There are specific criteria that an employee must meet to qualify for such statutory protection, relating to whether they are capable and ready and willing to work. Employers must closely consider the reason for furloughing the employee to determine whether the employee qualifies. 

Where an employee does not qualify, they will be entitled to their contractual remuneration, as set out above. If an employee does qualify, the calculation used to work out a week’s pay will depend on whether an employee’s hours and pay vary and will be based on average or ‘normal’ pay. Unfortunately, there are further complications when deciding whether ‘normal’ remuneration means pre-furlough full pay, or reduced furlough pay. 

Should employers reduce notice pay for furloughed staff?

Given that the spirit of the furlough scheme is to preserve employment, it would seem counterintuitive to allow employers to give notice to terminate furloughed employees and be able to pay reduced notice pay. If employers do pay reduced notice pay they may end up being liable to make up the shortfall and possibly face a breach of contract claim. Further, it may be possible for an employee to argue that the reduction in notice pay could amount to a breach of trust and confidence if it was not pointed out clearly when the furlough arrangement commenced. 

Businesses should therefore think carefully about whether they should pay full notice pay, even if they technically can reduce it. Ultimately, employment tribunals (and possibly the government through further guidance) will likely imply that notice pay should be 100 per cent so that employees aren’t disadvantaged by agreeing to be furloughed. 

What should employers be thinking about now?

If businesses do have to make the difficult decision to reduce staff numbers, they should analyse employees’ notice provisions and may wish to revisit furlough agreements to ensure that there is clarity on notice pay. 

Employers should also be mindful of the duration of the notice period and its end date. As employers can receive a proportion of an employee’s notice pay under the furlough scheme, it may be beneficial for both the employer and employee to align the end of the notice period with the end of the furlough scheme (note that the government grant will not cover any notice paid in lieu).  

Rachel Kendall is an associate in the employment team at Kemp Little

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