Furlough and Annual Leave – Are We Clear?

With many businesses struggling during the ‘lockdown’, furlough is now a common term in employment law. Daniel Barnett looks at how this works alongside other forms of leave.

The Government’s guidance on whether employees can take annual leave while on furlough under the Coronavirus Job Retention Scheme (‘CJRS’) is incomplete.  Employment Barrister Daniel Barnett gives his interpretation of the current situation while we await clarification. The following article deals with a wholly unclear area of law.  Daniel answers some frequently asked questions with his views at the time of publication (3rd April 2020) and specific advice should be sought on this fast moving area of law.

Can an employee be on furlough and annual leave at the same time?

At the moment, the current Government guidance for both employers and employees is silent on how the CJRS interacts with annual leave / holiday pay.

But it does address sick pay, with the employers’ guide saying: ‘If your employee is on Statutory Sick Pay: Employees on sick leave or self-isolating should get Statutory Sick Pay, but can be furloughed after this.’

The employees’ guide says something very similar: ‘If you’re on sick leave or self-isolating because of coronavirus (Covid-19), speak to your employer about whether you’re eligible — you should get Statutory Sick Pay (SSP) while you are on sick leave or self-isolating, but can be furloughed after this.’

This suggests that an employee can only be on one type of leave — either sickness leave or furlough. Acas seems to agree.  In their guidance on coronavirus and holiday they give examples on when it will be impractical to take holiday, among which is if the employee has ‘been temporarily sent home as there’s no work (“laid off” or “put on furlough”)’.

Acas therefore seems to be suggesting here that you cannot be on furlough and holiday at the same time. I disagree, for reasons I’ll come to.

Can an employee be on maternity leave and furlough?

First, though, I want to look at what the employers’ CJRS guidance says about maternity leave: ‘If your employee is eligible for Statutory Maternity Pay (SMP) or Maternity Allowance, the normal rules apply, and they are entitled to claim up to 39 weeks of statutory pay or allowance… If you offer enhanced (earnings-related) contractual pay to women on maternity leave, this is included as wage costs that you can claim through the scheme.’

That, then, suggests that you can’t be on sick leave and furlough, but you can be on maternity leave and furlough — at least for such monies as the employer pays over and above SMP.

So it doesn’t look as though the Government is concerned about each and every combination of two types of simultaneous leave.  It appears to recognise that you can be on a different leave — maternity — and also benefit from the CJRS.

The key issue appears to be that Ministers do not want people claiming two different types of benefit. For example, they don’t want to see someone claiming SSP (which is normally all the pay an employee would get when sick) but then having to top it up with furlough pay. And they don’t want someone claiming SMP — normally all the pay a woman would get when on maternity leave — and topping that up with furlough pay.

But the government seems to be relaxed about someone who would get more than SMP — because the employer pays more — getting a contribution towards that payment with the CJRS.

So I think this is the right approach: But it comes with a health warning: this is a rapidly moving situation, the Government has yet to announce its policy on many of these issues, and there is a very real possibility that Ministers may announce the precise opposite (and with that very strong caveat, here’s what I believe is the correct way to proceed)…

• Employers reclaiming under the CJRS for furlough leave are entitled to claim money from HMRC for those of their employees who are taking holiday leave while furloughed. The one is not inconsistent with the other.
• Eligibility for CJRS furlough payments simply require the employee not to be at work, and not working. If the employee is on annual leave, they are not at work and not working. The two are therefore consistent, not inconsistent.

There also seems to be no reason why two weeks’ holiday cannot count as two of the minimum three weeks’ furlough leave needed to claim a salary repayment from HMRC under the CJRS.

Can employers require employees to take their holiday leave during furlough?

Employers might want to do this for a number of reasons, for example:

• to deplete some or all of the employee’s outstanding annual leave
• to reduce the amount of leave still to be taken when work resumes
• to get the Government to fund 80% of an annual leave payment.

So can they do that? The answer is yes.

The Working Time Regulations 1998 reg 15 makes it clear that an employer can insist on an employee taking annual leave on particular dates, as long as they give twice the number of days’ notice that they want the employee to take as holiday. So, for example, an employer needs to give two weeks’ notice to require their employee to take one week’s annual leave.

(Note that I’m using the word ‘employee’ because while the Working Time Regulations apply to all workers, the CJRS only applies to employees on PAYE as of 28 February 2020.)

In practice this means an employer can furlough the employee for three weeks and tell them at the start that the third week is annual leave. By definition, this then means they’ve given the required two weeks’ notice of the one week’s annual leave.

Is holiday pay when on furlough based on 80% or 100%?  And does it include commission and bonuses?

Next comes the knotty question of whether the holiday pay is based on 80% or 100% of salary. Are payments based on ‘salary’ under the CJRS — which excludes bonuses, commissions, and so on — or is it ‘normal remuneration’ under EU caselaw, which includes these additional payments?

The answer is that it’s currently unclear. We may get guidance from HMRC or the Department for Business, Energy and Industrial Strategy, or we might need to wait for a year or so until a tax tribunal answers the question for us. This would become significantly more complicated if an employment tribunal meanwhile found unlawful deductions from wages to have been made from an employee’s wages.

But while we wait for all that to unfold, here is my best guess…

I’m answering the question based on the assumption that we are still bound by EU caselaw on holiday pay (given we are anyway bound by it until at least December 2020).

An employee is entitled to be paid ‘normal remuneration’ when on their first (EU) four weeks of annual leave. That’s been interpreted in numerous cases as including overtime, allowances, commission payments, and — dependent on their nature — bonuses.  That’s because the law should not allow employees to be disincentivised from taking annual leave by paying them less on holiday than they would be when at work.

In contrast, the CJRS specifically excludes commission, fees, and bonuses from the amount HMRC will reimburse. So what does an employer need to pay? Can they agree with the employee only to pay 80% of base salary? Or do they need to pay the full amount, certainly for the first four EU weeks?

The argument in favour of being able to agree to pay holiday at 80% of base salary is that it then becomes ‘normal remuneration’. Why?  Because if someone is being paid at 80% of base salary anyway (because they are on furlough) and they’ve agreed to accept that figure, they are not being disincentivised from taking annual leave by being paid less than they otherwise would.  To the contrary, they are being paid exactly the same as they would be if they were on furlough instead.

The argument against that is two-fold…

• first, you can’t contract out of being paid ‘normal remuneration’ — although that does beg the question whether ‘normal’ is the full financial package or the 80% when someone is on furlough.
• second, flowing from that, is that ‘normal remuneration’ must be looked at over a longer reference period and not just based on a temporary dip in income triggered by furlough. So if someone is earning commission and bonuses, they are likely to be on irregular earnings and the method of calculating their annual leave payments will be — from 6 April 2020 — by averaging out remuneration over 52 weeks.

That latter argument is, in my view, the better one.  It means remuneration paid by the employer to an employee taking annual leave while on furlough must be their normal pay which includes bonuses, commission, and allowances.

However, there is no reason to think that the employer cannot recover 80% of the normal salary — excluding bonuses, commission, and so on — from HMRC under the CJRS.

What does this mean in practice?

• the employer recovers 80% of the basic salary for any part of furlough when the employee is also on annual leave under the CJRS, but;
• the employer has to top that up to 100% (not 80%) of normal remuneration including the bonuses and commission element.

This only applies to the first four weeks of annual holiday. For the remaining 1.6 weeks of Working Time Regulations leave, there is an argument that the employer only need pay 80%. However, the more likely position is that the employer needs to top up the furlough payment to normal basic salary — so without the bonuses and commission — because the parties cannot contract out of WTR holiday pay.

For enhanced holiday entitlement beyond the 5.6 weeks, an employer and employee can agree whatever they want, including that it be paid at only 80% during furlough.

Find Out More

These extraordinary circumstances bring new perspectives on employment law and the guidelines will hopefully be clearer soon.

This article represents Daniel’s views and specific legal advice should always be sought. Please contact Daniel’s Practice Manager, Adam Macdonald, who will be happy to arrange a confidential discussion regarding your current circumstances.

Further guidance will be posted as the Government announces updates.

Covid-19 4 Apr, 2020