Furlough Leave and Notice Pay

Where an employee is paid reduced pay during furlough leave should their notice pay also be reduced, or paid at 100%?

Whilst the government’s Coronavirus Job Retention (or ‘furlough’) scheme has offered an invaluable lifeline to struggling businesses, the unfortunate situation is that for many it is not enough to avoid staff cuts and redundancies. There are no restrictions on an employer giving a furloughed employee notice of dismissal under the government guidance. However, in a situation where an employee has agreed to reduced remuneration (e.g. 80%) during furlough leave, the question then arises as to whether the employee’s notice period should be paid at 100% or 80% pay?

The answer to this question is complex and at present there is no government guidance or caselaw to clarify the correct approach. From a technical legal perspective, whether an employer can pay reduced notice pay will depend on factors such as the duration of the notice period, the employee’s hours and pay and the reason for the employee being placed on furlough. However, even where an employer can pay reduced notice pay, there are arguments to say that notice pay should be increased to 100%, regardless of the strict statutory interpretation.

What is the technical position?

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

Alternatively, if an employee’s contractual notice period is the statutory minimum, or under a week more than the statutory minimum, then they may be entitled to statutory minimum notice pay. There are specific criteria that must be met for an employee to qualify for such statutory protection, relating to whether they are incapable of working due to sickness or incapacity, or whether they are ready and willing to work but there is no work being provided by their employer. The employer must therefore closely consider the reason for the employee being placed on furlough to determine whether the employee qualifies.

Where an employee does not qualify for the statutory protection, they will be entitled to their contractual remuneration (as set out above).

If an employee does qualify for the statutory protection, the level of statutory minimum notice pay will be based on a ‘week’s pay’. The calculation used to work out a ‘week’s pay’ will depend on whether the employee’s hours and pay vary, as follows:

If an employee’s hours and pay do not vary then a ‘week’s pay’ will be based on the normal remuneration. Unfortunately there are further complications when deciding whether ‘normal’ remuneration means pre-furlough full pay, or reduced furlough pay.
If an employee’s hours and/or pay do vary then a ‘week’s pay’ will be based on an average of the last 12 week’s pay. This may therefore be less than full pay as it will involve an average of some furlough weeks (at 80% pay for example) and some non-furlough weeks (at 100% pay).

What other considerations should employers take into account?

Even if paying reduced notice pay is technically permissible, employers should carefully consider whether they should still pay notice at 100%. Given that the spirit of the furlough scheme is to preserve employment, it may be considered as counter-intuitive to allow employers to give notice of termination and pay reduced notice to furloughed employees. 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.

Therefore, ultimately the Employment Tribunal (and possibly the government through further guidance on the furlough scheme), may seek to imply that notice should be paid at 100% to ensure that employees are not disadvantaged during their notice period by having agreed to be on furlough leave. If an employer did decide to pay an employee reduced pay during their notice period, they may end up being liable to make up the shortfall and possibly face a breach of contract claim.

What should employers be thinking about now?

Following the Chancellor’s announcement that the furlough scheme will be gradually unwound by October 2020 (the details of which are anticipated at the end of May), the minds of many employers will be turning to whether their businesses can maintain their workforce after the furlough scheme ends. If employers do have to make the difficult decision to reduce staff numbers, then planning how notice pay will be dealt with should not be an afterthought. Employers should analyse their employees’ notice provisions and consider whether to pay notice at the full or reduced amount. In addition, employers may wish to re-visit furlough agreements to ensure that there is clarity in respect of whether the furlough arrangement will impact notice pay.

Particular attention should also be paid to the duration of the notice period and its end date. Given that employers can receive up to 80% of an employee’s pay during their notice period 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 if the employer decides to pay in lieu of notice then the government grant will not cover any notice paid in lieu).

Given the complexities in this area we would recommend that employers take legal advice based on the specific facts and circumstances of each situation. Please get in touch with the team for further advice.