Most employers will at this stage be aware of the furlough scheme (Coronavirus Job Retention Scheme), which was intended to protect jobs during the ongoing pandemic. However, unfortunately it will not necessarily protect all jobs and increasingly some employees who have been furloughed are now being made redundant. Last Friday, the government passed regulations to ensure that such employees receive their redundancy payments based on their full pay, rather than their furloughed pay, in order to close a potential loophole which may have been exploited.
Essentially, employees placed on furlough under the scheme have 80% of their wages paid for by the government, up to a maximum of £2,500 (until September when employers have to make greater contributions). In many cases employers are not topping this up, meaning the employee’s salary is reduced to 80% for the period of furlough. There were concerns that furloughed employees who are made redundant would receive statutory redundancy pay calculated based on their reduced furlough pay of 80%, rather than on their full pay.
Seeking to clarify this, the Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020 came into force on Friday 31st July 2020. These regulations are designed to ensure that furloughed employees who are then made redundant receive statutory redundancy pay based on their normal (pre-furlough) wages, rather than the reduced furlough rate of 80%. The Regulations also apply to other payments, such as statutory notice pay and calculations for a basic award in an unfair dismissal case.
The Employment Rights Act 1996 contains provisions for calculating a “week’s pay”, which is then used in cases of statutory payment (such as statutory redundancy pay). The new regulations modify this in cases of furloughed workers. The new statutory provisions are somewhat complicated, and which section applies depends on whether the employee would usually have “normal working hours” and then whether their earnings vary with the timing or amount of work completed. However, the position is broadly as follows:
- Where a worker has normal working hours and a fixed salary, weekly pay is the amount payable under the employee’s contract, and any reduction in pay due to them being furloughed is disregarded.
- Where a worker’s pay varies with the amount of work or the time of the work done, their average hourly rate is calculated with reference to their contract, and again any reduction due to being furloughed is disregarded. As per the usual rules in calculating a weeks’ pay where pay is not fixed, a reference period of 12 weeks prior to the calculation date applies, with no account being taken of weeks when no work was done.
- Where a worker has no normal working hours, their weekly pay is calculated as an average over a reference period of 12-weeks, disregarding weeks where there was no pay. Where they are furloughed for any part of that period, their weekly pay is that used as the reference salary for claiming under the furlough scheme, disregarding the scheme cap.
Essentially, if a worker has normal working hours, their salary for the purposes of calculating statutory payments is that which they were paid under their contract before being furloughed and any reduction in pay due to being furloughed is disregarded. If a worker does not have normal working hours, a week’s pay will be calculated according to the same “reference salary” used for claiming pay under the furlough scheme, but without the cap of £2,500 imposed by the scheme.
The new regulations are also designed to cover various statutory employment rights that rely on calculating a “week’s pay” to determine their value. These are:
- Notice pay;
- Compensation for unfair dismissal;
- Compensation for an employer’s failure to comply with an order for re-engagement;
- Compensation for an employer’s failure to provide a written statement of reasons for dismissing an employee;
- Payment for time off to arrange/undergo training and seek employment;
- The assessment of whether an employee is to be kept on ‘short-time’ working for a week.
It should be noted that the cap on a weeks’ pay of (currently) £538 per week applies to statutory redundancy pay, so if the worker’s weekly pay would be above this cap regardless of being furloughed or not the calculation is more straightforward. However, notice pay is not capped and must be paid on the basis of actual weekly pay calculated in accordance with the regulations.
It is also of note that these regulations do not cover the situation where an employee’s hours or salary have been reduced as a result of the pandemic generally, but not because of furlough. For example, if the employee is still working but has agreed to a reduction in hours and/or pay which amounts to a contractual variation, if they are then made redundant arguably the redundancy pay would be based on the reduced salary. It remains to be seen whether any further regulations will be introduced to protect employees in such broader scenarios.
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