Warnings issued over using furlough pay to calculate redundancy pay outs

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Employers could be unwittingly breaking the law by calculating redundancy pay outs based on furlough pay, rather than an employees’ full salary, employment law specialists have indicated.

Reports have emerged that some organisations may be using employees’ lower rate of furlough pay, 80% of their usual salary, to calculate how much they are owed when making them redundant.

“I have heard about two businesses which are doing this, luckily not our clients,” said Sebastian Mattern, lead employment consultant at Tiger Law, “It’s a very, very grey area.”

Alison Loveday, an employment lawyer at Kennedys, said such practice is unlawful and organisations could find themselves embroiled in an employment tribunal claim.

“I anticipate some employers will get it wrong because they don’t understand the rules, or because they literally are so cash poor they are trying to limit what they have to pay out and hope they get away with it,” she told Personnel Today.

“This would be particularly bad form, given that any employee who earns less than the statutory maximum weekly wage may already be in a lower paid job, and it would appear such employees are being particularly hard hit by the coronavirus and its knock on impact.”

However Danielle Parsons, an employment lawyer at Slater and Gordon, said she thought the rules were clear enough and had not come across employers who had mistakenly calculated redundancy pay-outs based on furlough pay.

“I’m not seeing this happen, nor do I think that the rules are confusing on this point or that further guidance is needed on this point. In the redundancy/furlough situations I’m seeing people are serving notice while on furlough. I’ve also seen notice of redundancy retracted while on furlough, because the furlough system has saved the jobs,” she said.

Employers have just seven working days to furlough employees that have not so far been registered under the job retention scheme, as the last three-week furlough period needs completing before the rules change on 1 July.

A spike in redundancies may be seen in early autumn, as employers begin consultation periods ahead of the closure of the furlough scheme on 31 October.

Mattern said the Coronavirus Job Retention Scheme guidance stresses that employees’ redundancy rights are not affected if they are put on furlough, but noted that they must also agree to a change of employment terms because their salary has been reduced.

“Our letters have included a paragraph about redundancy pay and that it would be calculated at pre-furlough salary but in absence of that it’s a different story,” he said.

Loveday agreed that the way a furlough agreement is worded is an important consideration when considering redundancy. “If silent [on redundancy], then I think there would be a strong argument that redundancy pay should be calculated using full, pre-furlough salary – as with the statutory scheme.

However, notice pay is a different story, she said: “Notice pay depends on whether the employee is entitled to statutory notice or contractual notice. If the employee is only entitled to statutory notice, the notice pay is based on full salary, not furlough salary. If the contract gives at least one week more than statutory notice, notice pay depends on the furlough agreement.

“If the furlough agreement reduces pay below 100% and the employee is on furlough for the duration of the notice period, then notice will be paid at the same rate as furlough pay. If the furlough period comes to an end before the end of the notice period, then the employee is entitled to 100% for the period in which furlough has ended.”

For more on this topic visit Calculating notice pay for employees on furlough.