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Furlough Leave: Avoid Breaching Employment Contracts

The Job Retention Scheme announced for employers to issue a percentage of payroll wage paid as a grant has been a welcome result for businesses across the UK. As more guidance has become available over the weekend via HMRC, how can employers avoid breaching employment contracts?

We now know that the Job Retention Scheme (JRS) is available, essentially, to all those that are on the PAYE payroll as of the 28th February 2020, including full-time and part-time employees, agency and zero-hour contract employees, apprentices, office holders (company directors), and salaried members of LLPs. This is great news.

How do company directors and members of LLPs comply?

Well, you'll need to ensure that a formal board of director's decision has been passed to furlough a director of a company. This would need to comply with a shareholders' agreement, the articles of association, the Companies Act 2006, and any directors' services or employment agreement with the individual director. Directors can continue to complete their legal duties, but only as far as necessary during furlough.

For salaried members of LLPs, the member will need to ensure that the terms of the members' agreement or any agreement made between the members of the limited partner are complied with. This will usually require a change or variation to be made in standard terms. You will also need to maintain compliance with the LLP Act 2000 for making binding decisions and records, as well as the performance of their legal duties.

What about employees and workers? Are there formalities to their contracts of employment?

This is an extremely important point for employers to consider, you will have a contract of employment with your staff (whether express in writing or orally). This contract is binding between you and the employees (and workers). You have a duty and remain liable to pay 100% of wages.

However, with the requirement to place staff on furlough leave to claim from the JRS, you will need to agree on changing this contract of employment. This is because placing your staff on furlough changes the terms related to the work location, employment status, and pay in most cases. There may also be suspension or cancellation of benefits, bonuses or other perks that you may no longer be in a position to provide. These must also be addressed, where applicable.

It is clear that, regardless of the employment status, you will need to provide written notice of the decision to place staff on furlough leave. This is because you need this to claim the grant from HMRC, as it is an eligibility criterion.

Now, if you have an express written contract of employment for a staff member, you can check this to see if provision has been made to account for changing or varying the agreement. This will usually state that any variation must be in writing and signed by both parties or by deed.

However, for an oral or unwritten contract of employment for a staff member, you can simply provide written notice of the changes you wish to make to your prior agreement and record the acceptance of the staff member. This should also be in writing but does not necessarily need to be signed. An email will probably do.

Why complete the contract formalities?

The default position is that you're liable for 100% of the pay due to any staff member under your contract, telling your staff to stay at home and not work does not change this. Although a variation implied by conduct could be argued, it does not remove the risk of having to argue it in an employment tribunal.

A staff member could insist on receiving full pay per their contract of employment and if you fail to pay they could file a claim against you at the employment tribunal and force you to pay. As this would be your duty and breach, you would likely be liable to all the costs associated with making a claim; as well as your own costs. It's cheaper to draft a document, trust me!

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