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Startup Guides Mar 23, 2020 3 min read

What is Furlough Leave and the Coronavirus Job Retention Scheme?

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Nadya Rajput

Coronavirus Job Retention Scheme (Furlough Leave)

A few days ago HMRC launched their Coronavirus Job Retention Scheme in an effort to avoid business closures. This scheme allows all UK employers a grant of up to £2,500 per employee, to cover 80% of the wages of employees where the employer cannot cover employee costs due to coronavirus and as such they have been asked to stand down but have not been made formally redundant. They are referred to as “furloughed workers”.

All UK businesses are eligible with a PAYE system set up before 28 February, and all employees on PAYE are covered under the Scheme.
An employee is someone who has an employment contract (full time, part time, even zero hours) which was put in place when they started the role. An employment contract has the following characteristics: the right to be provided with regular work (with the exception of zero hour contracts) which the employee must do personally, PAYE and NI is handled by the employer. This does not include consultants or advisors.

Use this government guide to determine the employment status of an employee.

The Scheme is intended to run for 3 months from the 1st March 2020 until 31 May 2020, and may be extended beyond this as the situation develops.

How much can I claim and what does it cover?

HMRC guidelines state that the scheme allows employers to claim a grant of up to 80% of an employee’s wage for all employment costs, up to a cap of £2,500 per month.

The scheme will reimburse 80% of gross salary and employers’ national insurance contributions and minimum pension contributions.

What about the remaining 20%?

Employers are not obliged to top up the remaining 20% but can if they want.

As an employer, what are the steps I need to take to put my employees on furlough leave?

For all the practical and legal steps needed to set up your own furloughed worker scheme and make someone a furloughed worker, see setting up your furloughed worker scheme.

What can my newly furloughed employee do or not do?

It’s incredibly important that they do NO WORK for the company that is furloughing them. If they do any work and you claim from the HMRC scheme then you will be committing fraud. The scheme is only to support those employees who have been asked to not work.

But, they are able to do voluntary work and undertake training, as long as they do not provide services to or generate revenue for, or on behalf of the company. This might be a good way to keep your employees engaged while you take advantage of the scheme. Please note however that if an employee is undertaking company training they must be paid at least the national minimum wage for time spent training.

How many days can I furlough my employee?

The MINIMUM amount of time you can furlough an employee and receive a reimbursement from HMRC is three weeks. The implication from current guidance is any shorter periods than that will not attract the reimbursement.

The current maximum amount of time you can furlough an employee and receive a reimbursement from HMRC is until 1 July 2020. However, this may well be extended.

Of course, you could furlough an employee for less or more time than those periods, but doing so will not attract a reimbursement from HMRC.

Can founders and/or directors decide to furlough themselves?

A founder could furlough themselves but only if they are genuinely prepared to stop. They could not answer company emails, they could not delegate tasks to their team, they could not do anything that could be construed as providing services to the company until they return to work.

A director could also furlough themselves under the same conditions. But, the additional caveat for directors is that they are subject to directors’ duties. One of which is to promote the success of the company. Therefore, they would also have to truly believe that furloughing themselves (so the company does not have to pay them their fee/salary) is more beneficial to the company than them continuing to act for the company.

What about employees I have already made redundant?

Individuals made redundant after 28 February 2020 can be re-hired, provided it is on terms that allow you to furlough them (more here) and then furloughed to preserve their job.

What about employee holiday entitlement?

Our opinion is that holiday entitlement will continue to accrue as normal as they are still technically your employee. However, you may insist that they take their holiday during this period as a pre-emptive cash saving measure, so that you will have them back in the office once they are allowed to return rather than their taking paid holidays then.

What about other employee rights?

Other employment rights are also maintained. So, employees still benefit from statutory sick pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and redundancy payments.

Use of the CJRS will not represent a risk to EMI option contracts as furloughed staff have continued employment rights. But, no attempt should be made to vary the vesting terms of the agreement as this could invalidate the scheme.

How do I furlough someone, what are the next steps?

This article shows you what to do and how to create the legal documents to furlough your team members, free on SeedLegals.

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