What is furlough leave?
Furlough leave is the government’s scheme to repay 80% of your employees’ wages up to a gross salary of £37,500 (i.e. £2,500 a month). From 1 September 10% of that 80% must be paid by the employer and from 1 October 20% must be paid by the employer.
The actual name of that scheme is the Coronavirus Job Retention Scheme – more on that here – but what everyone really wants to know is how to place an employee on furlough leave, and the contract or paperwork that you’ll need in order to make that official. We’ll describe that here, and you can do it all on SeedLegals for free, details below.
How do I furlough an employee?
First, talk to them and explain that this was not an easy decision but you have to do this to avoid having to terminate them, or to protect the solvency of the company.
Simply saying “You’re furloughed” is not good enough.
Neither, as some articles would have you believe, is sending them an email or letter saying “You’re furloughed”.
So, what paperwork do I need?
Although you have to formally notify them, the employee also needs to have a contract with your company that allows you to make them furloughed. This is what HMRC means when they say the scheme “remains subject to employment laws”.
To legally make someone furloughed, you must reduce their salary and refuse to offer them any work
But, if you simply told your employee that you were reducing their salary or refusing to offer them work, you would be in breach of your employment contract with them, where you promised to pay them a certain wage, a termination period, holidays, etc.
So what you need to do, as well as notifying them of your intention to furlough them, is formally vary your existing employment contract with them to add in the power to reduce their wage and the ability to offer no work.
How to vary an employee’s existing employment contract to legally make them a furloughed worker
How do you vary an employment agreement to allow you to furlough your employees? You’ll need a new legal agreement to do that, one for each employee, which outlines the furlough conditions and includes wording that varies the terms of their existing employment contract.
It will need to contain a formal notice explaining to your employee that you want to furlough them, as well as crucially including a contract variation agreement which allows you to vary their existing contract, and include the terms you need to legally put them on furlough leave and remain compliant with employment law.
The document should also explain that this decision is not one that was taken lightly. It should explain that placing them on furlough leave is practically the only alternative to making redundancies in the business. So, while the employee is free to refuse to sign the document, the message is that signing it is a better solution for both parties.
How do I find or create a furlough notice?
We’ve done all the hard work for you, you can create all your furlough notices on SeedLegals, free of charge, here’s how:
- Sign up on SeedLegals
- Create your company (we’ll automatically fetch the details from Companies House)
- Go to Quick Agreements
- Click to create a new Furlough Notice
- Enter the email and name of the person you’re creating it for
- We’ll take you through a few questions where you can choose if you want to pay them anything above the government payment, and a few other options.
- When you’re done the furlough notice will automatically be created.
- Read it, then e-sign it for the company.
- Click to share it with the employee, they’ll get an invite email.
- The employee logs in to SeedLegals, reviews the agreement and e-signs, all done.
A big advantage of using SeedLegals is that everything is instantly e-signed online, so your employee doesn’t need a printer at home, and doesn’t need to scan or post anything back. They simply e-sign on their computer, tablet or phone. And, you’ll get a browser notification as soon as they do so.
Does creating furlough notices on SeedLegals cost anything?
We’ve added Furlough Notices to our Quick Agreements plan, which gives unlimited team agreements (employment agreements, consulting agreements, zero-hour contracts, NDAs and more), completely free for 30 days.
After 30 days it’s £19/month… but there’s no commit to that, and no credit card up front.
So just sign up, create as many agreements as you need, totally free.
Does it matter if my employee’s contracts are made by SeedLegals or made elsewhere?
No. Our Furlough Notice will legally vary pre-existing employment contracts made elsewhere, as well as any SeedLegals employment contracts you have made on our platform.
I heard the government will pay some of an employee’s salary, do I have to top up the remaining amount?
If the government pay a portion of my employee’s salary, what about the remaining amount? The government’s recent announcement stating that employers will now need to fund a portion of the 80% figure means that some element of ‘topping up’ is mandatory. This has been set at 10% of the 80% from 1 September, and 20% of the 80% from 1 October.
When you create your Furlough Notice on SeedLegals we give you a few options:
- The employee just gets the government payment
- You’ll top up so that they continue to get their original salary (of which the government will fund up to £2,500 per month, and we’ll pay you the rest)
- You’ll top up so they get somewhere between the government payment and their existing salary
If the company has no money, option 1 is the way to go – employees on furlough cost the company nothing, but the employee will have less money each month:
- if they earned less than £37,500 a year they’ll have 20% less income,
- if they earned more than £37,500 per year then the £2,500 month cap means they’ll experience a bigger reduction in income
So, if the company can afford it and wants to be gracious, you could agree to pay them at their existing salary, with the government paying the first 80% (up to £2,500 a month) and your company picking up the difference above that.
Or, you might want to do something in between.
Here’s an example:
- Alice is a software developer in your team, she earns £48k per year, i.e. £4,000 a month.
- You need to furlough her.
- If you went with option 1 (i.e. no top-up), she would get £2,500 a month from the government.
- That’s a hefty 37% drop in income for her.
- So, you decide to be gracious and top up some of that.
- But, continuing to pay her £48k is just too much, so you agree to pay her £40K (i.e. £3,333 a month) while she’s furloughed.
- You specify this in the furlough notice you create on SeedLegals.
- Each month you’ll now pay her £3,333 less the £2,500 that the government chip in, i.e. £833 a month.
We’ve tried to cover all the bases so you can optimise between cutting costs as much as possible, or trying to preserve the income of your employees as much as possible. And of course you can choose this individually for each employee when you create each furlough notice.
What’s the procedure for getting the reimbursement from HMRC?
Once your to-be-furloughed team members have agreed in writing (and with the contract variation wording) to their reduction in salary (if you are not in a position to top up) and once you have confirmed in writing that the employee in question is officially furloughed (our agreement says you will do this via email once they agree to the variations. You must also keep this correspondence for 5 years as recently announced by the government), you will have to continue to pay them as normal through payroll (but at the new lower salary rate) until the HMRC online portal is set up to facilitate reimbursements. This is taking time as HMRC have never before had a system for reimbursing employers. They have recently announced that the portal will go live Monday 20 April.
- Although the scheme applies retrospectively from 1 March 2020, if your employees have been working for the company beyond that date you will not be able to claim a government reimbursement for those days. That period would not technically be considered furloughed due to their work for the company, and claiming furlough reimbursement from HMRC for those days would then be considered fraud.
It is likely that your employees’ furlough leave would have begun on 23 March as that was the date lockdown was announced.
- So, you might pay their normal salary from March 1-23
- and then pay them at 80% (or less if they earn over £37,500) from March 23-31.
You should keep an accurate record of all your furlough payments while you wait for the HMRC online portal to be set up. We’ll link to that portal here once it’s live.
Once the HMRC online portal is set up, the expectation is that companies will notify HMRC of their furloughed workers and be required to make one claim for the entire workforce.
- HMRC have announced that employers cannot claim more than once every three weeks.
- You will need employees’ ePAYE reference number, number of furloughed employees, national insurance numbers for the furloughed employees, names of furloughed employees, your company registration number (or self-assessment or corporation tax unique taxpayer reference), claim period, amount claimed and bank details, contact name and phone number.
You will need to calculate the amount you are claiming and HMRC retain the right to retrospectively audit all aspects of your claim. You must keep all records and calculations in respect of all claims made.
If you have fewer than 100 furloughed staff you will need to enter details of each employee you are claiming for, if you have 100 or more furloughed staff you will need to upload a file with their information instead of putting it directly into the HMRC system. They accept .xls .xlsx .csv or .ods files.
HMRC have stated that claims should be paid within 10 days of submission. The initial claims should cover the period from the date staff were first furloughed until 30 April (or earlier if you took any of your stuff off furlough before that date). Subsequent claims can be made within 14 days of the payroll payment date, with payment of this second wave of claims expected in 4-6 days.
Once HMRC have checked the claim, the grant will be paid by BACS to a UK bank account.
Extension to the scheme
HMRC have also announced an extension to the CJRS and now weekly-paid employees who have been on your payroll before 19 March are eligible to be furloughed. For monthly paid employees, 28 Feb is still the cut-off date.
The government have also recently announced that the scheme has been extended generally so it now covers furloughed workers up to 31 October 2020.
How will I fund salaries when I am not making any money?
If there is no spare cash in the business, government officials expect companies to borrow in the short term to fund the wage bill until the retention scheme is running and companies can claim for the wages paid. The various support packages offered by the government can be found here.
Deferral of VAT payments for the quarter until June 2020 which do not have to be paid until March 2021 may free up some cash. Government officials have told the Financial Times that there would be no interest payable on these VAT deferrals and no late payment charges. If you are thinking of using your VAT funds, ensure your VAT Direct Debit has been cancelled, else HMRC will collect any VAT due.
Consultation with trade unions
You should consider whether you may need to consult with employee representatives or trade unions about your proposed contract variations.
For example, where the employer intends to vary the contracts of 20 or more employees, and it intends to dismiss employees who do not consent to the change in their terms, for the purposes of section 188 of TULRCA, those employees will be classed as dismissed by reason of redundancy. The employer will therefore have a duty to inform and consult appropriate employee representatives and notify the Secretary of State using form HR1. We should add however that it is unclear, at this stage, whether the government expects employers to follow this process before placing employees on furlough leave.
For more information please contact us.