Furlough and Redundancy

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Written by: Alcumus
7th August

On 30 July 2020, BEIS announced that the government was to legislate that if an employer makes a furloughed employee redundant, the employer will need to calculate statutory redundancy pay and statutory notice pay (among other payments) with reference to the employee's normal pay and not with reference to their reduced furlough pay. The government has provided further guidance on their website.

On 31 July 2020, the Employment Rights Act 1996 (Coronavirus, Calculation of a Week's Pay) Regulations 2020 (SI 2020/814) (the “Regulations”) came into force.

In terms of background, an employee will be entitled to statutory redundancy pay if they have been working for their employer for 2 years or more. Redundancy pay is calculated taking into account the employee’s age and length of service as well as their weekly earnings. The employee will also be entitled to notice pay on termination of employment on the grounds of redundancy and there are various options with how this can be paid (this list is not exhaustive but notice pay could be paid in lieu (if permitted by the contract of employment) or the employee may be asked to work their notice, for example).

The Coronavirus Job Retention Scheme (the “CJRS”) requires employers to ask employees for their consent to be furloughed. When doing this, the employee’s pay is only reduced for the period whilst they are on furlough. Employees would not be agreeing for notice pay or redundancy pay to be based on the lowered rate of pay.

What does this mean for furloughed employees who are made redundant?

Where an employer has unfortunately had to make a furloughed employee redundant, Alcumus has advised that the employee can remain on furlough during the course of their notice period and, generally, their pay should be topped up to their normal pay (so paid 100% of their normal pay rather than just 80% of their normal pay (capped at £2,500 per month)). The employer can then look to reclaim the furlough pay element of that notice pay under the CJRS (it is not possible to claim through the CJRS when making a payment in lieu of notice).

Alcumus has also always advised that redundancy pay calculations should be based on the employees’ normal pay and not the reduced level of furlough pay (it is worth noting that redundancy pay or other termination payments cannot be claimed for under the CJRS).  

Being able to recover part of the statutory or contractual notice pay through the CJRS for furloughed employees was confirmed by the government in their guidance pages. Originally, the relevant page only referred to statutory notice, but was updated to make reference to contractual notice after concerns were raised by the legal community. However, this has since been changed again to make reference to statutory notice only.

It is not clear why this was changed again but it could be a result of the introduction of the regulations which appear to relate to statutory notice only. This creates a potential problem for those employers who have looked to claim back through the CJRS part of any contractual notice pay paid to a furloughed employee but it would be a surprise if the government penalised employers given the ever changing status of their guidance. For more information on this, follow this relevant guidance page and see specifically under the heading, “If you’ve made your employees redundant”.

Unfortunately, it would seem that not all employers were paying their employees their full pay for their notice and/or their statutory redundancy pay. The government has become concerned by what it saw as a “loophole” allowing employers in some cases to pay severance sums based on less generous furlough pay (80% of normal pay, capped at £2,500 per month).

The introduction of the legislation has moved to address this:

  • For employees with normal working hours, if the calculation date for statutory redundancy pay or statutory notice pay falls on or before 31 October 2020 (when the CJRS comes to an end), the amount which is payable “is to be calculated disregarding any reduction in the amount payable as a result of [the employee] being furloughed”. The position on any further contractual notice pay is currently unclear.
  • For employees whose pay varies with the time of or amount of work, or who have no normal working hours, pay is normally averaged over the last 12 weeks. The new rules apply where this period includes at least one week during which the employee was furloughed and ensure that the averaging is based on full rather than reduced pay.

The regulations also protect employees’ pre-furlough position in respect of certain other claims where the calculation of a week’s pay is relevant, such as unfair dismissal basic awards, and claims relating to a failure to provide a statement of employment particulars. 

There has been no change to the cap on a week’s pay for the purpose of calculating statutory redundancy pay (currently £538), so there is no effect on the overall maximum statutory redundancy payment or unfair dismissal basic award that an employee can receive (currently £16,140). 

The regulations do not appear to have retrospective effect and if so, any redundancy or notice payments already made before 31 July will not be covered by the new rules. The result of this being that those employees already made redundant before this date may have missed out.

Please note, this information is correct as at 5 August 2020, but could be subject to change.

If you have any queries or concerns, please do not hesitate to contact the Alcumus PSM HR team for assistance via email [email protected] or call us on 01484 439930.

Alcumus PSM (People & Safety Management) specialises in human resources (HR) and health and safety (H&S) consulting for small and medium-sized enterprises.

Written by Anil Champaneri, Senior HR Consultant

Our Redundancy Guide for Employers During the Coronavirus Pandemic goes into further details on alternative options to redundancy and what redundancy involves. Download your copy here.