The Coronavirus Job Retention Scheme (CJRS) is making it more complicated for employers to calculate holiday pay, notice and redundancy pay.
Holiday pay for a start has many moving parts, complicated by a long line of developing case law. If that wasn’t enough, CJRS has complicated matters further. This is because many employers have been paying furloughed employees the higher of 80 per cent of basic salary or £2,500 while they are furloughed. Some employers, who made redundancies early on in the CJRS, calculated statutory notice and redundancy payments on employees’ reduced rate furlough pay (and were arguably lawfully able to do so).
After drawing criticism from unions, the Government introduced the Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020 which ensured that from 31 July 2020, furloughed employees who were made redundant should have their statutory notice pay and redundancy calculations based on their normal pay, rather than the reduced rate of furlough pay.
The regulations do not apply to any contractually enhanced entitlement to notice pay or redundancy pay - that depends on what was agreed under the terms of their employment contract and furlough agreement.
There is a loophole where the regulations do not apply to employees who are contractually entitled to a longer period of notice than the law requires. In that case, the employer may only be obliged to pay the employee what they are currently earning during the entire notice period, rather than what they normally earned.
But what about holiday pay?
The regulations do not apply to holiday pay calculations. HMRC’s guidance on the CJRS states that employers should top up furlough pay to 100 per cent of normal pay during any holiday taken by employees during furlough. Whilst not specifically required under legislation, a failure to top up to 100 per cent may result in HMRC determining any furlough claim covering that period invalid. It would therefore be prudent to do so.
But what about holiday pay calculations when the employee returns to work from furlough, which isn’t covered by the CJRS guidance? For employees who do not have fixed hours (for example casual workers or shift workers), holiday pay calculations since 6 April 2020 must be calculated using the average pay earned over the previous 52 weeks. But should weeks where an employee is furloughed at reduced rate furlough be included in that calculation? Arguably they can, because the legislation states that no account shall be taken of a week in which no remuneration was payable by the employer to the employee. When an employee is furloughed though, they continue to be paid by their employer, which would suggest these weeks should be included.
Some practitioners argue that weeks where an employee is on furlough, and paid less than normal, should be excluded in the same way that some statutory payments like statutory maternity pay (SMP) are. However, there is legislation which specifically excludes weeks where the employee is receiving SMP from the holiday pay calculation. In the case of furloughed weeks, no such legislation exists. On that basis, holiday pay calculations for employees without fixed hours can arguably include weeks on furlough where they received less than their normal pay.
We call on HMRC to resolve these uncertainties by publishing extra guidance.