What notice pay should employers pay to employees on furlough?

What do you pay if an employee has agreed to accept 80% of pay during furlough

I was recently asked what, on the face of it, appeared to be a simple question. The question was if employees have agreed to accept 80% of their salary while on furlough, is their notice pay also paid at 80%, or does it revert by operation of law to 100%?

The answer, upon consideration, is not simple and like many legal issues linked to furlough, remains unresolved. However, while untested, we can predict with some certainty how a tribunal will deal with the issue and what they would do if an employer gets it wrong.

What does the law say?

Before making any decision on what to pay for the notice period, the employer has to consider the contractual position between employee and employer and seeing how that fits in to the complex statutory framework dealing with payments during notice periods.

The first question is how much notice is the employee entitled to receive under their contract? The answer to that question affects whether certain minimum notice payment rights under the Employment Rights Act 1996 (‘ERA 1996’) are engaged.

More than statutory minimum notice

If the employee is entitled to at least one week’s greater notice under their contract than the statutory minimum notice period, then the right to minimum pay during statutory notice does not apply.

Accordingly, unless the furlough agreement (or employment contract) says otherwise, the employee is only be entitled to their 80% pay during their contractual notice period. This means that the employer will be able to reclaim some or, quite possibly, all of the notice pay under the furlough scheme.

Statutory minimum notice

If the employee is only entitled to statutory minimum notice (or no more than a week above statutory minimum), an employee gains the benefit of minimum guaranteed notice pay rights, as set out in ss88-91 ERA 1996.

However, in this case, you then have to answer whether the employee is either:- a. incapable of working during notice, due to sickness or injury; or b. “ready and willing to work” but the employer is not supplying work – which will apply during furlough leave.

If either of those criteria are met, the employee is entitled to a statutory minimum payment during their notice period.

The first criterion is straightforward. If the employee is incapable of working because of sickness, they get their minimum notice period. To fall within this requirement, the employee must actually be ‘incapable of work’ because of sickness or injury. Shielding, or living with someone who is shielding or unwell, is not enough.

The second is trickier. Is a furloughed employee “ready and willing to work”? This will depend on the reason for furlough.

If the employer has furloughed the employee because there is insufficient work available, then the employee will be ‘ready and willing’ to work, despite that they may have agreed not to do so – in which case they do qualify for minimum guaranteed notice rights.

If the employee has asked to be furloughed because they are shielding, a tribunal will probably decide they are ready and willing to work but unable to because of government shielding advice, and so they do qualify for minimum guaranteed notice rights.

If the employee has asked to be furloughed because they would prefer not to be at work – and they are not shielding or otherwise unable to work – they are probably not willing to work, and so will not qualify for minimum guaranteed notice rights.

What if the furloughed employee on notice does not qualify for minimum notice rights?

If they do not qualify for minimum guaranteed notice rights, then the position is that their pay during a furloughed notice period will be whatever they have agreed to receive while on furlough – most likely 80% of normal salary subject to a £2,500 per month cap.

What if they do qualify for the minimum guaranteed notice rights?

The amount you have to pay for the notice period will be based on a ‘week’s pay’, which in turn will vary according to whether the employee has normal working hours and whether the pay varies with the amount of work done.

For employees with normal working hours, where remuneration does not vary with the amount of work done, a ‘week’s pay’ is the amount of contractual pay due on the day before notice was given which by this time, will normally be furlough pay, i.e. 80%, assuming the employee has varied their contractual salary entitlement by agreement to receive only 80% of normal pay.

For employees with normal working hours where remuneration does vary with the amount of work done, a ‘week’s pay’ is the average earnings over the 12 weeks before notice was given. Depending on the length of the notice period, that will very likely involve averaging out some non-furlough weeks (at 100%) and furlough weeks (at 80%).

For employees without normal working hours the calculation is the same as in scenario 2.

So, what does this mean?

Many employees will be entitled to their contractually varied furlough pay only while on notice while others will be entitled to a figure on a sliding scale between 80% and 100%, if they have varying pay which will require the employer to ‘top up’ the 80% it receives from the Coronavirus Job Retention Scheme.

What if you get it wrong?

Well, firstly, if employers pay 100% when the employee is strictly only entitled to 80% of salary while under notice, the employee is unlikely to complain!

If employers pay 80% and a tribunal later rules that full salary ought to have been paid during notice, there is no financial loss to the employer in underpaying, as it will simply be ordered to pay what it ought to have paid anyway (i.e. there is no additional penalty).

However, if you want to rely on a post-termination restrictive covenant you may find you are unable to do so, if you have dismissed the employee in breach of contract by underpaying notice pay. This might be particularly important when businesses are competing even more ferociously following the gradual lifting of restrictions.

Conclusion

It seems unfair to allow employers to pay less than normal notice pay during a notice period, just because an employee was willing to forego part of their normal salary in an attempt to help their employer remain solvent and save their jobs.

Therefore, as all simple questions are answered, the answer to the question is actually ‘it depends’.

Nevertheless, employers should remember that a tribunal is likely to find ways to ensure that an employee receives 100% of their normal pay during notice period – even if they have agreed to accept 80% during any furlough period, and there are a number of devices a court could use to achieve that outcome.

If you are giving notice to an employee to terminate their employment during the furlough period, we strongly recommend that you seek advice if you intend paying less than 100% of normal salary during the notice period.

Other Relevant Articles for Employers

Furlough and Annual Leave

Furlough / Job Retention Scheme & Parental Rights

Business Reputation Considerations and Furlough

Furlough and Directors

Returning to work after lockdown & furlough

Key points employers should be considering during furlough

External Resources

PHE and BEIS: COVID-19: guidance for employees, employers and businesses

World Health Organisation guidance

Workplace social distancing guidance

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