Coronavirus & furloughing employees: What UK SMEs need to know

by Startacus Admin

Coronavirus & furloughing employees. Nichola Hailes, from integrated payroll and HR management software Payfit looks to answer some of the most frequently asked questions about the job retention scheme and what UK SMEs need to know. 

"Following Chancellor Rishi Sunak’s announcement of the Coronavirus Job Retention Scheme, many employers have begun furloughing their employees, and many more are wondering if this is the right direction to take. Many small business owners are still unsure what furloughing means for them, and for their team.

Without the job retention scheme, employers would likely need to choose between one of two options: laying off employees or making them redundant. However, the plans proposed by the Chancellor have been designed to support employers and minimise the number of job losses. 

In this article, we (Payfit) look to answer some of the most frequently asked questions about the job retention scheme.

What is a furloughed employee?

A furloughed employee is someone who has been placed on leave from work without pay. The employer ordinarily determines the length of the suspension.

Typically, an employer will furlough employees as a means of cutting costs when they do not want to necessarily lay off staff or terminate their contract, but at that time lack the resources to continue paying them.

What is the Coronavirus Job Retention Scheme?

The Coronavirus Job Retention Scheme has been designed to support employers whose operations have been severely affected by the coronavirus crisis. The scheme will allow employers to keep employees on the payroll and keep their contract of employment in place.

Employers will be able to claim up to 80% of furloughed employees’ usual monthly wage costs, up to the value of £2,500 per month, as well as Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on the wage. 

The Scheme, while temporary, is open to all UK employers for a period of at least three months backdated to March 1st, 2020. It is expected to be up and running by the end of April when it will be able to support employers whose operations have been acutely impacted by coronavirus.

Who can claim the Coronavirus Job Retention Scheme?

Any organisation can claim the Coronavirus Job Retention Scheme, providing that they meet several essential criteria. 

Any organisation with employees can apply; this includes businesses, charities, recruitment agencies and public authorities. The organisation in question must have created and started a PAYE Payroll scheme either on or before February 28th, 2020 and must have a UK bank account. 

The vast majority of public sector organisations are not expected to use the Scheme. This is because a lot of public sector organisations are continuing to provide essential public services or are contributing to the response of the coronavirus pandemic. 

Which employees can be claimed for?

An employee must have been on a company’s PAYE payroll on February 28th, 2020.

Employee’s on any type of contract can be furloughed, including: full-time employees; part-time employees; employees on agency contracts; employees on flexible or zero-hour contracts; and employees who were made redundant after February 28th, 2020 can be furloughed if their employer rehires them. 

To be eligible for the subsidy, furloughed employees must not undertake any work on behalf of their employer nor can employees be furloughed for part of their working week. While on furlough, the affected employees’ wages will be subject to the same income tax and deductions as per usual. 

Should employees continue to work, albeit on reduced hours, hourly rate or salary, then they will not be eligible for the Coronavirus Job Retention Scheme. The employer will have to continue paying the employees affected through their payroll and pay their salary subject to the terms agreed in the employment contract.

Employers should hold discussions with their staff and should agree on any amendments to the employment contract. Equality and discrimination laws are applicable during the furloughing process.

Furloughed employees should be written to by their employers to confirm that they have been furloughed. Employers should also keep a record of all communications.

Can an employee be furloughed if they start employment after 28th February?

Employees can be placed on a period of furloughed leave but they will not be eligible to have their employment costs reclaimed via the Job Retention Scheme.

Can an employee on unpaid leave be furloughed?

Employees can be furloughed if they were placed on unpaid leave after February 28th, 2020. If they were placed on unpaid leave before that date, then they will be unable to be furloughed.

Can an employee receiving Statutory Sick Pay (SSP) be furloughed?

Employees who are on sick leave or are self-isolating in line with public health guidance are eligible to receive SSP; however, they can be furloughed once they are due to return to work.

Can an employee with more than one job be furloughed?

An employee who has more than one employer can be furloughed for each job they hold. As each job is separate, the cap applies to each employer individually.

Can an employee undertake another job when furloughed?

An employee can work for a different company while furloughed, providing that their original employment contract doesn't prohibit it.

What happens if an employee does volunteer work during their furloughed period?

Volunteer work can be done during the furloughed period, subject to the fact that it does not provide a service or generate revenue for the business.

What happens if an employee does training during their furloughed period?

Training can be done subject to the fact that it does not provide a service or generate revenue for the business. However if a company requires their employee(s) to complete online training courses whilst they are furloughed, they will need to be paid at least the NMW/NLW rate for this time even if this exceeds the 80% reclaimed amount.

What is the situation if an employee is on parental leave?

Any individual who is already on or plans to take maternity, paternity or adoption leave cannot be furloughed. In this case, the standard maternity leave regulations would apply.

Can company directors and shareholders be furloughed? 

Directors who pay themselves through their payroll will be eligible for the Job Retention Scheme. It is unlikely that they will qualify for the Self Employment Income Support Scheme in addition to this.

How much can employers claim?

Employers can make a claim for wage costs through the Coronavirus Job Retention Scheme. They will receive a grant from HMRC to cover 80% of an employee’s regular wage or £2,500 per month, whichever is lower. They will also be covered for the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on the subsidised wage. Any bonuses, commission or fees would not be included; however, payments for enhanced contractual leave (maternity pay, sick pay etc) can be included. 

An employer can choose to top up an employee’s salary beyond the minimum; however, they are not required to do so. Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through the Coronavirus Job Retention Scheme.

How are the salaries of full and part-time employees calculated?

Employers should use the gross salary of both full and part-time employees, as of February 28th, 2020, to calculate 80%.

How can an employer calculate the salary of an employee whose pay varies, such as zero hour workers?

If the employee has been employed for a full year prior to the claim, then the employer can claim for either the same month’s earnings from the previous year; or the average monthly earnings from the 2019/20 tax year. 

If the employee has been employed for less than a year, then the employer can claim for an average of their monthly earnings since they first started working for their organisation.

How can Employer National Insurance and Pension Contributions be worked out?

All employers will continue to remain liable for associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on behalf of their furloughed employees.

How will salary sacrifice be impacted by furlough payments?

Salary sacrifice arrangements stay in place, deducted from the employee's gross furlough payment. There are no NMW implications with this during the furlough period as NMW only applies when the employee is actively at work. 

Businesses can claim a grant from HMRC to cover wages for a furloughed employee, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on paying those wages. 

As mentioned earlier, any top-up salary in addition to the grant is not funded through the Coronavirus Job Retention Scheme. The same is true of any voluntary automatic enrolment contributions that go beyond the minimum mandatory employer contribution of 3%.

What about those who earn the National Living Wage (NLW) or /National Minimum Wage (NMW)?

Those who are on the NLW or NMW are only entitled to this amount for the hours they work. Consequently, furloughed employees must be paid 80% of their salary or £2,500 based on their usual working hours, even if this falls below the NLW or NMW.

What is required to make a claim?

 An ePAYE reference number

The number of employees being furloughed

The claim period (start and end date)

The amount claimed (per the minimum length of furloughing of 3 weeks)

A bank account number and sort code

A contact name

A phone number

An employer will need to calculate the amount they are claiming and HMRC will retain the right to audit all aspects of the claim retrospectively.

How does the claim process work?

An employer can only submit one claim per employee every three weeks; this is because this is the minimum amount of time an employee can be furloughed for. All applicable claims can be backdated until March 1st, 2020.

What will happen after a claim has been made?

Once HMRC has received a claim, and if the claim is successful, they will pay it via BACS payment to a UK bank account.

All claims should be made in accordance with a business’s actual payroll amounts at the point at which payroll is either run or in advance of an imminent payroll. The employee must receive all of the grant, and no fees can be charged from the money that is granted.

What happens when the Government ends the Coronavirus Job Retention Scheme?

Once the Coronavirus Job Retention Scheme has come to an end, employers must decide whether furloughed employees can return to their jobs. If the employer determines that they no longer wish to continue with a furloughed employee or furloughed employees, then they may consider termination of employment. In this instance, a formal process such as redundancy will need to be followed. More information on contract terminations here.

What about Income Tax and Employee National Insurance?

The wages of furloughed employees will be subject to Income Tax and National Insurance, as is normal. Employees will also pay automatic enrolment contributions on qualifying earnings unless they have chosen to opt-out of saving into a workplace pension scheme.

Employers will also be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions on qualifying earnings unless an employee has opted out of their workplace pension scheme.

How is the grant associated with the Coronavirus Job Retention Scheme treated for tax purposes?

Any payments received by a business under the Scheme are made to offset the deductible revenue costs. Therefore, they must be included as income in the business’s calculations of its taxable profits for Income Tax and Corporation Tax. This is consistent with the regular procedure. 

However, businesses can deduct employment costs as normal when looking to calculate taxable profits of the purpose of Income Tax and Corporation Tax.

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Published on: 2nd April 2020