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Furlough Scheme – A blueprint for future redundancies?

Last month, the Chancellor announced an unprecedented package of Government measures to support businesses through the economic impact of COVID-19. Front and centre was the Coronavirus Job Retention Scheme (CJRS), which introduced the concept of “furlough”.

While CJRS is only intended to be a temporary measure, it may be an opportune time for policy makers to consider whether this new concept of furlough could be of benefit as a permanent feature of the redundancy framework.

CJRS and furlough

CJRS allows employers to reach agreement with their workforce that they will place them on “furlough” – a temporary period of leave where they remain an employee but will not work for the business. The Government will fund 80% of the furloughed employee’s salary (maximum £2,500 pcm) for a minimum of three weeks.

The initial scheme will run for a maximum of three months, although it may be extended. Employers may choose to “top up” the remaining 20% of the employee’s salary, but there is no obligation to do so.

The Scheme applies widely, including any worker on PAYE payroll as of 19 March 2020 and those falling outside of the traditional legal definition of an employee. It was extended to incorporate those who have changed employment after 28 February 2020, allowing previous employers to re-employ workers so they are able to benefit from the Scheme.

The impact of furlough

As businesses scrambled to react to the scale of the crisis, widespread redundancies looked unavoidable. CJRS has provided valuable support to both businesses and employees during huge economic uncertainty. The benefits are circular: businesses can weather what is hoped to be a relatively short but acute economic crisis by effectively “downing tools” and alleviating the immediate pressure of staffing costs on cashflow. In turn, employees retain some financial security to meet their own obligations and some breathing room to look to the future.  They also get to keep some cash coming into their pockets that they can spend to keep the wheels of our economy moving and hopefully keeping more businesses alive.

Limitations of the Scheme

While widely welcomed, the Scheme has its limitations. The most glaring concern is the unavoidable tax burden on future generations. Equally, CJRS does not provide any guarantee against redundancies once the Scheme has ended. It provides a temporary stopgap to weather the worst of the storm, and there remain workers who fall outside its remit. The current supporting Guidance lacks a little clarity (particularly on the relationship between furlough and annual leave).

Perhaps the principal concern is the system is open to abuse, with employers potentially furloughing staff while continuing to require them to work. HMRC has already recognised this and set up a whistleblowing hotline to try to address the issue but we will need to wait to see how successful a deterrent that is. As with all new benefits, it will require fine-tuning and re-evaluation in order to make it work as required.

Furlough as a continuing benefit?

At present, employers looking to make redundancies have an obligation to consider other alternatives before dismissing. If a Government-funded furlough system was available to them as one alternative, it may provide a fair balance to both employers and employees: employers will benefit from a temporary alleviation of their wage burden which may give time to avoid the redundancies altogether; employees will gain a financial parachute that provides security and some time to consider whether to look for alternative employment or retrain.

The arguments against a continuing furlough system will be much the same as with any welfare changes: it’s expensive and open to abuse. There would certainly need to be an in-depth analysis to consider whether there is value in continuation.

Providing potentially-redundant employees with an opportunity to look for new employment and minimise a period in which they may be reliant on state benefits may prove a net benefit over time. Qualification criteria would need to be significantly more stringent if we are to avoid furlough being used as a cash-saving measure by struggling businesses. It would be critical that a business had no other alternative to redundancy, and not simply be experiencing a quieter period in their business and used as a mechanism to increase shareholder value.

The CJRS is a radical treatment for a radical problem. However, many people who have never faced job insecurity or redundancy are now appreciating the fragility of their positions and as the crisis passes we may hear louder calls for enhanced employment protections. A more moderate system of furlough may be a workable alternative to redundancy. There are a multitude of ways this could be structured. For example, the costs of furlough could be split between employer and government; employees may be willing to pay into a contributory system to elect for furlough rather than redundancy should the situation arise; contributions could be made according to size and turnover. While COVID-19 has impacted businesses across the board, most businesses at some stage in their lifecycle will experience unforeseen hardship and need to consider their ongoing viability; incorporating furlough into the range of options available to them during those times may well provide valuable protection to both shareholders and employees in the longer term.

Article written and contributed by Faith Widdowson, Machins Solicitors

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. It is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered above, please speak to Machins Solicitors directly

Published on 22nd April 2020
(Last updated 7th May 2021)