Making an employee redundant while on furlough due to coronavirus

29 June 2020

The Coronavirus Job Retention Scheme is intended to give employers whose operations have been severely affected by the coronavirus (COVID-19) pandemic an alternative to making staff redundant. As employers are expected to bear some of the cost of furloughed employees from August 2020 onwards, and with the scheme being wound up at the end of October 2020, it may be that autumn 2020 will see a particular spike in the number of redundancies being made. Either businesses will need to close altogether, or they will have to adjust to radically different market conditions.

What is a redundancy?

A redundancy is a dismissal caused by one of three situations:

  • the closure of the employer’s business;
  • the closure of the employee’s workplace; or
  • the fact that the employer’s requirements for employees to carry out work of a particular kind have ceased or diminished or are expected to cease or diminish.

A redundancy may be part of a planned reorganisation or a change in business strategy. It may also be an unavoidable response to an external crisis, such as the coronavirus pandemic. A redundancy may arise simply because the employer cannot afford to continue to employ staff.

While the Coronavirus Job Retention Scheme may obviate the need for redundancies while it lasts, it does not prevent them. There may be reasons why an employer needs to make employees redundant even while they are furloughed. However, employment tribunals may question why it was necessary to take such a step while the wages of employees were being so heavily subsidised by the state.

The Coronavirus Job Retention Scheme does not directly affect the normal operation of employment law when it comes to making staff redundant. There are two key legal obligations for employers making redundancies. First, the employer has an obligation to behave reasonably in making the employee redundant, as employees with at least two years’ service have the right not to be unfairly dismissed. The length of service requirement does not apply to dismissals on certain grounds, for example if the employee is selected for redundancy having made a protected disclosure. Second, in the case of large-scale redundancies (20 or more employees being dismissed at a single establishment over a period of 90 days or less) there is a requirement to consult the appropriate employee representatives. The employer also has a duty to submit form HR1, informing the Government of collective redundancies.

The extraordinary circumstances that many employers are facing does not mean that they can ignore these obligations. There is a limited defence, in relation to collective consultation, if “special circumstances” mean that it is not reasonably practicable for the employer to follow all of the steps that are usually required. The employer must nevertheless carry out whatever consultation is reasonably practicable in the circumstances. In the context of unfair dismissal, the question of whether or not the employer has behaved reasonably is one that must be judged by a tribunal with regard to “all the circumstances of the case”. This means that the impact of the pandemic is something that the tribunal will take into account, but it does not give the employer a free pass to behave unreasonably. If an employee is unfairly dismissed, the financial circumstances of the employer will not affect the amount of compensation that is awarded. Failing to meet the required standard of reasonableness could, in those circumstances, make the employer’s financial situation even worse.

This guide does not go into detail about collective consultation with furloughed employees. For practical advice on this area please seek further guidance from your HR supplier.

Redundancy during furlough

If an employee is dismissed for redundancy before the end of the Coronavirus Job Retention Scheme, a tribunal hearing an unfair dismissal claim is likely to want to know why it was not possible to retain the employee until the scheme ended. Similarly, an employer that chooses to make redundancies without taking advantage of the scheme at all will be expected to explain why that was a reasonable course of action to take.

From August 2020, employers will no longer be able to claim under the scheme for employer national insurance contributions or pension contributions, and in September and October they will have to contribute to furloughed employees’ wage costs. Even before August 2020, there are costs to an employer in furloughing employees and administering claims under the scheme. An employer might be in a position to show that these costs, given its financial circumstances, made it reasonable to dismiss employees without taking full advantage of the scheme.

Nevertheless, the Coronavirus Job Retention Scheme, as its name suggests, is designed to encourage employers at least to delay making staff redundant. Without a good reason for not going down that route, an employer that does not take full advantage of the scheme may be found to be acting unreasonably. In an unfair dismissal claim, it is likely that the compensatory award (to be paid by the employer) would represent at least the amount that the employee would have received while furloughed, with a further sum representing the chance that the job could have been retained beyond the lifespan of the scheme.

Consultation

Where an employer is proposing to make 20 or more employees redundant at a single establishment over a period of 90 days or less, it must comply with the specific requirements for consulting the appropriate employee representatives.
Consultation is a fundamental aspect of a fair dismissal for redundancy, no matter how many, or how few, employees are at risk of redundancy. The fact that employees have been placed on furlough under the Coronavirus Job Retention Scheme will not in itself excuse the employer from the duty to consult.

The essence of fair consultation is a genuine attempt to seek the views of the employee on the employer’s proposals and to consider them with an open mind. The employer should engage in a dialogue with individual employees and any representative body, such as a trade union or staff consultative committee, as appropriate. Generally, consultation with representatives is focused on the employer’s overall approach to the need for redundancies and the selection process. Individual consultation then takes place on the impact of the selection process on the employee and any individual circumstances that the employer needs to consider.

Where there are no appropriate representatives, the employer’s consultation with individuals should cover both the general redundancy proposals and the selection of the individual.

To be genuine, consultation must take place before a final decision is taken. However, the overall duration of the consultation is of less importance than the quality of it. What matters is that the employer gives the employee adequate time in which to respond to its proposals and that the employee’s response is properly considered before any decision is final. In individual cases, it is generally accepted that a fair consultation process tends to take at least two weeks, but there is no fixed timetable. Complex reorganisations may require a longer period of consultation, whereas individual redundancies arising when a job is no longer sustainable may take much less time.

One important effect of the Coronavirus Job Retention Scheme is that it will make it difficult for employers to argue that meaningful consultation was not possible because of the sudden and urgent nature of the crisis it faced. Government guidance on the scheme confirms that employees can participate in any consultation process while furloughed. An employer that believes that redundancies will become necessary when the support of the scheme is withdrawn should be open with employees and seek their views as to any possible alternatives well in advance.

In normal circumstances, an employer would expect to conduct consultations through face-to-face meetings. Clearly, however, that will no longer be possible in many cases. Email, telephone or online meetings may be appropriate, depending on the circumstances. Provided that consultation takes place and is genuine, the form it takes is of less importance.

Selection for redundancy

Most redundancy exercises involve a process of selection. This involves identifying the group, or “pool”, of employees to be placed at risk of redundancy, then selecting the individual employees within that pool who will actually be dismissed. Each element of selection is a matter for the employer. The choice must be a reasonable one, but there are no fixed rules about how the selection is to be made. The pool for selection should be based on the employer’s future needs and the structure of its business. It should not generally take into account temporary factors such as whether or not an employee was placed on furlough. Furloughed staff should not be disadvantaged, and those employees who have not been furloughed should not, on that ground alone, be excluded from the process.

The selection of individuals should be based on criteria that are either agreed with employees or at least arrived at after appropriate consultation. The emphasis should be on objective criteria where possible, but where a subjective assessment is necessary, the employer should be as transparent as possible about how the assessment is made and be prepared to provide objective supporting evidence. The employer must take particular care to ensure that any selection criteria are not discriminatory.

Typically, a selection process seeks to assess the skills and performance of the employee in their current role. That may be more difficult when the employee has been on furlough over an extended period or working under less than ideal conditions as a result of the coronavirus crisis. It may be necessary for the employer to look primarily at performance before March 2020, to ensure that a fair assessment is made of the employee’s performance in normal operating conditions.

Employees with caring responsibilities or vulnerability to coronavirus

Where some employees have been placed on furlough and others have not, the employer should take care to ensure that those who have been furloughed are not placed at an unfair disadvantage. This is especially so if some employees have volunteered for furlough because of their caring responsibilities. Those employees who have been able to continue working are not necessarily more dedicated than colleagues who were furloughed. Placing an employee on furlough is ultimately a choice for the employer and an employee should not be penalised as a result of that choice.

In a redundancy exercise, the employer is seeking to ensure that it retains the workforce that will best be able to take the business forward. Attendance and reliability often form an important part of the selection criteria used, although the employer needs to be careful to make reasonable adjustments to the selection process when these criteria are impacted by an employee’s disability.

An employer may, when making selections for redundancy, want to select those employees who are less likely to be able to return to work immediately after furlough because of underlying health conditions or concerns about their vulnerability to coronavirus. This raises the obvious risk of discrimination arising from disability or indirect discrimination based on protected characteristics such as race or age. The employer may potentially be able to justify its actions, but it would need to show compelling evidence of its need to make a choice based on these factors to protect the business. Such an approach should be adopted only when the risks to the business are urgent and the employer needs to prioritise reliable attendance from the reduced workforce.

A problem facing many employees during the coronavirus pandemic is childcare, with many schools and childcare facilities remaining closed for the foreseeable future. Selecting employees for redundancy on the basis of their difficulty in coming into work because of this would create a risk of indirect sex discrimination. Parental status is not in itself a protected characteristic, but women are more likely to be disadvantaged by the unavailability of childcare. Since the childcare issue is likely to be temporary, an employer would have to show a severe and urgent need for employees to attend work, to be able to justify selection on this basis in response to any allegation of discrimination.

Employers should note that there is no qualifying length of service for a discrimination claim.

Cost considerations

Cost is another factor that can play a role in the selection process. The employer may want to select those employees with the lowest entitlement to a redundancy payment or seek to select the highest paid and therefore most expensive employees to make the maximum saving in terms of salary cost. There is the potential for indirect age discrimination in this approach. Cost alone is not considered sufficient to justify what would otherwise be indirect discrimination, but in a redundancy exercise, cost saving is one aspect of the overall aim of preserving and protecting the business. Whether or not an approach based on these factors is justifiable will depend on the details of the employer’s financial position and if any alternative ways of proceeding are available.

Employees who were re-employed prior to furlough

Some furloughed staff may have been made redundant before the Coronavirus Job Retention Scheme was introduced and then re-employed so they could be placed on furlough. This should not in principle affect their vulnerability to selection for redundancy, except to the extent that the factors leading to the first dismissal still apply. However, in many cases the employee would have had a period of more than a week when there was no contract of employment in place and continuity of employment will be broken. An employee with less than two years’ service cannot claim a redundancy payment or a normal unfair dismissal, so selecting employees in this position presents less of a legal risk. If the employee was given a redundancy payment when initially dismissed, even if they were re-employed quickly enough that continuity is still preserved, their service for the purposes of another redundancy payment will be reset to zero.

Giving notice of redundancy

An employee dismissed for redundancy is entitled to notice in accordance with the contract of employment and subject to the minimum notice of period set out in the Employment Rights Act 1996. This provides for one week’s notice per year of service, to a maximum of 12 weeks.

There is nothing to stop an employer from giving notice while the employee is on furlough. The employer will be able to claim under the Coronavirus Job Retention Scheme throughout the notice period, just as for any other furloughed employee.

Notice pay

Where an employer has been topping up employees’ pay so that they receive their normal pay during furlough, they must continue to do so during the notice period. However, the question of whether an employee furloughed on reduced pay should be paid at their pre-furlough rate during the notice period, or can remain on reduced furlough pay, is a complex one.
One complication is that an employee who is “ready and willing” to work during the notice period, but who is not provided with work by the employer, is entitled to be paid a normal week’s pay (ss.87 to 89 of the Employment Rights Act 1996). This could mean that an employee who has agreed to accept 80% of their normal pay (or £2,500 per month if lower) while furloughed would be entitled to full pay for the period of notice.

However, this is not straightforward. In the first place, this right to full pay does not apply if the employee’s contractual notice exceeds their statutory notice entitlement by one week or more. For example, the right would not apply to an employee with two years’ service and a contractual notice period of four weeks. The second complicating factor is whether or not an employee who has agreed to be furloughed can be described as “ready and willing” to work. This may depend on the circumstances. In many cases, a furloughed employee will be ready and willing to work, should the employer ask them to. In other cases, the employee may have made other arrangements, or even taken other employment, for the agreed period of furlough. In that case, arguably there will be no obligation on the employer to top up the payments made under the Coronavirus Job Retention Scheme.

Where the right to a normal week’s pay during the notice period does apply, a week’s pay for this purpose is calculated in the same way as for a redundancy payment, save that there is no cap on the amount payable. This means that employees with normal working hours on a fixed salary will be entitled to the amount they would be paid if they worked those normal hours. Those whose pay varies will be entitled to an average of their pay over 12 weeks (which may include weeks of furlough if they do not have normal working hours).

Where the right to a normal week’s pay during the notice period does not apply, ie where the employee is not ready and willing to work, or where their contractual notice period exceeds the statutory minimum notice by a week or more, arguably the employer can continue to pay them at the furlough rate, without topping this up. Clearly, the question of notice pay during furlough is not straightforward. The safest option for an employer, to avoid any dispute, would be to pay the employee at their normal, pre-furlough rate. Where an employer decides to continue to pay the reduced furlough rate, it should be aware that this may be challenged by employees and it is not yet known how tribunals will approach this issue.

Additional payments

The Coronavirus Job Retention Scheme will not cover the additional payments that will become due to the employee when the notice expires. For example, the scheme will not fund a redundancy payment or the payment for any holiday accrued but not taken, which all employees are entitled to when their employment ends.

Employers should note that the value of the payments due may vary depending on when the notice expires. The employee may have accrued more holiday during the notice period or completed another year of service for the purposes of a redundancy payment. In both cases, the key date is the date the notice expires, not the date when the notice was given. An employer could consider requiring employees to take annual leave during their notice period, although again there is a potential risk that this could be challenged at a tribunal.

While the Coronavirus Job Retention Scheme will cover at least some of the wages payable during a notice period, it will not subsidise a payment in lieu of notice. If the employee is dismissed without notice, they are no longer an employee and are not covered by the scheme.

Asking employees to work their notice

An employee who has been given notice of redundancy remains an employee for the duration of the notice period. In theory, an employer could ask a furloughed employee to return to work at any stage before the day the notice expires. There may be a need for the employee to return to work for a short time if there are some loose ends that need to be tied up before they leave.

Whether or not the employer is able to instruct the employee to return will depend on the terms on which they were furloughed. If the employer and employee agreed that the furlough would last for a minimum period, for example to allow the employee to be free to work elsewhere, the employer may not be able to instruct the employee to return, depending on what was agreed. However, in most cases, the employee remains at the disposal of the employer and can be asked to work under their contract without the need for a formal notice period bringing the furlough to an end. The employer must make sure that the employee has been furloughed for at least three weeks under the original scheme (this period may be reduced to one week from July 2020 onwards). Bringing the employee back before the minimum three-week furlough period has expired will mean that the employer cannot claim for that period under the Coronavirus Job Retention Scheme.

New employment during the notice period

Under the terms of the Coronavirus Job Retention Scheme, a furloughed employee can start a new job with a different employer without the original employer’s eligibility to claim for their wage costs being affected. If the employee remains on furlough during the notice period, they may be able to start a new role before the notice period has expired. However, even during the notice period, a furloughed employee remains subject to the implied terms of the contract of employment, including the duty to provide faithful service. This means that the employer can seek to prevent the employee undertaking work for another employer that will harm the original employer’s business. The employee may also be bound by other restrictions in the contract of employment that prevent them working for any rival.

Subject to those restrictions, there is no rule to the effect that an employee cannot have two jobs at once and there is nothing to stop a furloughed employee from finding work elsewhere, even if that means that overall they earn more than they would have earned had they not been furloughed.

Calculating statutory redundancy pay

Employees with at least two years’ service are entitled to a statutory redundancy payment, based on their length of service, age and weekly pay. The employee’s normal “week’s pay” is calculated as at the date on which notice is given (or the date on which the dismissal takes effect if the employer fails to give notice).

However, in most cases, this does not mean that an employee who is furloughed on reduced pay when notice is given will receive a lower redundancy payment than they would have received had they not been furloughed.

For employees with normal working hours, a week’s pay is the amount they would be paid if they worked those normal hours. A furloughed employee will still be employed under a contract with normal working hours, they are just not being asked to work those hours while they are furloughed. Therefore, a week’s pay is not the amount they are receiving while furloughed, but the amount they would receive if they were working normally.

There may be cases where the employee agreed to shorter working hours before furlough took effect. If this was intended to be a temporary change, it is unlikely to affect the employee’s normal working hours. However, a permanent change will affect the calculation of a week’s pay, and therefore the redundancy payment as a whole, even if it was introduced a short time before the employee was made redundant.

Where the pay of an employee with normal working hours varies by the amount of work done, or the time at which the work is done, a week’s pay is based on the average amount paid in the 12 weeks leading up to the date when notice is given. But this average must be based on actual hours worked. If no hours are worked in a particular week, that week is disregarded, and the average is pushed back a week until 12 weeks where work is actually done are counted. Therefore, for a furloughed employee, the average week’s pay will be based on the 12 weeks leading up to furlough and not the period of furlough itself.

For employees with no normal working hours the position is less straightforward. A week’s pay must be based on a 12-week average, but a week is only disregarded for this purpose if no remuneration was payable. There is no requirement for any work to have been done for the week to form part of the 12-week average.

Therefore, a week’s pay for a furloughed employee with no normal working hours will be calculated on the basis of a 12-week average that includes weeks of furlough. In some cases, this will lead to a lower redundancy payment, but in other cases the employee may be better off as a result.

In any event, employers should remember that the statutory cap on a week’s pay for the purpose of calculating a statutory redundancy payment is £538. Many employees will be receiving more than this per week while furloughed, even if they are receiving only 80% of their normal pay (capped at £2,500 per month).

Liability for a redundancy payment

An employer is responsible for paying a redundancy payment to any employee who qualifies for one. Funding from the Coronavirus Job Retention Scheme is not available for this purpose. If the employer is not in a position to pay, the employee is likely to make a claim in the employment tribunal. Ultimately, an employer’s inability to pay its debts can lead to insolvency proceedings.

Redundancy can be a tricky situation and therefore we always recommend that you seek professional advice in the first instance before undertaking any process.

Should you require any further advice or guidance in relation to redundancy please call us on 0191 205 8020 or send us an email.

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