COVID-19 Developments for UK Employers: Coronavirus Job Retention Scheme, Annual Leave Carryover

March 30, 2020

In updated guidance to the Coronavirus Job Retention Scheme announced March 20, the UK government gives employers much needed clarity about how the scheme will work in practice, as well as details on the permitted carryover of annual leave.

The Coronavirus Job Retention Scheme is a temporary government scheme designed to help UK employers that are struggling financially due to the coronavirus (COVID-19) pandemic to retain their employees pending an upturn in work levels. The scheme is intended to allow employers to furlough employees who would otherwise be laid off or made redundant, giving employers greater flexibility in managing their workforces during this time.

The UK government has committed to covering 80% of furloughed employees’ usual monthly wage costs, up to a cap of £2,500 (approx. $3100) a month, plus the associated Employer National Insurance contributions and minimum automatic enrollment employer pension contributions due on that wage. However, employees will need to pay income tax and Employee National Insurance contributions as usual.

The following are included in the scheme:

  • 80% of an employee’s regular wage or salary before tax (capped at £2,500 (approx. $3100))
  • Associated Employer National Insurance contributions
  • Minimum automatic enrollment employer pension contributions on the subsidized wage

These are not included in the scheme:

  • Fees
  • Commissions
  • Bonuses
  • Benefits other than minimum automatic enrollment employer pension contributions

The scheme is open to all UK employers that had a PAYE payroll scheme on February 28, 2020, and will run for at least three months; payments will be backdated to March 1, 2020. There is no need for an employer to show that it is suffering any form of financial hardship in order to claim.

The government has suggested that the scheme will be up and running by the end of April; however, this is not guaranteed as a system to reimburse employers is not yet in place. This may be problematic if COVID-19 has had a significant impact on a business’s cash flow, limiting its ability to maintain regular pay. In such circumstances, employers may be eligible for a coronavirus business interruption loan.

Eligible Employers

The scheme has been designed to include any UK organization with employees, including businesses, charities, recruitment agencies, and public authorities (the government does not expect public sector employers to use it as long as central government continues funding wage costs in the normal way).

Eligible employers will need to do the following:

  • Designate affected employees as “furloughed workers” and notify their employees accordingly
  • Submit information to HM Revenue and Customs (HMRC) about the employees who have been furloughed and their earnings through a new online portal

Eligible employers will need to use the employee’s actual salary before tax (as at February 28, 2020) to calculate the 80% figure, and must consider the employee’s length of service in accordance with the following principles:

  • Employees who have been engaged by their employer for at least 12 months should submit the higher of (1) the same month’s earnings from the previous year or (2) average monthly earnings from the 2019–20 tax year.
  • Employees who have been engaged by their employer for less than 12 months should submit an average of their monthly earnings since they started.

The government intends to publish further guidance on how to calculate Employer National Insurance contributions and minimum automatic enrollment employer pension contributions before the scheme becomes live.

Eligible Employees

Employers will be able to furlough any of their employees who were on the employer’s PAYE payroll as at February 28, 2020. Significantly, the scheme also covers employees who were made redundant after February 28, 2020, if they are rehired by their employer.

The scheme covers any type of contract, including the following:

  • Full-time employees
  • Part-time employees
  • Employees on agency contracts
  • Employees on flexible or zero-hour contracts

The government has confirmed that any individuals who are engaged through the PAYE system will be eligible for support, which means that workers who are paid through PAYE will be covered, including those on zero-hour contracts and other flexible contracts. Self-employed persons are not covered by the scheme and instead are eligible to receive support directly from the government.

Employers should be mindful of the following categories of employees who may be treated differently:

  • Employees working on reduced hours or for reduced pay will not be eligible for the scheme, and employers will have to continue paying the employees in accordance with their employment contracts. Therefore, where a business needs its employees to work, but on a reduced schedule, that arrangement will need to be contractually agreed with each employee and financial support will not be available from the government.
  • Employees currently on sick leave can be placed on furlough leave once they are no longer on sick leave.
  • Employees who work more than one job will be eligible for furlough leave in each employment.

Maternity/Parental Leave

The scheme does not affect employees’ entitlement to statutory maternity pay. However, employers that offer enhanced contractual maternity pay can place employees on maternity leave on furlough and remain eligible to receive support in respect of the cost of that enhanced payment. The same applies for people on other types of similar leave, such as shared parental leave. As noted below, care will need to be taken when deciding whether to furlough an employee who is on maternity leave, to ensure that the employee is not furloughed because she is on maternity leave, which could potentially amount to direct discrimination.

Process for Furloughing Employees

When the scheme was first announced, it was unclear whether employers could impose the decision to furlough on their staff or whether it must be done with consent. The government has now confirmed that any decision must be discussed with staff and any changes made “by agreement.”

In order to be eligible for the financial support, the guidance states that employers should write to their employee(s) confirming that they have been furloughed and should keep a record of this letter. The potential implication is that without written evidence of such communication, there is a risk that employers may not be able to claim under the scheme.

The guidance states that when deciding which employees should be placed on furlough leave, the usual rules relating to equality and discrimination will apply. This means that decisions about who or who not to furlough should not be based on a protected characteristic. Beyond this, nothing is said about how employers should go about selecting who to furlough (assuming only part of the workforce needs to be furloughed), suggesting the discretion remains with the employer.

Nevertheless, it is likely sensible to try to establish a fair selection process and criteria, which may include consideration of those who fall within vulnerable groups or have additional caring responsibilities as a result of the coronavirus outbreak. Employers are advised to keep a written record of the employees that have been placed on furlough leave and any correspondence on this matter.

The guidance also states that “if sufficient numbers of staff are involved, it may be necessary to engage collective consultation processes to procure agreement to changes to terms of employment.” Employers will need to take a pragmatic approach as to the extent of consultation that takes place, balancing the need to take urgent steps to reduce costs against the strict obligations that apply under collective consultation legislation. A risk analysis should be undertaken in each case, and employers should bear in mind the “special circumstances” defense, which can be asserted where an employer has been unable to comply in full with collective consultation legislation, and which might be invoked in the unprecedented circumstances presented by the COVID-19 crisis.

Employees must be furloughed for a minimum of three weeks and can be rotated in and out of furlough as the employer deems appropriate.

While on Furlough Leave

Employees who are placed on furlough leave cannot undertake any work for their employer. However, they are allowed to take part in volunteering or training activities, provided these don’t generate revenue for the employer. For example, the National Health Service (NHS) has been recruiting volunteers for its NHS Volunteer Responders, in which employees on furlough leave will be eligible to participate. If employees are required to complete training courses for their employer while furloughed, they must be compensated at least the national minimum wage for this time (even if this is more than the 80% government subsidy).

Additional Considerations for Employers

The Coronavirus Job Retention Scheme provides a welcome measure of financial support for employers that may be struggling financially during this time. Employers that sign up for the scheme are not obliged to top up the 80% grant to 100% of the employee’s wages, although they may do so if they wish. If employers do so, they must consider how this will be perceived by any part of the workforce that continues to work full time, while their peers are off work on full pay.

Employers should also note that the scheme does not apply to any future/new hires, as employees must have been on the payroll on February 28, 2020, to be eligible. This poses a challenge for employers who have new recruits who started work in March, or are due to start imminently, but for whom there is not currently sufficient work. As they do not have the option of putting such employees on furlough leave until the business recovers, they may seek to negotiate a later start date with the employees, or terminate their contracts in accordance with their terms.

While the Coronavirus Job Retention Scheme helps employers to retain employees in the short term, it is a temporary measure. There is no requirement under the scheme that employees must be retained at the end of the furlough period, and employers should actively monitor their business needs and consider whether they will need to make employees redundant when the scheme is no longer available.

Annual Leave

An inevitable consequence of the pandemic is a disruption to annual leave. Key workers may find that they are unable to take annual leave due to the heightened need for key workers in the present circumstances, or employees may not be eligible to take annual leave while furloughed.

UK Business Secretary Alok Sharma announced on March 27 that the Working Time Regulations 1998 will be amended so that workers can carry over annual leave entitlements into the subsequent two years. The changes will apply to almost all workers, including agency workers, those who work irregular hours, and workers on zero-hour contracts. Workers who have not taken all of their statutory annual leave entitlement due to COVID-19 will now be able to carry over a maximum of four weeks into the next two leave years, providing welcome flexibility to employers and employees alike.

Coronavirus COVID-19 Task Force

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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Matthew Howse
Louise Skinner