How will furlough affect statutory redundancy and statutory notice pay?
One of the sad realities of the COVID-19 pandemic is that people will be made redundant from their employment. Redundancies have already happened and will continue to happen until the end of the CJRS on 31 October, and beyond. It is reported that approximately 9 million employees have been placed on furlough with many seeing their earnings be reduced to 80% or be capped at £2,500 a month.
Until 31 July 2020, the law and position were unclear over how statutory redundancy and statutory notice pay should be calculated for those on furlough. There was concern that such payments may be calculated not on their earnings under their employment contracts but on the basis of the reduced rate of pay whilst on furlough. On 31 July 2020, the Government published the Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020. It is a tough read and takes potentially multiple attempts and some strong drinks to get through and understand!
Broadly speaking the Regulations have the effect that statutory redundancy pay and statutory notice pay will be calculated at the employee’s normal weekly earnings, not the reduced furlough rate. Statutory redundancy pay remains capped at £538 per week.
For employees with fixed hours and a fixed salary, the calculation of their pay is straightforward as it based on the value of what a week’s pay was before they were placed on furlough leave. For employees who have variable pay based on the amount of work done (this is important), a week’s pay is calculated by averaging their earnings over a 12 week period before furlough. The same calculation is to be used for employees with no set hours of employment.
Section 86 of the Employment Rights Act 1996 (“ERA”) confirms that employees are entitled to 1 week’s statutory notice for each complete year’s service subject to a maximum of 12 weeks. Sections 88 and 89 assists with what the position would be if a furloughed employee was served notice. As it is likely they would be willing and able to work then they would be entitled to receive paid notice.
Potential Problem Area
Having reviewed the Regulations, I believe there could be a significant gap which the law does not seem to address with those employees who are paid a basic salary which is then topped up with commission or bonus based on sales. The reason for this is that the ERA has somewhat complicated provisions on how a weeks pay is calculated – which the Regulations have touched upon and modified.
As stated above, for employees with fixed hours and a fixed salary a week’s pay is their pay under their employment contract. For employees whose pay varies on the amount of work done such as a production rate they a weeks pay is calculated on the basis of their average pay over 12 weeks. The same being true for those employees whose hours of employment vary. These situations do not appear to fit with an employee who receives a set basic rate of pay which is then topped up with commissions earned on sales – a fairly common situation with those working in sales.
Previous case law has confirmed that for commissions and bonuses to be included in the calculation for a weeks pay they need to be due because of work actually done, not the result of work done such as securing a sale. For example, if an employee was paid a weekly attendance bonus that payment would be made for the work they did that week. Whereas a salesperson is paid commission as a reward for an outcome that has been achieved – i.e. a sale. The commission payment is not paid for the amount of work undertaken but because of the outcome of the work.
This appears to create the situation where for example a sales employee who is made redundant and serves their notice under furlough will only be paid at the rate of their basic pay. When calculating furlough pay for the same employee the employer would consider the corresponding months earnings from the previous year or the average monthly earnings during the tax year 2019 / 20. Furlough pay for that employee would include payments in respect of commission whereas their notice pay would not.
The upshot is that this could lead to the perverse situation that the employee would receive more whilst as furlough pay than they would be entitled to when serving their statutory notice. This a situation that appears to be at odds with what the Regulations were seeking to do but given that legislation, Government guidance and Treasury Directions in respect of furlough and COVID-19 have contained holes, this is not necessarily a surprise. This could lead to some confusion and potential disputes between employees and employers over what the correct level of notice pay should be.
A further area of confusion is that holiday pay for employees with variable pay (such as those who receive commission) is to be calculated by using a 52-week average. As such for an employee receiving commission their furlough rate of pay differs from their entitlement to statutory notice which differs to their entitlement to holiday pay. The phrase “clear as mud” comes to mind. If you are an employee or employer who requires advice on calculating statutory notice pay please do not hesitate to call me (01752 513549) or email me (email@example.com).