Are redundancy payments on furlough wages?

Jul 20, 2020

Under the coronavirus job retention scheme (CJRS), employers can reclaim 80 per cent of their employees’ wages up to £2,500 per month from the government, provided that the business has been severely affected by Covid-19. There are reports of workers receiving redundancy payments calculated on the basis of their furloughed rate of pay of 80 per cent, as opposed to their pre-furlough pay.

Once an employee has been made redundant, they are entitled to a statutory notice period based on their length of service. An employee might be required to work any notice period or be paid in lieu of notice. Where an employee has two years’ service, they are entitled to a statutory redundancy payment for each full year they have worked for their employer. 

Notice pay and redundancy pay are based on a ‘normal’ week’s wages. There isn’t specific government guidance on this issue but there is a question arising over whether this newly reduced wage could be used to represent the employee’s ‘normal’ wage when calculating redundancy payments.

It is clear that an employee on furlough retains the same rights to redundancy payments and therefore implies that any redundancy payments should be based on pre-furlough pay.

But notice payments are more complex, and whether this pay should be based on furlough or pre-furlough amounts depends on whether the employee is entitled to statutory or contractual notice. If an employee is entitled to contractual notice and the contract provides at least one week in addition to the statutory notice amount, notice pay is based on the furlough agreement. 

If an employer were to base redundancy payments on an employee’s furlough pay, there are certainly risks in this approach. Employees could raise a grievance or bring a claim in the employment tribunal for unlawful deduction of wages or breach of contract. If it turns out that the employer has underpaid, they will be required to pay any outstanding amounts to the employee. Employees could seek to challenge the redundancy and attempt to bring an unfair dismissal claim. 

Many businesses are likely to be experiencing significant financial difficulties at this time. But it’s also important to consider that if an employee was to bring a claim, this could require substantial time and money to defend. The safest option would be to ensure that redundancy payments are paid with reference to the employee’s pre-furlough rate of pay, excepting the more complex rules surrounding contractual notice pay. Provide clear written agreements is the best way forward.

Employers who retain staff for three months after the furlough scheme ends will receive £1,000 government ‘bonus’ for each employee. One of the main purposes of the Coronavirus Job Retention Scheme (CJRS) has been to support continued employment rather than face the prospect of mass redundancy.