Employers Who Make Redundancies May be Forced to Return Furlough Payments

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Employers who make furloughed employees redundant could potentially face action from HMRC to clawback furlough payments. Although the Government has stated that placing employees on furlough does not prevent a business from considering redundancies, there is an open question about whether serving employees with redundancy notices while they are on furlough is an abuse of the Coronavirus Job Retention Scheme.

The Government and unions have heavily criticised major airlines such as British Airways for cutting jobs and changing employees’ contracts while they are furloughed. Some have even called for the Treasury to review the Scheme and ban employers from using it to pay workers who are placed on redundancy notice. Employers could also face a double challenge if their employees claim that the redundancy procedure and selection criteria used was unfair.

Most businesses will not be considering redundancies on the scale of BA; however, as the country dips into the deepest recession on record it is inevitable that many will be forced to review their workforce and make tough decisions.

How does the Furlough Scheme work?

The Coronavirus Job Retention Scheme (also known as the Furlough Scheme) was introduced in March 2020 to enable businesses facing financial difficulty due to the coronavirus/covid-19 pandemic to keep on their employees.

The Scheme is split into several phases: the first phase, which ran until the end of June 2020, allowed employers to place employees on leave while claiming 80% of their salaries from HMRC. The second phase is more flexible and will run between 1 July and 31 October 2020; employees can be furloughed and brought back to work again when needed but employers must start contributing to their salaries and National Insurance and pension contributions.

Since the Scheme’s introduction, nearly 10 million employees working for around 1.2 million employers have been furloughed. But with the Scheme officially due to end on 31 October 2020, many are worried about the potential avalanche of redundancies waiting to happen.

Furloughed employees’ redundancy rights

The law on redundancy has not changed since the Furlough Scheme was introduced. This means that furloughed workers are entitled to everything they would get if there were not on furlough, including:

Redundancy pay (for employees who have worked for the business for at least two years unless otherwise stated in their employment contract) – payments must be calculated according to the employee’s pre-furlough salary
Holiday pay, unpaid salary and other remuneration
Notice period
A consultation
The option to move to a new role
Time to look for a new job

Employees must be selected for redundancy fairly and not discriminated against. For example, employees cannot be made redundant due to protected characteristics such as age or gender. Employees should also not be made redundant specifically because they are on furlough – this is unlikely to be a valid reason and could lead to an unfair dismissal claim.

Could employers be forced to return furlough payments for making employees redundant?

As the Furlough Scheme approaches its end on 31 October 2020, your business, like many others, may be considering whether it is viable to bring your employees back to work or whether redundancies are the only option.

The point of the Furlough Scheme is to prevent mass redundancies, so could making furloughed employees redundant be construed as an abuse of the Furlough Scheme? The Government has clearly stated that you can make furloughed employees redundant, although it has stressed that employers should do everything in their power to avoid that eventuality. From this, it can be assumed that any payments legitimately claimed for employees who have been validly made redundant are safe.

However, there are two types of scenario where HMRC may act to clawback furlough payments from employers and could even impose additional penalties and start criminal proceedings. These are in cases of mistake and fraud.

HMRC’s powers to clawback furlough payments

HMRC has extensive powers to clawback furlough payments by imposing a tax bill on employers who claimed payments to which they were not entitled (even employers who made genuine mistakes). The tax bill could amount to up to 100% of the furlough payments received by the employer.

In certain situations, HMRC can also impose additional fines and can even start criminal proceedings against companies and individuals who are suspected of intentionally defrauding the Scheme.

Mistake

While HMRC has promised not to penalise employers who genuinely need it, the Scheme’s complicated and constantly-changing rules have undoubtedly led to many confused employers. For example, in cases of redundancy, it may be possible for employers to claim a portion of:

Notice pay costs for a notice period spent on furlough
The costs of annual leave taken during the notice period

However, employers cannot claim:

Statutory or contractual redundancy payments
Payments in lieu of notice
Untaken annual leave
Other compensation

For employers who calculate incorrectly, HMRC could clawback any furlough payments to which the employer was not entitled. Furthermore, employers should be aware that if they become aware of a mistake and fail to inform HMRC to rectify it or they fail to comply with an audit which uncovers a mistake, HMRC also has the power to impose financial penalties.

Therefore, if you are concerned about your entitlement to claim under the Furlough Scheme it is important to take legal advice and notify HMRC the moment you uncover any errors.

Furlough fraud

For cases of fraud, HMRC will take a harsher approach. As well as reclaiming furlough payments from the employer, it is also likely to impose additional financial penalties and could take criminal action against the business and/or its officers or employees.

Furlough fraud arises in situations where an employer deliberately claims payments to which it is not entitled, for example, where the employer:

Has asked a furloughed employee to continue to work
Is aware that a furloughed employee is still working and does not take steps to stop them
Asks a furloughed employee to ‘volunteer’ for the business
Backdates the furlough application to cover dates the employee was working

Furlough fraud can also arise where an employer claims furlough payments in full knowledge that the business is insolvent and it is highly likely that it will be unable to repay its tax liability.

Get expert advice about furlough and redundancy

If your business is facing difficult decisions about redundancies for employees who are or have been furloughed, our employment law solicitors are here to provide you with the advice and support you need.

We ensure that every decision is made within the boundaries of your legal obligations to minimise any risk of dispute. For more information, contact your local Atkins Hope office in Croydon or Blackheath. Alternatively, fill in our contact form for a quick response.