When is 80% not 80%?

The answer is simple – furlough pay, but the reason is definitely not simple!

We’ve been running payroll services for years now, but the last 10 months really have been the most testing period ever. 20 years ago running an employer payroll was difficult, it was generally a very manual process of written ledgers & tax tables to calculate an employee’s wages, only large employers would have some sort of software to do this and it was still a very manual process of inputting data and printing payslips.

For the last few years payroll, whilst still time consuming, much of it could be automated with emailed payslips, automated reporting and even the smallest employer could have access to software to do the job. Sounds good so far? Until March 2020 it was – then came Covid-19 and the new furlough system which changed everything.

The government publicly stated that employees will get 80% of their wage over and over again but that isn’t quite true, it’s actually 80% of their usual wage which for some is a very different amount. We’ve had a number of employers ask why they cannot claim 80% of staff pay through furlough when that is what was promised, equally their staff are expecting 80% pay anyway.

For an employer you should have two considerations – firstly, do your employment contracts allow an employee to be furloughed? Secondly, have you clarified what is considered as usual pay? These are HR matters which we can’t advise on and encourage employers to get the help of a HR professional.

Once you’ve established your employee contracts do allow for furlough then surely it’s just a case of paying 80% of their pay? Well, it’s 80% of their usual pay, but for the JRS-E scheme we have to look at a reference period to work out usual pay.

In general terms an employee’s usual pay is the greater of either same pay period last year or their pay during the tax year 2019-20 divided by the pay periods but cannot usually include pay after 19 March 2020. So very soon we’ll be looking at employees pay back in March 2019 for their reference period in March 2021.

But payroll isn’t that simple, you cannot include periods where an employee was already furloughed, or during periods of statutory leave – for instance Statutory Sick Pay and you can’t include things like discretionary bonuses, but you can include things that an employee would have earnt like significant regular overtime. In any case you must pass on all of the JRS-E grant you receive to your employees and you are only permitted to make the statutory deductions like Income Tax, National Insurance, Pension contributions and other such items.

The usual pay method explains why most Directors have lost out, because for the purpose of furlough calculations the reference period and usual pay are based in the past. It has, in most cases, been more tax efficient to pay a Director a small wage through PAYE (in the region of £720-£1050) and then pay a Dividend based on the company profits.

So assuming the Director has no work and the company is effectively closed the they will only receive 80% of their usual pay, not including any Dividend, so the most a JRS-E claim is likely to be is in the region of £540 per month. Even if the Director puts their pay up during 2020 & 2021 this is ignored, and the reference period is still used – essentially pay in tax year 2019/20. Similar rules apply to Directors paid annually albeit slightly more complicated.

Can an employee demand to be furloughed?

This question has been raised a few times with us and the answer is very much dependant on the employer however furlough is for supporting an employer to pay wages during periods of no work, if work exists then surely there is no need for furlough? This statement is true but it is assuming that the work can be completed by the employee safely and they have the tools and equipment to do the task and the employers’ industry is legally allowed to trade.

An employer will also have to balance the needs of the employee, especially if asking them to work from home or alternative locations – again these are HR matters which we strongly encourage all employer to seek specialist advice before making a final decision.

Do I have to ‘top-up’ my employee’s pay?

Unless you have contractually agreed to full pay then no, you only need to pass on the value you claimed from HMRC on behalf of the employee, this will be their Gross Pay. We know some employers were topping up salaries but have now found that pressure on income is such that this has become unsustainable. Whilst morally a difficult decision, it should also be viewed that you could be saving jobs in the longer term by reserving funds for the future.

I have employees on the same pay but some get more furlough pay than others, why?

As we’ve already covered reference periods and usual pay you’ve probably already found the answer but in most cases this is caused by staff having worked more hours in the previous year or where pay included such items as mandatory performance related pay.

What’s stopping me claiming more than the usual pay and passing that on to my employees?

In the first instance there is nothing stopping you doing this but take a moment to consider how pay is reported to HMRC. Each pay period an employer must report what each employee has been paid, together with the deductions which were made using a system called RTI (Real Time Information), each year you’ll also have submitted other information such as employees who have left and any employee benefits you have like company cars or medical insurance.

When a claim for furlough is processed it includes the total amount claimed along with all the employees who have been furloughed, this is where HMRC can then match data from previous pay periods to your current furlough claim. Differences of a few pennies is not going to cause any issue but more than that you’re going to have a problem and deliberate overclaims are fraud.

This data can also be matched against other sources including benefit claims and credit reference agency data, or HMRC can (and do) contact the employer or their agent for clarification of the claim.

For furlough pay in March 2021 onwards -

For pay periods in March onwards, the reference period is actually March 2019 onwards so basically looking at an employee and Director pay from 2 years ago rather than just last year.