How do I calculate notice pay for an employee who has been on furlough leave?

Update: On 3rd March 2021, Rishi Sunak announced in his Budget that furlough leave would now be extended until the end of September 2021.

On 31 October, it was announced that the Coronavirus Job Retention Scheme would be extended until the end of March 2021.  You can find out more about the extension in our latest Updated Coronavirus Job Retention Scheme Guidance article.

With over 6 million employees having been on furlough leave over the last few months, it is inevitable that some of those may have already been working their notice when their employer placed them on furlough leave.  If you have made this decision as an employer, you will need to consider how to calculate their notice pay.  Our Employment Law team discuss this here and review how you should proceed in this area, and the penalties if you make incorrect calculations.

In this situation, you may be wondering whether an employee who is furloughed during their notice period is entitled to be paid their notice pay at 80% of their salary or whether it reverts back to 100%.  In order to find the answer, you should check the notice period stated in the employee’s contract.

If the employee is entitled no more than one week’s greater notice under their contract than the statutory minimum notice period, then s87(4) of the Employment Rights Act 1996 gives them rights to minimum pay during their notice period. That is a “week’s pay” for every week of notice. The Employment Rights Act 1996 sets out several methods for calculating it, depending on whether the employee has normal working hours, and whether their pay varies with the amount of work done. Depending on the situation, the minimum guaranteed notice rights could be anything between 80% and 100% of their normal pay.

By way of demonstration, we’ll use the example of an employee who has worked for his employer for 15 years.  Their contract says they are entitled to three months’ notice, with their statutory minimum notice being 12 weeks.  They are given three months’ notice on 27 February 2020, which expires on 26 May 2020.  That is a contractual notice period of 12 weeks and 6 days. 12 weeks and 6 days is not at least one week more than his statutory minimum notice (12 weeks), and so they are entitled to statutory minimum notice pay, which may be a figure between 80% and 100% of normal salary depending on the method of calculation.

If the employee does not qualify for minimum guaranteed notice rights, then their pay during a furloughed notice period will be what they have agreed to receive while on furlough. This is usually 80% of their normal salary subject to a £2,500 per month cap.

Another example would be an employee who has worked for their employer for 2½ years with their employment contract stating they are entitled to receive one month’s notice.  They have agreed to accept 80% of normal pay while on furlough and because they have worked for 2½ years, their statutory minimum notice period is two weeks.  Their contractual notice period, one month, is at least one week more than the statutory minimum.  This means that they are not entitled to statutory minimum notice rights under s87(4), and their notice entitlement while on furlough is one month at their current contractual entitlement, i.e. 80% of normal salary.

Employment Tribunal considerations on notice pay

This approach could allow employers pay less than an employee’s normal notice pay during their notice period, because an employee was willing to forego part of their normal salary in an attempt to help their employer remain solvent and save their jobs.  This seems counterintuitive and there are ways that a Tribunal could find that employees are to receive 100% of their notice pay even if furloughed.

1. If an employee has a garden leave clause in their contract, and they are in their notice period, they could argue that they are entitled to their normal garden leave pay which is usually 100% of their normal pay. While on furlough leave the employee is on notice and being told not to do any work for their employer, which is the same definition of garden leave.

2. A Tribunal could imply a term that the employee’s agreement to reduce salary to 80% was only while they were not on their notice period, perhaps because the Coronavirus Job Retention Scheme (CJRS) is there to preserve, not remove, jobs. However, this may not be successful because:

1. This implied term would be inconsistent with the expressly agreed term to reduce salary to 80% during furlough; and
2. the CJRS does, in places, contemplate jobs ending due to redundancy whilst furloughed.

3. For some employees who are entitled to guaranteed minimum notice pay; work normal working hours and their remuneration does not vary with the amount of work done, they can rely on a section in the calculation of a ‘week’s pay’ which refers to calculating pay as ‘if the employee works throughout his normal working hours in a week’, to mean they should get the amount they would normally get if they were not on furlough.

What if employers pay the wrong amount?

If you pay 100% of the notice period when the employee is strictly only entitled to 80% of salary while on their notice period, the employee is unlikely to complain abut this. However, theoretically speaking, if you subsequently cease to trade, an administrator or liquidator might seek to offset those overpayments against any other payments due to the employee.

If you pay 80% (or between 80% and 100%), and a Tribunal or Court later holds that the employee should have received their full salary during notice, the employee will have a claim in the Tribunal or civil courts for the shortfall. If you wish to rely on a post-termination restrictive covenant you will not be able to if you have dismissed the employee in breach of contract by underpaying notice pay.

Calculating notice pay for an employee on furlough leave can be a difficult one to make and, as demonstrated here, will be determined by a variety of factors including the employment contract and length of service.  For assistance in making these calculations for any of your employees, or to have your other questions on furlough leave addressed, you can contact us today on 023 8071 7717 or email employment@warnergoodman.co.uk.  Alternatively, you may find the following articles useful:

• Can I force my employees to return from Furlough Leave?
• Furlough Leave: update and actions employers need to take
• What should I pay my furloughed employees who have just returned from maternity or paternity leave?
• Can my apprentices continue to learn while on Furlough Leave?

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.