COVID-19: our guidance on furlough, annual leave and Bank Holidays

Please Note: All information correct at time of writing on 6 April 2020. We do our very best to make sure our information is as up to date as possible, but we’d encourage you to check out our latest articles and to check the government website for updates as they happen.

We’re still waiting for clarification from the government on the relationship between annual leave and furlough. The original guidance issued on the Coronavirus Job Retention Scheme was completely silent on the question of holidays. This leaves employers in the difficult position of having to make decisions about their employees’ holidays, and in particular the forthcoming Bank Holidays, without knowing how this may affect furlough periods and their right to claim a furlough grant.

It remains one of the most controversial aspects of the scheme, with a diverse range of opinions from employment law solicitors as to how this position should be interpreted.

In an interview on 27 March, Ben Kerry, Head of Labour Markets at the Treasury and one of the architects of the Job Retention Scheme, was asked what would happen if an employee was on holiday when a decision was made to put all employees on furlough.

He answered that the employee wouldn’t be on furlough during the holiday period and therefore the employer could not recover the costs of the holiday from the scheme, but the employee could be put on furlough immediately after.

Assuming this approach is reflected in the scheme rules, this suggests:

  1. An employee can’t be on holiday and on furlough at the same time and
  2. Employers can’t recover the cost of holiday pay through the scheme

What it does not tell us is whether a period of holiday, taken during a period of furlough, breaks the continuity of the furlough period.

For example, employee A is on furlough for two weeks and then has a week of holiday. Immediately after her holiday she returns to furlough.

We know that furlough must be taken in blocks of three weeks. If holiday breaks the continuity of the furlough period, employee A’s employer would not be able to claim a furlough grant for the first two weeks of A’s furlough as it was less that the required three-week period.

In order for her employer to claim for the furlough period after her holiday, she will have to be on furlough for a minimum period of three continuous weeks.

If, however, the holiday does not break the continuity of furlough, if A spends one week on furlough after her holiday, her employer will be able to claim the subsidy for her entire period of furlough.

Employers, therefore, have two options – allow holidays to be taken or cancel any holidays due to be taken.

Option 1 - cancel holidays

Given the uncertainty surrounding the scheme rules, we would advise cancelling any annual leave which is due to take place during a period of furlough. Employers have the right to do this if they give the employee notice equivalent to the length of the holiday. However, you can always ask the employee to waive this.

The advantages to the employer of this option are:

  • they will not have to pay holiday pay at this challenging time. This is a cost it appears they will not be able to recover under the scheme and this would have to be paid at full pay, including commission etc (to the extent that it complies with European case law and your contractual obligations).
  • it removes any risk that the scheme rules will treat the holiday as breaks in the continuity of furlough which could cause problems in claiming a grant for the full period of furlough.

The main disadvantage of this approach would be the problems in managing substantial periods of untaken holiday when business activities resume. However, these concerns have been alleviated by the passing of legislation which allows for up to four weeks statutory holiday, which it has not been reasonably practicable for the employee to take because of the effects of coronavirus, to be carried over for two subsequent leave years.

The UK’s additional 1.6 weeks of annual leave has always been capable of being carried over but only to the following leave year. There is, therefore, lots of scope to manage this problem when things return to normal.

Option 2 - allow holidays to be taken during a period of furlough

The advantage of this approach is that it does not require any changes to be made, it allows annual leave to be used up at a time when it has no impact upon the business (apart from financially) and the employee has the benefit of a boost to their income.

However, the disadvantage is that, until we know how holiday will affect continuity of furlough periods, the business is assuming the risk that this may affect their ability to claim a grant for the full period of furlough. Furthermore, it appears the business will not be able to recover holiday costs from the scheme and therefore this will have to be funded by the business at full holiday pay costs.

Bank Holidays

The most pressing issue for businesses with employees on furlough at the moment is how to treat the Easter and May Bank Holidays, which will fall during the initial three-month scope of the scheme. Again, there are a number of options here:

  1. Ignore the Bank Holiday as it falls within a period of furlough – continue to treat the employee as being on furlough and pay furlough pay
  2. Pay full holiday pay for the Bank Holiday
  3. Reach an agreement with the employees that the Bank Holidays will not be taken now but days in lieu will be added to their holiday entitlement

Let’s take a look at some of the pros and cons of each of these approaches.

Ignoring the Bank Holiday

For many small businesses, this may be an option they feel they have no option but to take because the current crisis leaves them with no choice but to do so. However, they should be aware that the scheme rules may prevent them from claiming furlough pay for Bank Holidays.

The risks of this approach are:

  • This may put the employer in breach of contract as many contracts of employment provide that Bank Holidays can be taken and paid for
  • This may result in the employer being in breach of the requirement to provide a minimum of 5.6 weeks holiday as many employers include Bank Holidays as part of this statutory entitlement.

Pay full pay for the Bank Holidays

The advantage of this approach is that employers will be meeting their contractual and/ or statutory obligations. The disadvantage is that it is speculated (but we do not know for sure) that employers will not be able to claim through the scheme for any element of holiday pay including a Bank Holiday. We are also unclear as to whether taking a Bank Holiday could break the continuity of a furlough period. Whilst it would seem very unfair if the rules were to operate this way, there will always be some element of risk until the position is clarified.

Agreement for the Bank Holiday to be taken at a different time

This avoids the disadvantages of the first two options, but it does leave the employer with additional holidays to manage when the employees come back to work. This will be partially alleviated by the introduction of new rules allowing carry over of up to 4 weeks holiday into the following two leave years.

We would hope that,  given the speed with which business owners have had to make decisions and the total absence of guidance available to them, the Treasury and HMRC will not treat holidays as breaking the continuity of furlough as to do so would penalise employers who have only tried to do the right thing by their employees.

Furthermore, interpreting the rules this way would only undermine the main purpose of the scheme which is to preserve businesses whose operation has been affected by coronavirus and leave them in a strong position to return to trading as normal as quickly as possible.

Helping you protect your business in uncertain times

Our HR and Employment Law experts are following the latest government updates to find out as much information as possible, and help you understand the help available to you to keep your business up and running.

Keep an eye on our latest articlesfree guides and social media for more advice and guidance. And if you’re already a Citation client, you can call our advice line on 0345 844 4848.

If you’re not a Citation client yet and you want the support of our team of HR and Employment Law experts, give our team a call on 0345 844 1111 to talk through your business needs. Or, just fill out your details in the form opposite and we’ll be in touch as soon as possible.

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