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Furloughed workers and annual leave – the unanswered questions

Please note that the article below was accurate as of 9 April, when the article as published. Since then guidance has moved forwards. Please read this article for an updated version: Furloughed workers and annual leave – what we know now.

The Government’s guidance on the Coronavirus Job Retention Scheme (CJRS) (updated on 4 April 2020) has failed to address whether employees can take annual leave on furlough and, if so, what the rate of pay for any such annual leave should be. This article discusses some of the key issues associated with those questions.

Before we go any further, it is worth highlighting that it is generally accepted that annual leave will continue to accrue during furlough as the furloughed worker remains employed.

Can employees take annual leave on furlough?

A definitive answer to this question is crucial. If annual leave cannot be taken on furlough, an employer needs to ensure that holiday (even on designated bank holidays) is only taken outside of the minimum three week furlough periods so that it can still access the CJRS for wages paid.

Updated guidance from ACAS (as of 8 April 2020), commentary from employment specialist QCs and responses from HMRC’s support line suggest that an employee can take annual leave during furlough without breaking the furlough period (as they continue to not be working) and that pay for annual leave can be recovered from the CJRS at the specified furlough rates. Whilst we cannot guarantee that this will not change, this is the best estimate of the position at the moment.

The Working Time (Coronavirus) (Amendment) Regulations 2020 (SI 2020/365) have recently been introduced by the government to allow the carry-over of four weeks annual leave into the next two holiday years, where it is not reasonably practicable to take the leave as a result of the effects of coronavirus. The ACAS guidance provides furlough as a factor which may result in an employee needing to carry over holiday. This could suggest that the annual leave and furlough are not in fact compatible. However, the more likely reading of this is that, whilst it is not impossible to take annual leave during furlough, an employee may not wish to and may want to carry over the time instead.  This interpretation is in line with the rest of the comments in the ACAS guidance and ACAS’s employee friendly approach.

The question is then whether an employer is able to require an employee to take annual leave during furlough. The principle reason why an employer may wish to do this is to avoid a situation whereby following the pandemic (when the business is operational and in need of its workforce), there is a surge of holiday requests. Subject to anything in the employment contract, an employer can require an employee to take annual leave by giving notice to the employee that is twice as many days as the number of days leave to be taken i.e. two weeks’ notice for one week’s leave.

It follows that if annual leave and furlough are not incompatible, that an employer can require an employee to take annual leave during furlough. However, given that the government has specifically introduced the Working Time (Coronavirus) (Amendment) Regulations 2020 to allow carry over, employers are advised to take a reasonable and fair approach so that employees are not left in a position of having little or no annual leave to be taken once the pandemic is over. Perhaps by allocating a pro rata amount of leave to the furlough period or encouraging employees not to cancel leave already booked.

By way of summary, we consider that it is likely that annual leave can be taken without breaking a period of furlough; that an employer can recover pay for annual leave at the furlough rate; and that an employer can require an employee to take annual leave during such period (subject to that request being reasonable), but we cannot stress enough that this is not a definitive position. Guidance may be released tomorrow which contradicts this, or worse still no further guidance may be released and employers could be caught out by claims later down the line. 

In terms of the forthcoming bank holidays, employers will need to take a risk based decision on whether they accept that the guidance from ACAS and others is correct and that those bank holidays can continue to be designated as annual leave (where they already are under the employment contract), accepting the low risk that later guidance may show that this breaks the furlough period.  To mitigate this risk, employers may wish to advise employees that this is how those days will be treated, but if further HMRC or government guidance is provided that suggests that this breaks furlough, those days will be reassigned as accrued but not yet taken annual leave. 

For those employers who would prefer to avoid any risk at all, the safest route would be to ensure that annual leave (including that which would have been taken over the bank holidays) is taken outside of the minimum three week furlough periods, until clarification is provided.

What is the rate of pay for annual leave taken during furlough?

If annual leave and furlough are not incompatible, this leads onto the question regarding the correct rate of pay.

Should annual leave be calculated and paid as:

  1. the normal/full (pre-furlough) rate of pay;
  2. the newly agreed furlough rate of pay (if a lower rate of pay has been agreed with the employee for the furlough period); or
  3. by applying the statutory principle of calculating the average rate of pay for the last 52 weeks (but discounting any weeks where no pay is received). The consequence being that, as the period of furlough extends, the rate to be paid for annual leave will reduce (unless the employer is topping up the furlough worker’s pay).

Commentary from employment barristers discussing this question is technical and divides assessment into three categories (1) the four weeks annual leave derived from the Working Time Directive, (2) the additional 1.6 weeks statutory leave provided for by the Working Time Regulations and (3) any additional contractual holiday.  We do not intend to delve further into those discussions for the purposes of this article, but it is something to be aware of and may require further assessment.

Until we receive further guidance, the safest course of action is to pay the normal/full (pre-furlough) rate of pay for any annual leave taken. This is the view that is currently endorsed by HMRC’s support line and ACAS guidance. 

Alternatively, you may decide to pay at the furlough rate, and then, if it later transpires that it should have been paid at a higher rate, further payments can be made.  Whilst there is a potential risk that this could amount to a breach of contract leading to a claim for constructive unfair dismissal, unlawful deduction from wage or holiday pay claim, in the current climate, this seems unlikely and the employer is likely to be able to remedy the latter two potential claims before they reach a tribunal.

Whilst we have advised on both the low risk approach and a more commercial approach the reality is that all employers will need to make risk based decisions now on whatever information is currently available, and so we hope this helps with that assessment.

We hope that further clarification on the issues raised in this article will be provided soon.

If you would like any further guidance in relation to any of these issues, please contact the Employment Team or visit the Coronavirus/ COVID-19 area on our website.

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