Furloughed workers and annual leave – what we know now

When the Government’s guidance on the Coronavirus Job Retention Scheme (CJRS) was first published on 26 March 2020 (and for several subsequent updates) it did not address whether employees can take annual leave on furlough or, if so, what the rate of pay should be. Likewise, the Treasury’s formal Direction to HMRC does not mention annual leave at all.

This is not entirely unsurprising. The question of annual leave is one of employment law, which is expressly unchanged by the CJRS. However, there was an unanswered question of whether annual leave would break the furlough period, which the Government guidance for employees and the guidance for employers on calculating payments finally addressed.
This article sets out what we now know in light of updated guidance; what case law suggests about some of the key questions that remain unanswered; and considerations employers need to look at when deciding how to proceed.

What does government guidance say about annual leave and furlough?

On 17 April 2020, the Government’s guidance for employees was updated, and guidance on calculating payments was introduced, mentioning annual leave for the first time. The guidance sets out that:

  • Annual leave continues to accrue whilst an employee is on furlough leave
  • Employers and employees can agree to vary the employee’s holiday entitlement, provided it does not go below the statutory entitlement of 5.6 weeks paid annual leave
  • Annual leave can be taken while on furlough, but must be paid at the usual rate of pay (i.e. topping up the grant of 80% or £2,500 that employers can recover, and calculating holiday pay in accordance with the Working Time Regulations)
  • Employers will be able to restrict when leave can be taken if there is a business need
  • If bank holidays are usually taken as leave then employers must either top up the pay to usual holiday pay or give the employee a day of holiday in lieu
  • The government is keeping the policy on holiday pay during furlough under review
    Although this is a welcome confirmation, there are questions left unanswered, some of which are discussed below. Whilst many are hoping that further iterations of the Government guidance will clarify some of these points, the truth is that these are questions of employment law which (in the absence of specific new legislation) are likely to only be fully answered by the courts in claims later down the line.

Can employees take annual leave on furlough?

Yes, the guidance confirms that employees can take annual leave whilst on furlough. It must follow that doing so would not interrupt the minimum furlough period of three consecutive weeks and annual leave would not therefore prevent an employer from accessing the CJRS for that period.
Note that this is where employees choose to take annual leave; enforced annual leave is not so straightforward.

Can employees be compelled by an employer to take annual leave on furlough?

This is the trickiest area and one which remains uncertain. Our view is that this is a question of employment law, not an unanswered element of the scheme, so can only be found in a full consideration of the case law on annual leave applied to this unprecedented situation. It is therefore unlikely to be settled until it comes before the courts.
However, the fact is that employers will need to take a decision on whether to compel employees to take annual leave, so we will set out the various views and our practical tips for taking a risk based decision.
The most popular view (supported by ACAS) is that employers can require an employee to take annual leave, subject to anything in the employment contract. Employees must be given notice of the requirement to take annual leave 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. Employers should adopt a fair and reasonable approach, not leaving an employee in a position where they have little or no annual leave to be taken once the pandemic is over.

However, some commentators have claimed that employers cannot require annual leave to be taken during furlough, primarily because the purpose of annual leave is to have rest and leisure, which is unlikely to be achieved during lockdown. It is the lockdown rather than the furlough which is the problem here, and is being compared to a long term sick leave situation. The extensive case law in this area establishes that workers may choose to take annual leave while off sick, but they cannot be compelled to. This school of thought would be consistent with the regulation introduced by the Government allowing up to four weeks’ annual leave to be carried forward to the next holiday year where it is not reasonably practicable to take the leave as a result of the effects of coronavirus. Whilst not as widely supported as the previous view, the logic is compelling, and may well be the view taken by the courts when the inevitable cases are brought.
We appreciate that this is not particularly helpful, so will look at what this uncertainty means in practice for the decisions you need to take.

You may wish to require employees to take annual leave during furlough to avoid a situation in which, following the pandemic (when the business is operational and in need of its workforce), there is a surge of holiday requests. Taking into consideration the ability to carry annual leave forward, employers should consider the implications for its business of both the options of requiring leave to be taken and allowing it to accrue and remain untaken:

Option 1 – don’t require employees to take annual leave whilst furloughed

Whilst there is still uncertainty around the lawfulness of requiring employee to take annual leave, this option offers the minimum legal risk. However, there are practical considerations to be considered.

Employee expectations will need to be managed: when lockdown is over, you may not want everyone to take their annual leave immediately, or at the same time, so decisions as to how to manage holiday requests in a fair manner will require consideration.

Where employees have contractual annual leave in excess of 5.6 weeks per year, you may ask for their agreement to vary their contract to reduce their annual leave for the year (although not below 5.6 weeks). This is anticipated by the government guidance, and is perfectly possible, although if you do want to explore this, we would recommend that you obtain legal advice.

Another approach would be to invite employees to volunteer to take annual leave now if they wish to, explaining that they will be paid at their higher rate. Note that employees should not be pressured to do this.

Option 2 – require employees to take annual leave whilst furloughed

Whilst there is no guarantee, it appears that the risk of requiring employees to take annual leave breaking the furlough period (such that it would prevent a claim for employment costs under CJRS) is very low.

However, you may face employee relations issues. Employees may feel disgruntled at having to use up their annual leave whilst they are in lockdown and furloughed, and you may have the hassle of dealing with complaints or grievances. To avoid or minimise this, communication will be key, in terms of explaining to employees the reason why it is so important to ensure that the business is able to manage its costs and function at the end of furlough, and the difference in pay that they will, in many cases, receive.

A key risk is, of course, if it later transpires that employees should not have been required to take annual leave. In theory, there is the possibility of facing claims. However, our current view is that this “mistake” could be rectified, simply by giving the employees the annual leave back (or paying them in lieu of that leave if they have left the business).

The potential costs of incorrectly requiring leave to be taken will differ depending on your furloughed workforce; their salaries and the extent to which you are already topping up earnings during furlough. For example, if you have a furloughed employee earning less than £2,500 per month and you are topping up from the government grant to 100%, if you have to give those days back, there will be no additional cost to the business. However, if you have an employee whose normal pay is £5,000 and you have agreed a varied pay of £2,500, all of which is being claimed under the CJRS, you will have to top this pay up during assigned annual leave. If you subsequently have to treat those days as not coming out of their annual leave allowance, it is unlikely you will recoup that top up cost.

Can employees be prevented from taking annual leave on furlough?

The guidance confirms the usual employment law position that employees can be prevented from taking annual leave if there is a business need. It is difficult to see what that business need could be when someone is on furlough, other than the business not being able to afford to pay the employee at their normal rate of pay (which is, of course, required during periods of annual leave, and is likely to be the only reason why employees would want to take annual leave whilst on furlough).

What about carrying holiday over?

Ordinarily, there is no right to carry over holiday into the next holiday year unless this is agreed between the employer and employee.

However, in light of COVID-19, the government has introduced the Working Time (Coronavirus) (Amendment) Regulations 2020 (SI 2020/365) 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 refers to furlough as a factor which may result in an employee needing to carry over holiday.
This may be a helpful option for many businesses and employees if employees have large amounts of annual leave remaining but are needed in the business once restrictions ease and they become busier.

Will we get any further clarity?

Whilst, at first blush, it may seem surprising that there is not more clarity on annual leave in the guidance or the Direction, this makes sense when you consider the comments made throughout the guidance that the scheme does not change existing employment rights, of which annual leave is one. Having said that, both the employee guidance and the guidance on calculating pay contain the ominous comment “During this unprecedented time, we are keeping the policy on holiday pay during furlough under review”, so watch this space!
We must therefore be clear that despite our best attempts to make sense of the guidance that is available, this article cannot set out a definitive position. Guidance or legislation may be released tomorrow or case law may be created which changes the position.

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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