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Dealing With Staff Costs During the Coronavirus Crisis

The Coronavirus crisis has already caused economic havoc and businesses have been scrambling to cut costs. With less work around, many are looking to reduce staff costs. Different options being explored include salary cuts, reduced hours, unpaid leave and even redundancies.

Last Friday (20 March), the Chancellor, Rishi Sunak, announced a package of new measures to assist businesses with the crisis including the Coronavirus Job Retention Scheme. This could be a game changer for businesses in deciding how to respond to the crisis.

Summary of the Coronavirus Job Retention Scheme

In short, the scheme provides for HMRC to reimburse the salary costs of employees who are placed on ‘furlough’, up to a limit of 80% of salary, but capped at £2,500 per month. We are waiting to see the full details of the scheme, but so far the key points include:

  • The scheme will only apply to employees on PAYE (i.e. not consultants)
  • Employers will need to classify the relevant employees as “furloughed workers”, which should be done with the agreement of the employees
  • Selected employees cannot continue to work, but they will remain as employees (and they will continue to accrue holiday and other employee benefits)
  • The employer will need to pay the relevant salaries, which can then be reimbursed with retrospective effect from 1 March, initially for a period of 3 months
  • It appears possible for employers to limit salary payments to the amount HMRC will reimburse (see above), though this would need to be agreed with the employees
  • HMRC will be setting up a new online portal for employers to input the details of the relevant employees. They say reimbursements will be made by the end of April

Key strategic issues to consider

The above scheme should really help with staff costs, but employers will need to think strategically about how best to use the scheme. In particular:

  1. Strategic reorgansiations

As explained, employees can only be covered if they don’t do any work. Employers might want to explore if they can change roles and working patterns so that some employees keep all necessary activity running and ‘free up’ others to allow them to be classified as “furloughed workers”.

  1. Decisions on topping-up

Employers need to think strategically about whether to top up salaries beyond the above 80% of salary and £2,500 per month limits.

Many employers may want to stick as closely to the limits as possible. But this would of course be a major disadvantage to higher earning employees. For instance, those with salaries above £37,500 per year would have a higher effective salary cut if they are limited to £2,500 per month.

On the other hand, care needs to be taken when treating employees differently. From a practical perspective, staff might get upset and they might not agree to the above arrangements. From a legal perspective, care needs to be taken to avoid legal claims (e.g. for discrimination or for treating part time staff worse than full time staff).

  1. Cash flow issues

Although the scheme seems very attractive, there may be cash flows issues, since employers need to continue to pay staff (as opposed to putting them on unpaid leave or dismissing them), while reimbursement may take time to come through.

In addition, even if there is full reimbursement of salaries, there remains other costs to bear, such as employer’s national insurance contributions, pension contributions and holiday accrual.

This piece is a summary, based on the limited information available at the date of writing. It should not be relied on as a substitute for legal advice on any specific situation.


Article written by: Oliver Harris