Furlough pay may be based on wages from two years ago

The Low Incomes Tax Reform Group (LITRG) point out that furlough pay from now until September 2021 could be based on two-year-old pay data and would not take into account recent pay rises, including the April 2021 minimum wage rate riseif existing rules remain in place.  

The government is extending the Job Retention Scheme until September 2021. The Budget confirms that it will continue in its current form until the end of June 2021. As the economy reopens and demand returns, the government will require increased employer contributions until September 2021. 

LITRG say the furlough scheme is a lifeline for small employers, but point out that the JRS has now been in place since March 2020. By the scheduled current end date of September 2021, the JRS will have therefore run for more than 18 months – which, the group say, will cause complexities in some employees’ furlough pay calculations. 

Victoria Todd, Head of LITRG, says

HMRC have already confirmed that for some variably paid employees, when working out their furlough pay for the corresponding period in March and April 2021, wages for March 2019 and April 2019 must be used for the ‘higher of’ calculation and not March 2020 and April 20201

Without this change, the relevant reference periods employers use to calculate the JRS grant would overlap with periods during which the JRS has been running. This could result in employers basing furlough pay for March and April 2021 on periods during which the employee was on furlough and may have had only 80% pay, meaning their furlough pay for these months could be 80% of 80% of wages, which would be unfair

If the calculations from May 2021 onwards follow this same methodology, it is important for both employers and employees to be aware that some future furlough pay calculations could, counterintuitively, be based on two-year-old pay data. 

LITRG also point out that this methodology means that variably paid furloughed workers will not feel the benefit of any pay rises they may have received, including National Minimum Wage pay rises in April 2021, until they are back at work. 

Victoria Todd continues: 

The government have today confirmed the minimum wage rates from 1 April 2021. We know that some staff currently on furlough are on the minimum wage and we also know that some sectors like hospitality, wont fully reopen for some months. 

Because of the look back when calculating furlough pay, workers who are expecting a National Living Wage rise to £8.91 from 1 April 2021 for example, won’t see the benefit of this while they remain on furlough. The furlough pay calculation will also bypass the £8.72 rate rise in April 2020This is likely to come as an unwelcome surprise to employees. 

This could feel quite unfair, but, practically speaking, finding a solution presents challenges. Higher pay rates could be used, but then you have the problem that overall, weekly or monthly pay is likely to be lower in 2020 or 2021 anyway, due to the impact of lockdown on working hours skewing the result.  

As an example, say you have Dav, who is variably paid, according to the hours he worksDav’s furlough pay for April 2021 will be based on his monthly pay in April 2019 of £1,100 which was calculated using the then NMW rate of £8.21. The alternative is that his furlough pay for April 2021 is based on the higher minimum wage rate in force in April 2020 or April 2021 but with actually a much lower monthly pay amount, due to it being a furlough periodwhich would be to his detriment. 

The only way around this is for employers to do many better off calculations to work out what might give the best outcome. But there has to be a balance between doing the right thing for an individual employee and making things administratively manageable for employers. Adding further complexity to an already complicated scheme means employers may simply refuse to furlough people.