Guidance on Settlement Agreements and Furlough

In the past two months, we have successfully concluded over 200 settlement agreements for both our employer and employee clients, and, as the end of the Company Job Retention Scheme (CJRS) fast approaches (31 October 2020), we’re sure there will be many more.

A Settlement Agreement is a document by which an employee agrees to waive their rights to bring any employment-related claims against their employer and is often used in a redundancy situation.

In our experience when handling settlement agreements, we have come across some common questions and misconceptions about, in particular, the payments to employees that have been furloughed and whose employment is being brought to an end. Getting it right from the outset will save on management time and, potentially, legal fees.

Notice

Payment in lieu of notice (PILON) or ‘worked’ notice

You will need to decide whether you would like the employee to work all or part of the notice period and, if they are to work any part of their notice period, whether they are to remain furloughed.

Whilst you may be minded to make a PILON, you should bear in mind that under the CJRS, an employee must remain employed for you to reclaim part of any pay under the scheme. As such, it would be more cost effective for the employee to remain furloughed for all (or part) of the notice period so that all (or part) of their notice pay can be recovered under the CJRS.

Notice Pay

You can continue to claim reimbursement from the CJRS in respect of employees during their notice periods, whether statutory or contractual.

Statutory notice pay should be calculated at the employee’s normal weekly earnings, not the reduced furlough rate i.e. for employees with fixed hours and a fixed salary, the value of what a week’s pay was before they were furloughed and, for employees whose pay varies based on the amount of work done, a week’s pay is based on an average of their earnings over a 12 week period before furlough.

The same rule does not apply to any contractual notice pay over and above the employee’s statutory minimum. However, in our view, best practice would be to pay an employee their normal weekly earnings in respect of that period in any event, to reduce the risk of a breach of contract claim.

Holidays and Holiday pay

Workers continue to accrue annual leave during furlough; a payment in lieu of any accrued but unused annual leave should be provided for in the settlement agreement.

Any holiday taken during furlough, as well as any Public Holidays that have fallen within the furlough period, should have been paid at the employee’s normal, pre-furlough rate of pay. If that didn’t happen, you should provide for a top up payment in the settlement agreement to make up for the shortfall.

You can require employees to take annual leave during their notice period. In doing so, you will be able to, effectively, reclaim part of the employee’s holiday pay for that period under the CJRS. Unless the employee’s contract of employment allows you to force them to take a period of annual leave during their notice period, you must provide them with statutory notice i.e. double the number of days you are requiring the employee to take (e.g. for period of 10 days holiday you would need to give 20 days’ notice).

Statutory Redundancy Pay

You can make employees redundant whilst furloughed. However, you cannot claim reimbursement of redundancy payments under the CJRS (whether Statutory Redundancy Pay (SRP) or enhanced redundancy pay). Like statutory notice pay, when calculating SRP, a week’s pay should be calculated in accordance with an employee’s normal, pre-furlough pay (see above). The cap on a week’s pay for SRP purposes remains at £538 (until April 2021).

We know it can be confusing and so we are here to help and advise on all employment law issues including guiding you through any settlement agreements you may need. Call us on 01904 437680 or email info@torquelaw.co.uk.