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The Coronavirus Act 2020 and the furlough pay calculation

Julian Ball

Julian Ball | Legal Director

Thursday 30th Apr, 2020

The pressing question

In this article we take a look at the question that is proving so controversial: how do you calculate furlough pay for umbrella workers? But before we go into the legal technicalities we think it is important to say that this could be cleared up in a minute if the Government were to say; “for umbrella companies it works in this way.”

The Government knows that this is a big issue for umbrella companies and their tens of thousands of workers because trade bodies such as FCSA, APSCo, REC, TEAM and the umbrella companies themselves have been campaigning for an answer since the Coronavirus Job Retention Scheme ("CJRS") was introduced. Further details of PayStream’s campaign can be found here.


The Law

The nearest thing we currently have to legislation on this point is The Coronavirus Act 2020 Functions of Her Majesty’s Revenue and Customs (Coronavirus Job Retention Scheme) Direction.

Clauses 7.3-7.5 set out what you can and cannot include in calculating furlough pay. It says:

You cannot take into account payments that are “conditional” on any matter or which vary based on - (a) the performance of any part of any business of the employer or any business of a person connected with the employer,(b) the contribution made by the employee to the performance of, or any part of any business, (c) the performance by the employee of any duties of the employment, or (d) any similar considerations or otherwise payable at the discretion of the employer or any other person (such as a gratuity).

The wording seems, on the face of it, to cover a wide range of payments. If the employee brings in income for the company and is paid commission is this caught by the wording?


The Guidance

HM Treasury has also issued Guidance which says you cannot include the following when calculating furlough payments:

  • payments made at the discretion of the employer or a client - where the employer or client was under no contractual obligation to pay, including:
    - discretionary bonuses
    - discretionary commission payments

The fact that commission gets paid when the umbrellas are paid has been interpreted by some as being discretionary. This is because basic pay is paid even if the umbrella is not paid by the agency or client. Some umbrellas even use the word discretionary in their contracts to make the distinction clear.


How an umbrella contract is structured

Umbrella contracts provide a guarantee to pay minimum wage (basic pay) and also pay commission or bonus which is equal to the balance of funds received from an agency after costs and on occasion expenses.

This has worked well for everybody over the years as it gives umbrella employees the flexibility to move from assignment to assignment (at different rates) without changing contracts and has allowed, in some cases, for expenses to be reimbursed before commission is paid.


Legal Advice?

Industry lawyers have drawn attention to the word “conditional” in the Direction and warned that HMRC may interpret the commission or bonus paid to umbrella workers as “conditional” or “discretionary.” They have advised that HMRC may not refund umbrellas under the CJRS if payments are made on the gross amount (or will subsequently claw the payment back).

The advice has been to pay only basic pay if the CJRS is to be used at all. This is because the commission element is conditional on getting paid by the agency/client. If the agency or client did not pay the umbrella then the umbrella would pay the employee basic pay. If umbrellas get the calculation wrong they will likely be insolvent.


We do not believe this was Government’s intention

The Direction and the Guidance were quickly put together and almost certainly did not consider the way that umbrella companies work.

We do not believe that the Government made a considered decision to treat umbrella employees any differently from other workers. Indeed we believe they may not have initially been considered at all. This is not a criticism since the CJRS was put in place in haste.

Other industries were in the same position. For example the car industry, which pays sales commissions based on car sales were told that these commissions could be included (presumably because they are regular payments). These commissions are no different from umbrella workers’ commissions which rely on payment by the agency (rather than the car buyer).

It is very worrying (and some might say telling) that the Government has been unable to provide the same clarity to umbrella companies.


Next Steps

We have introduced a furlough scheme for eligible employees based on basic pay. This will be topped if the Government confirms that gross pay can be used as the basis of the calculation. We sincerely hope this will be the case. Payments will be made from our own funds for as long as we can and during that period we will not make a grant claim under the CJRS. This is because once you have made a claim under the CJRS you cannot amend it to ask for more which would leave our umbrella employees out of pocket.

We will continue to press for an answer.


Related article - Why furlough pay isn't straight forward for umbrella employees

In this article we look at the challenges around furlough for umbrella employees. In particular the frustration and confusion created by differing opinions as to whether furlough pay is calculated on gross pay or basic pay.

Find out why
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