It has been widely reported that many businesses expect to make redundancies at the end of April, when the furlough scheme comes to a close.
However, many smaller businesses may be unaware that the Coronavirus Job Retention Scheme rules were changed in December. The furlough grant can no longer contribute towards notice pay.
This is going to prove a major challenge for some small businesses which are already hanging on by their fingernails to their prospects of surviving this crisis.
Particularly where the employees facing redundancy have long service – this is likely, as they are the most experienced and will have been the most expensive to make redundant last year and remain on furlough – the coming costs could well push businesses under.
Unprepared small businesses looking at the prospects of redundancies over coming weeks and months may be in one of two highly problematic scenarios.
Scenario one – you’re unaware of your staff’s right to notice and redundancy pay
The employer has staff on furlough where redundancies will likely need to be made but he or she is unaware of their rights to notice and redundancy pay and how these are calculated.
A myth tends to circulate that notice periods are a month, provided by the employer. It’s not true. An employee with ten years’ service, for example, is entitled to statutory notice of ten weeks’ pay (notice is capped at 12 weeks). Redundancy pay, meanwhile, is factored by age and has likely additional cost implications.
Such employers need to be aware and start preparing now, as time for consultation processes and time and cost for statutory notice need to be factored in for any redundancies to be made.
Scenario two – you used furlough to cover the notice period in 2020 but are unaware the rules have changed
An employer made some redundancies last year and used the furlough grant to cover the notice period, topping up the remaining 20 per cent to full pay.
Employers may not realise that this 80 per cent contribution towards notice pay can’t happen again – as things stand, changes in furlough rules mean that the employer will not be able to use the furlough grant and will need to pay the notice in full, without government support.
In either case, understanding of the rules and obligations for employers will provide options, rather than restrictions.
What can I do now?
Struggling businesses with little revenue coming in may well decide not to take employees off furlough, to start paying notice pay in full, especially where there’s an alternative to continue to use furlough and ‘wait to see what happens’.
However, whether or not the furlough period is extended beyond the end of April, at some point the reality of this crisis is going to hit home. Any business which is treading the fine line between sinking and swimming should be aware of the situation to make an informed decision.
The chancellor could, of course, change the rules to allow the furlough grant to contribute towards notice pay again, as was the situation last year.
If this happened, employers could potentially start the redundancy process now, using the furlough grant to contribute towards the notice pay and then, if the situation proves less dire than expected, they simply retain the employee and stops the notice period – at no additional cost to the business or the taxpayer. If the redundancy still needs to take place, much of the notice pay cost has already been absorbed.
It wouldn’t cost the government any extra – the Exchequer is already contributing furlough periods during this time anyway. However, with the reality of redundancies rapidly approaching, this measure would let small business take those decisions now, so we can avoid a mass of insolvencies further down the line.
Otherwise, there is a serious risk that businesses which delay the redundancy process until the end of the furlough period will face significant costs, especially regarding long-serving employees.
These could sink the whole business, with the government picking up all the redundancy costs, through the National Insurance Fund. It’s not a winning situation for anyone involved – the business or the employees most importantly, as well as the taxpayer and the government itself.
Jill Bottomley is the director at The HR Dept.