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Notice pay during furlough

View profile for Reggie Lloyd
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Notice pay during furlough

Employers may be considering making redundancies and employees may be notified that they are to be made redundant. Both will be keen to understand what payment they should receive if the employee is on furlough.

How is notice pay calculated if an employee is given notice of dismissal of redundancy during furlough?

If an employee is made redundant, their notice pay will be calculated based on their entitlement under their contract of employment subject to the statutory right to a minimum period of notice and pay.

In most cases, an employee will have signed a furlough agreement (a variation of contract) and may have agreed to reduced pay during furlough. In these circumstances, in theory, contractual notice can be paid at furlough rate. However, the rules on statutory notice pay are complex and depend on whether:

  • the employer is required to give only statutory notice, or at least a week more than statutory notice, and
  • whether the employee has normal working hours or not. 

Employers in a redundancy context may be minded to pay in lieu of notice (PILON). However, under the Coronavirus Job Retention Schemes (CJRS) the employee must remain employed for the employer to reclaim part of any pay under the scheme. So, it will be more cost effective to keep employees on furlough for all (or part) of the notice period so that all (or part) of the employee’s notice pay can be recovered (in full or in part) under CJRS.

Calculating notice pay

First, you must establish the contractual notice the employer is required to give the employee to terminate the contract and the statutory minimum notice the employee is entitled to (broadly 1 week notice for each complete year of service).

The rules

(A)    An employee who is entitled to only statutory notice from their employer (or less than one week more than statutory notice) will be entitled to their normal remuneration for their normal hours. This is the case even if they are on furlough and therefore on reduced pay at the time notice is served, as long as they are ready and willing to work (section 88(1), ERA 1996). 

If they remain on furlough during their notice period, the employer will only be able to recover their notice pay up to the 80% or the £2,500 cap.

For example, an employee with 4.5 years’ service is entitled to 4 weeks’ statutory notice. If the contract says he is entitled to 2 weeks’ notice he will be entitled to 4 weeks’ statutory notice and must be paid 100% pay (not furlough pay) during the 4 week notice period. As he is entitled to statutory notice he is paid full pay.

(B)    An employee with normal working hours who is entitled to at least one week more than statutory notice from their employer does not benefit from (A) above. Their statutory notice pay will be based on the pay that they are contractually entitled to (which will be their reduced furlough pay if they remain on furlough) for the duration of their notice.

For example, an employee with 4.5 years’ service is entitled to 4 weeks’ statutory notice. If the contract says he is entitled to 5 weeks’ notice (being one week more than statutory) he can be paid at furlough rate during the 5 week notice period. 

Where the employee does not have normal hours, the same principles (A) and (B) apply but their pay will be calculated in accordance with average hours worked rather than salary.

If you have any questions relating to paying employees notice pay during furlough, please contact me on 01206 217347 or reggie.lloyd@birkettlong.co.uk.

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