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Understanding settlement agreements and the coronavirus Job Retention Scheme

23 March 2020 Employment Law Garry Sutherland

On 20th March the Chancellor announced a package of measures aimed at supporting business and protecting jobs throughout the UK.

The headline of course is that where businesses were to furlough (or lay off as we know it in Scotland) employees, then the Government would pay 80% of their salary up to a maximum of £2,500 per month - the "Coronavirus Job Retention Scheme"

This provides some much needed real support for both business owners and employees across the whole spectrum of industries in Scotland. The timing of it is particularly important for businesses in the hospitality industry where the Government also in effect ordered their businesses to shut down and send their employees home at the same time. What we didn't receive (understandably) were details - this is a "one size fits all" policy and of course it would be impossible for the Government to have provided that and unreasonable for us to expect it at the time.

Garry Sutherland, partner in our employment team at Macnabs, has been giving this a lot of thought on behalf of all of our clients since before the formal announcement was made. Such Government guidance as is available from the HMRC website currently points out that "changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation". That tells us that from an employment law perspective, the normal rules apply when looking to enter into this Scheme. In plain English that means:

  1. most obviously when furloughed an employee remains an employee, and all their rights under both their specific contract of employment and employment legislation remain - "subject to negotiation";
  2. that means that they have a right to be paid their full normal contractual salary dispite the fact that an employer can recover only 80% up to £2,500 per month from the Government under the Scheme - unless agreed to the contrary with their employer;
  3. that means that they continue to accrue annual leave whilst on furlough - unless agreed to the contrary with their employer;
  4. that means that they continue to be entitled to all other contractual benefits whilst on furlough - such as for example use of a car, a mobile telephone, payment of health insurance etc - unless agreed to the contrary with their employer;
  5. probably most importantly, unless the current contract of employment expressly provides for furlough/laying off, the employer has no automatic right to force that.

You would think therefore that employees are in a position of real strength if their contract of employment doesn't provide for furlough/laying off - and many do not.

In the real world, however, businesses face the possibility of insolvency in the very short term unless they can cut costs - especially those where they have essentially been prevented from trading entirely by the Government's announcements or simply as a direct impact of the effects of Coronavirus. For most businesses, by far their biggest operating cost is their wage bill. Reducing this will most likely be the difference between having a chance of surviving or failing very quickly.

Employees who wish to still have a job to return to after this current crisis has passed - and it will pass - would be best advised to be flexible and work with their employers on this. The best way to do that is to agree to enter into furlough/lay off on a controlled basis where both employer and employee know exactly where they stand. After all, if an employee enters into such an arrangement but the business sadly fails anyway, they will still be entitled to recover statutory redundancy payments etc from the Redundancy Payments Office that is funded by the Government.

The mechanism for documenting agreements between employer and employee where the employee is waiving claims that they may have under employment law, is known as a Settlement Agreement. Traditionally they are used when an employee's employment is being brought to an end on an agreed basis so that both employer and employee have certainty. It is a requirement under the Employment Rights Act for the employee to receive independent legal advice from a solicitor who signs a certificate to confirm that advice has been given (usually paid for by the employer). A shortened version of the same type of agreement is recommended here to deal with the points above to give everyone certainty.

Whether you are an employer or an employee Garry and his team are able to assist you - either in preparing a form of Settlement Agreement for your employees to sign up to or providing advice to you if your employer has presented you with a Settlement Agreement to sign to place you on furlough/lay you off. Conscious of the safety of everyone at the moment mechanisms have been put in place to deal with these remotely rather than in the traditional "face to face" manner and as efficiently as possible.

We are expecting a vast uptake of the Government Scheme and of both employer and employee clients looking for assistance - get in contact with Garry now if you need his help by emailing him at garrysutherland@macnabs-law.co.uk

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