Overtime and CJRS calculations- should overtime be included or not?
The HMRC guidance from 4 April 2020, stated that employers could include in payments for non-fixed rate employees, regular contractual payments, including ‘past overtime’.
The term ‘past overtime’ was not given any definition. It could be taken as overtime worked in the previous month that has to be paid during furlough, or average regular overtime worked, which would appear in line with the variable pay calculations.
The Treasury Direction released on 15 April 2020, referred to including ‘non-discretionary overtime’ in calculations. Again, this term was given no definition- does it include only guaranteed overtime, or could it include compulsory overtime which is discretionary to the employer but non-discretionary to the employee (i.e. if the employer asks the employee to do overtime, they cannot refuse), or does it simply mean that if an employee works overtime the employer has no discretion on paying them for the time worked? The latest HMRC guidance has also now changed to refer to inclusion of ‘non-discretionary’ overtime rather than ‘past overtime’.
Alarmingly, a client has informed us that they called HMRC on two occasions to ask about overtime, namely whether they should include average regular overtime, which an employee must work if requested to do so, but which is not guaranteed by the employer, i.e. it is at the employer’s discretion whether to offer overtime and how much.
On the first call, they were categorically told that they should include the overtime in the calculations. However, on the second call, they were categorically told that they should only include overtime in the calculations if the overtime is guaranteed (i.e. the amount of overtime is fixed by the contract) and if it is not they should not include it.
Given the above, caution must be exercised on this point. It would appear that there are conflicting views as to whether non-guaranteed overtime can be included in the calculations, and this uncertainty could result in an employer either overpaying an employee and not being able to reclaim the amount from HMRC/ having this element clawed back by HMRC in the future, or underpaying an employee if the overtime should have been included. This results in a choice for the employer- they could either include average overtime in the claim/ furlough pay and take the risk that HMRC will seek to claim it back, or not include it in the claim/ furlough pay, and explain that it cannot be included as it is discretionary on the part of the employer and not guaranteed. The latter option runs a risk that an employee will claim against the employer for an underpayment, but the former option runs a risk of a clawback from HMRC.
If you have employees who work regular contractual overtime, it may be a good idea to call HMRC to check your own position on this. It should be noted that the two calls referred to above were nearly two weeks apart and it may be that HMRC advisers have now received clarity that only guaranteed overtime should be included, but it is not clear. You should keep a careful note of the time, date and content of the call, together with the name of the person at HMRC you spoke to. You may also decide to call again on another day and ask the same question and see if you get the same answer. I’d also recommend that you discuss this point with your accountant.
If you decide not to include overtime and you have indicated to employees previously that it could be included in the calculation, then you should inform the employees of the reason for not including it, which will, of course, be stronger if HMRC has told you that it cannot be included and the reason they have stated this.
If you decide to include overtime, based on HMRC’s advice, then you may wish to agree to a clawback provision with the employee allowing you to require that they repay any sums which are subsequently claimed back by HMRC.
Holidays and Furlough
This area has also been the subject of confusion and uncertainty. To some degree, the latest guidance from HMRC clears some elements of this up. The main questions are:
1) Does holiday accrue during furlough leave?
It is very clear that statutory holiday (minimum holiday under the Working Time Regulations 1998) does accrue during periods of furlough leave. Further, it is very likely that contractual holiday will also continue to accrue during furlough leave, unless your contract or furlough leave agreement state otherwise.
2) Can holiday be taken during furlough leave?
Yes, latest HMRC guidance indicates that employees can take holiday whilst on furlough without breaking the furlough period. The guidance expressly states:
Employees can take holiday whilst on furlough. Working Time Regulations require holiday pay to be paid at the employee’s normal rate of pay or, where the rate of pay varies, calculated on the basis of the average pay received by the employee in the previous 52 working weeks. Therefore, if a furloughed employee takes holiday, the employer should pay their usual holiday pay in accordance with the Working Time Regulations.
Employers will be obliged to pay additional amounts over the grant, though will have the flexibility to restrict when leave can be taken if there is a business need. This applies for both the furlough period and the recovery period.
If an employee usually works bank holidays then the employer can agree that this is included in the grant payment. If the employee usually takes the bank holiday as leave then the employer would either have to top up their usual holiday pay, or give the employee a day of holiday in lieu.
3) Can an employer require employees to take holiday during furlough leave?
This remains a matter of debate. Employers can under the Working Time Regulations 1998 give their employees notice to take holiday at a prescribed time, provided that they give twice as much notice of this requirement as the length of the holiday e.g. two weeks’ notice to take one week’s holiday.
The debate has surrounded whether an employee can ‘enjoy’ holiday during a period of lock-down and social distancing and as such could refuse to take the leave or try and claim it back. This is, however, a problematic argument, given that people can still at the current time leave their homes to exercise etc. and we feel that asking employees to take a reasonable proportion of their holiday whilst on furlough (say a week’s leave) is unlikely to be challenged provided the required notice is given.
If you have any questions about the Furlough scheme or wish to seek professional advice, please contact James Johnson by either calling 01332 225271 or sending an email to firstname.lastname@example.org.