Umbrella companies' furlough dilemma: it’s reality, not eligibility, that's biting

There seems to be a myriad of questions from ContractorUK readers surrounding umbrella companies, and whether furlough can, or does apply, in addition to if the umbrella should furlough wherever possible, writes Lucy Smith, managing director of Clarity Umbrella.

In all cases where the Coronavirus Job Retention Scheme is concerned, it must be noted that the decision to furlough an employee is very much a decision that needs to be made by the employer. It is not compulsory for any company to do so. Morally, I think we all know what should be done, but the reality and financial viability for some will be very different.

Let’s get specific

If we have a scenario whereby an umbrella contractor’s assignment came to its natural end, then it’s implied that the employment ended in line with the original agreement and was not connected with COVID-19. Then, there is no obligation on the employer to re-employ you.

If the employee was terminated well in advance of the March eligibility furlough date and issued a P45, then there is probably little or no likelihood that the umbrella will take the contractor back on during this period. After all, the scheme was designed to prevent redundancies in light of the outbreak, rather than bridge a gap until the next employment opportunity arises (which falls into the Universal Credit /JSA arena).

For those employees who have seen their employment terminated due to COVID-19 circumstances, then they may be expected to gain written confirmation from the end-client to confirm that the coronavirus crisis brough their engagement to a halt, prematurely. Again though, it is then down to the umbrella company’s discretion as to whether they will accept that, and furlough the employee with the potential of the contract restarting when we finally emerge through this.

To furlough or not to furlough is only half the uncertainty

This then leads to the uncertainty as to what the employee is eligible for based on how the umbrella’s contract of employment is structured, and how the umbrella can update systems to accommodate the differing payroll requirement to their standard umbrella payroll operations.

Many umbrella companies structure the contract of employment as a basic plus ‘discretionary’ bonus, which based on the initial CJRS guidance from the government meant that any umbrella companies that were looking to support their contractors would only be able to do so on the basic pay at 80%.

The guidance has since been updated to state that in looking at the rate to be applied, it would not only be the contract that would need to be considered, but also the reality of the situation. Good news for some contractors as this means for employees who had repeatedly received a regular, consistent ‘discretionary’ bonuses, as many do, then this could be included within the furloughed amount.

It still very much remains a grey area, and one that HMRC stated should be considered based on legal advice sought by the employer. So again, the caveats here may serve to prohibit some companies from applying this due to the financial risk involved.

What it all boils down to, is that it can be a genuine financial risk to the umbrella if they opt to make payment based on the basic, plus bonus. That said, it’s a risk which could be argued, reasonably, that the umbrella ought to take, assuming there is a history to show that (in reality), that rate was always paid, and secondly, that the employee was genuinely furloughed due to the COVID-19 outbreak.

Pain in numbers

In calculating the figures, the umbrella company will need to review previous earnings for each employee individually (assuming they have not been with the umbrella for over a 12-month period). If the employee is working on an hourly basis, the pay will need to be calculated on the average hours work in previous periods. And based on that information, they will either average your contractor earnings at 80%, or average the hours worked at NMW at 80%.

Many umbrella companies work on a small margin which (as mentioned) cannot be charged to process any furlough payment. From your umbrella company’s perspective, there are not only operational issues and risks to consider. Indeed, for any contractors that are on furlough, the umbrella company can claim the Employer NI element, but cannot claim the Apprenticeship Levy element which, for those umbrellas processing many furloughed workers, could be a substantial figure and needs to be funded directly from (any) profits.

Despite it probably feeling like the exact opposite to some brolly contractors right now, quite a few umbrella companies are trying to support their employees wherever possible. But it may help contractors to know that these employers are not allowed to charge for the payroll processing, and as the calculations are not a standard calculation; then there is likely to have been a huge amount of work – behind-the-scenes -- to get software, systems, processes and people to allow for furlough payments to be processed properly, which is both costly and timely.

The worst-case scenario?

In short, to furlough or not to furlough might very well be the question, but the answer is this -- it has to be financially viable for the brolly. Moreover, if they answer ‘no’ and you answer ‘yes’ and insist on furlough, you may be contributing to the genuine risk of reputable payroll providers going to the wall and taking contractors’ money with them. This worst of all worlds scenario can hopefully be avoided, but the morally-right decision versus the financially-viable decision is right now a balance too fine for many brollies to call.