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Variable pay employee vs fixed pay employee – furlough scheme implications explained

We have recently assisted a well known fashion retailer in successfully defending an unlawful deduction from wages claim in relation to furlough payments received by the employee. This is an important decision, not only for our client, but also other employers who have made use of the Coronavirus Job Retention Scheme (“the Scheme”).

Background

The employee’s contract of employment stated the employee had a contractual entitlement to a minimum of 20 hours per week. Having had much time off due to sickness during 2019/2020, the employee had only worked a total of 32 hours overtime within the reference period (2019 – 2020 tax year). The employer categorised the employee as a variable paid employee under the Scheme, on the basis that the employee had an entitlement to and had worked overtime during the reference period. The employer adopted the same approach for all employees working in the same role as the employee, on the basis of this entitlement to work overtime.

Employee’s claim

The employee claimed that she should have been categorised as a fixed pay employee under the Scheme, arguing that she was entitled to a fixed number of hours under her contract. 

The Tribunal had to consider whether the employee was a variable pay or a fixed pay employee under the Scheme.

The law

For those who have looked into it, you will know that this is a particularly complex area which requires detailed consideration of the various Treasury Directions.

The employer relied on the definitions of fixed and variable pay employees in the Treasury Directions, which are as follows:

“Paragraph 7.6:

a) the person is an employee or treated as an employee for the purposes of CJRS by virtue of paragraph 13.3(a) (member of a limited liability partnership);

b) the person is entitled under their contract to be paid an annual salary;

c) the person is entitled under their contract to be paid that salary in respect of a number of hours in a year whether those hours are specified in or ascertained in accordance with their contract (“the basic hours”);

d) the person is not entitled under their contract to a payment in respect of the basic hours other than an annual salary;

e) the person is entitled under their contract to be paid, where practicable and regardless of the number of hours actually worked in a particular week or month in equal weekly, multiple of weeks or monthly instalments (“the salary period”); and

f) the basic hours worked in a salary period do not normally vary according to business, economic or agricultural seasonal considerations.”

Paragraph 7.2 of the Treasury Directions defines a variable pay employee as anyone who does not meet the definition of a fixed pay employee in paragraphs 7.6 of the Treasury Directions.

The employer relied on the fact that the employee did not satisfy the definition of a fixed pay employee, on the basis that the employee did not meet paragraph 7.6 (e) of the Treasury Directions. This is because under the employee’s contract of employment the employee was entitled to work and receive payment for overtime (which the employee had done during the reference period). This meant the employee’s pay, which took into account the number of hours worked, fluctuated due to the amount of overtime worked.

Consequently, the employee was not entitled under their contract to be paid in equal monthly instalments.

The employer further submitted that it would have been unreasonable to have undertaken an individual assessment for each employee to determine their categorisation under the Scheme, and that the employer’s decision to categorise all employees in the same way (so as to ensure that overtime was taken into account for the purposes of the employee’s reference salary) was reasonable. This approach is supported by the Government guidance that states “HMRC will not decline or seek repayment of any grant based solely on the particular choice of pay calculation, as long as a reasonable choice is made”.

Even if the employer had been wrong to categorise the employee as a variable pay employee under the Scheme, the employer relied on the following Government guidance:

“If your fixed pay employee has worked enough overtime to have a significant effect on the amount you need to claim, you should calculate 80% of their usual wages using the method for employees whose pay varies. Examples of situations where overtime could have a significant effect on the claim amount include where the employees worked overtime:

  • In the reference period;
  • In the corresponding calendar period to the pay period you’re claiming for;
  • A lot or often in the tax year up to the reference period;”

In support of this argument the employer provided evidence that during the reference period employees worked on average 110.73 hours of overtime, equating to each employee who worked this level of overtime earning an additional £1,030.77 – this was significant given the salaries such employees were earning.

Tribunal decision

The Tribunal decided that the employee was a variable pay employee for the purposes of the Scheme.

The Employment Tribunal noted that the provisions in relation to furlough and categorisation of employees as variable pay or fixed pay under the Treasury Directions are not altogether clear, but the Employment Tribunal read the guidance and Treasury Directions in line with the purpose of the Scheme (which the Employment Tribunal described as to compensate an employee for wages they would otherwise have earnt but for the Coronavirus pandemic).

In reaching its decision the Employment Tribunal considered that the employee satisfied paragraphs 7.6 (e) of the Treasury Directions, on the basis that regardless of the number of hours worked per month the employee was entitled to the same level of basic pay. Alongside this, any overtime worked was in addition to such basic pay and therefore did not affect the employee’s ability to satisfy paragraphs 7.6 (e) of the Treasury Directions. Ultimately, a decision was reached on the that the employee failed to satisfy paragraphs 7.6 (e) of the Treasury Directions due to the employee’s monthly instalments of pay not being equal in months where the employee had worked overtime - with the pay received depending on the number of hours worked.

The Employment Tribunal considered the Government guidance on the Scheme which stated “where a variable pay employee works enough overtime to have a significant effect on the amount the employer needs to claim from the Scheme that the employee’s wages should be calculated in the same way as a variable pay employee”. The Employment Tribunal highlighted that this does not mean a fixed pay employee becomes a variable pay employee, only that they should be treated as one. The Employment Tribunal also noted that the guidance on the Scheme provides “a degree of latitude to the employer in selecting a reasonable choice of calculation”.

The Employment Tribunal held that where an employee has worked enough overtime to have a significant effect on the amount the employer needs to claim under the Scheme, the employee fails to satisfy paragraphs 7.6 (e) of the Treasury Directions and should be treated as a variable pay employee. Given the significant level of absence the employee had during the reference period, and the fact that the employee still managed to work 32 hours of overtime (roughly 1/3 of the average overtime worked by other employees during this time), the Employment Tribunal found that the employee had worked enough overtime to have a significant effect on the employee’s pay. Therefore it had been correct for the employer to classify the employee as a variable pay employee, rather than a fixed pay employee under the Scheme.

Takeaway points

Whilst this is only a first instance decision, it is useful to understand how an Employment Tribunal will potentially deal with an unlawful deduction from wages claiming arising out of an employer’s use of the Scheme. It also develops an understanding of how the guidance, which changed numerous times, and Treasury Directions might be interpreted by the Employment Tribunal.

The decision will come as a relief to many employers, especially larger firms working in the retail or hospitality sector, which were forced to close with little notice and therefore were forced to make quick decisions in relation to furloughing employees. The decision should offer support to those who have struggled to navigate the Government’s guidance on the Scheme and its many changes. Employers will need to be aware that the incorrect categorisation of an employee as either fixed pay or variable pay under the Scheme may lead to potential unlawful deduction from wages claims in the future.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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