Do Furloughed Employees Accrue Annual Leave?

The Government has produced detailed guidance on, but not yet enacted by regulation or statute, the much-advertised “furlough” scheme allowing employers to grant their employees a leave of absence (as an alternative to redundancy or dismissal) with 80% of pay reimbursed up to a limit of £2,500 per month.

This brief article addresses the question of whether furloughed employees continue to accrue annual leave while absent. It was updated on 9 April 2020 in light of HMRC communications.

The short answer is that, unless the regulations or statute provide otherwise, the answer is most likely “yes” in respect of statutory holiday under Working Time Regulations 1998. Any additional contractual holiday accruement may, but would not automatically, cease to accrue by agreement.

What is “Furloughing”?

Although now in common parlance, English and Welsh law does not recognise “furloughing” as a defined concept and it is not a term of art with any distinct meaning. It is simply a convenient manner of describing a period during which the employment contract subsists albeit the employee is not required to attend work, usually in exchange for reduced pay. It is different to gardening leave, where there is usually no reduction in pay and the contract is in the process of concluding.

The benefit of a furlough to both parties is clear – the employer retains the ability to call back their workforce at a convenient time rather than incur the expense and delay or rehiring, and the employee retains a degree of financial security.

What is the Effect on the Employment Contract?

Furloughing takes place as a variation of the employment contract, with the consideration by the employer usually being the avoidance of inevitable redundancies. Some standard form furlough agreements are available online and updated guidance states that employers must confirm the arrangements in writing (even if they are agreed orally). It may also be prudent to provide an updated Statement of Employment Particulars.

Does Statutory Holiday Pay Accrue?

The right to annual leave accrues by virtue of an individual’s status as a “worker”, which includes of course employees but not those properly described as self-employed. It was established in Stringer v Revenue Commissioners that leave continues to accrue during sickness absence, it following that there is no requirement that the employee actually be working to obtain the benefit.

The Working Time Regulations 1998 in fact go further than the directive on which they are premised, and although there is a series of authorities from the ECJ suggesting that member states can prevent annual leave from accruing during period where employees are not obliged to work (for example because they are on zero-hours contracts), the Court of Appeal in Harpur Trust v Brazel (a decision from August 2019) found that the domestic regulations did not achieve that result. The result is that the domestic law does not permit an employer to pro-rate accrued holiday to reflect only the time an employee was actually working, and may only do so when employment commences or terminates part way through the holiday year. 

It seems fairly certain that this logic would also apply to furloughed employees, and that statutory leave would therefore continue accrue.

Can Statutory Holiday be Taken?

It is not clear whether an employer could compel furloughed workers to take their accrued annual leave during or in addition to the period of their furlough. The ECJ established in Merino Gomez that an employer could not take such a course during parental leave, as to do so would remove the benefit of at least one statutory protection. It was further asserted in the BECTU case that any precondition for taking statutory leave that denied workers the benefit would not be lawful. 

Given that furloughed employees are not taking advantage of an employment right per se, but are benefiting from a government sponsored and underwritten compromise designed to prevent mass unemployment, it may be arguable that no detriment occurs. However, that employees are specifically prevented from undertaking profitable work for their employers during the furlough period presents a powerful counter argument (particularly if pay is reduced) along with the fact that the recent amendments permit holiday entitlements to be rolled-over in very broad circumstances (where it was not reasonable practicable to take leave “as a result of the effects of coronavirus (including on the worker, the employer or the wider economy or society)”, which could certainly include furloughing. One solution may be to end the furlough a few days earlier than planned to allow for accrued leave to be taken. 

An interesting related question is whether an employee could take annual leave at their previous full-rate instead of or in addition to accepting furlough. Remuneration for holiday pay is calculated with reference to Part XIV Employment Rights Act, and where an employee has “normal working hours” section 221 provides that remuneration is determined in line with the contract in force at the time of the calculation (when the holiday is actually taken). It would therefore seem that the lower furlough rate would apply. 

There is however an argument that this provision only applies where “the employee’s remuneration… does not vary with the amount of work done”, which does not sit entirely comfortably with the concept of furloughing that intrinsically involves less pay for less / no work. If this were the case, the relevant calculation would involve averages based on previous weeks’ pay, necessarily involving the higher pre-furlough rate. This is the position that HMRC have alluded to informally on Twitter (see The ‘full pay’ approach would also apply to workers with variable hours where such a retrospective calculation is the norm.

It may be that employers could notify employees in advance that they are not to take annual leave during furlough and, although this may raise issues of mutual trust and confidence, these seem less pertinent given that (i) employees now have the right to roll-over accrued but untaken leave, and (ii) the government scheme would not cover holiday pay above financial limits.

What About Additional Contractual Entitlements?

There is nothing in principle to prevent the variation of the contract of employment to either reduce contractual annual leave or to prevent it from accruing during a furlough period, provided of course this does not reduce the overall total below the statutory minimum. In such circumstances a new Statement of Employment Particulars would be required. 

The risk is that employees would claim that either (i) this was an ineffective variation to their terms, or (ii) it amounted to a breach of the term of mutual trust and confidence. However, provided the employer is genuinely placing the employee on furlough to prevent inevitable or highly likely redundancy, this may be a manageable risk.

Mike practises within chambers’ specialist employment team, and is happy to assist with any queries arising from this article.