UK: Potential hidden costs under “job retention scheme” (COVID-19)
UK: Potential hidden costs under “job retention scheme”
Some employers have discovered potentially significant additional costs when operating salary sacrifice schemes in conjunction with the job retention scheme—a program established to provide economic relief in response to the coronavirus (COVID-19) pandemic.
Under job retention scheme rules, employers must determine that furloughed employees receive at least 80% of their cash “reference salary” (subject to a cap) after factoring in adjustments in respect of any salary sacrifice arrangements. What is less clear for many employers is that they cannot then net-off the cost of the corresponding benefit, as they would normally, from their employees’ minimum furlough pay. This creates a potentially significant cost to employers.
What’s the issue?
Normally, when employees enter into a salary sacrifice arrangement with the employer, the employees agree to a reduction in salary in return for a benefit and in so doing vary their contract of employment. For example, when an employee earns £1,000 per month and agrees with the employer to reduce that amount in return for a 10% employer pension contribution, the post-sacrifice pay is £900 with a corresponding £100 employer pension contribution.
The job retention scheme funds a percentage of post-sacrifice pay. In other words, employers must use the lower “take home” cash pay when making a claim. In the above example, £720 (80% of £900, based on the current portion of reference salary funded by the job retention scheme) would be claimed and paid to the employee. Whether the employer continues to pay the employee a monthly salary of £900, or some lower amount, would be agreed as a term of the furlough.
Additionally, unless the employer and employee agree otherwise, the employer is still contractually obliged to make the employer pension contribution which, depending on the specific terms of the furlough agreement, will be either £100 or, £72 (10% of £1,000 or £720).
However, the full furlough grant must be paid to the employee—the employer is not allowed to reduce pay to meet the cost of the pension contribution. Therefore, the employer has an unexpected and unrecoverable contractual cost of between £72 and £100 that it must meet.
While HM Revenue & Customs stated that furlough is a “lifestyle event” (with the possibility therefore of “switching off” the salary sacrifice), HMRC has also indicated that benefits must continue to be provided under the furlough. Further, an employee and employer can agree to suspend a salary sacrifice during furlough, but this has a tax and social insurance (NIC) consequence for both.
What can employers do?
Most employers probably have not altered their salary sacrifice arrangements. Some may now wish to reconsider that position as contributory costs under job retention scheme starting from 1 August 2020. However, having chosen initially not to do so, employers may consider it inappropriate to change their position part way through the job retention scheme, and employees may be reluctant to agree to suspend current arrangements.
Employers need to consider several points in light of this potentially unexpected cost, including:
- What has been agreed with the employees either in the employment contract and/or the furlough agreement, and can it be revisited?
- Can an employer invoke a lifestyle event in order to change salary sacrifice selections?
- What would be the effect on employee relations if the employer were to change salary sacrifice rules?
- Has the employer fully costed salary sacrifice post-furlough?
This is a complex issue requiring not just a deep understanding of the job retention scheme and salary sacrifice, but also the employment law effects on potential changes to employee contractual arrangements. All these issues require very careful consideration.
Read a July 2020 report prepared by the KPMG member firm in the UK
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