What employers need to know about COVID-19 wage subsidy programs in the United Kingdom and Ireland

Governments throughout the world have been responding to the ongoing COVID-19 pandemic, ranging from public health initiatives to stem the spread of the virus to economic support for businesses and individuals. A popular fiscal tool that some governments have pursued is to subsidize an employer’s payroll costs.

How wage subsidy programs work

Under a wage subsidy program, an employer receives money from the government to cover some or all of their payroll costs. While there are variations among the programs, the intent is the same: to keep as many people on payroll as possible so they can support themselves and their families, and then enable businesses to quickly return to normal operations when the crisis subsides.  

This blog focuses on the wage subsidy programs that have been implemented in the UK and Ireland. You may learn about similar programs in Australia and New Zealand here. As you will learn, employers who decide to participate are expected to follow strict rules and will need to understand how their participation impacts their workforce, both during the period of time that the employer is receiving the subsidy and afterward.

UK: Coronavirus Job Retention Scheme

On 20 April 2020, employers could begin submitting claims under the UK Coronavirus Job Retention Scheme (“UK scheme”). The UK scheme is expected to operate through the end of May 2020, but it could be extended.

Details of the UK’s Coronavirus Job Retention Scheme

All UK employers are eligible to participate in the scheme, but they have to ensure that they follow the rules about which employees are eligible to be claimed. Employers may only claim employees who were on the employer’s payroll on or before 19 March 2020 and who have been placed on furlough for at least twenty-one consecutive calendar days.

Understanding furlough leave

For many UK employers and employees, “furlough” may be an unfamiliar term because it is not used in UK employment laws and regulations. Under the UK scheme, when an employee is on furlough it means their employer has instructed them to not work (some exceptions may apply for training), but the employment relationship has not ended. By remaining an employee, the individual continues to be eligible for statutory entitlements such as maternity leave even while on furlough. In addition, once the business returns to normal operations, the employer will be able to quickly re-open as they will not need to hire new workers; they simply start scheduling furloughed employees.

An employer, however, is permitted to reduce a furloughed employee’s wages to 80 percent of their normal earnings. This is because the UK scheme was designed to cover only 80 percent of an employer’s payroll cost, which includes the employee’s gross wages, National Insurance Contributions (NICs), and compulsory pension contributions.

Employers are responsible for figuring out what amount equals 80 percent of a worker’s normal wage, as well as any NICs and pension contributions based on the gross wages.

Subsidy calculation for the UK’s Coronavirus Job Retention Scheme

The government published guidance to help employers calculate the wage subsidy. For a salaried employee who receives the same pay each pay period, calculating 80 percent of the employee’s salary is straightforward. For employees whose pay varies (i.e., they have fluctuating schedules), employers will need to follow specific guidance to calculate furlough pay. There are different rules depending on the employee’s tenure. For instance:

• If the employee has been employed at least 12 months, the employer uses the higher of the same month’s earnings from the prior year, or the average monthly earnings for the 2019-2020 tax year.
• If the employee has been working for less than 12 months, the employer uses 80% of the employee’s average monthly earnings since starting work.

The HMRC published a calculator that employers may use; however, if the employer has a high number of employees who are furloughed, it could be a time-intensive process to figure out pay and claim amounts for each employee. There is no separate benefit that the government is providing directly to furloughed employees to make up the difference in the furlough pay and their normal earnings. But an employer may always decide to “top-up” the subsidy amount so that an employee continues to receive their normal wages. While not intended, there may also be situations where an employee ends up with more take-home pay as a furloughed worker than they would have received from working.

Submitting claims for furloughed employees

An employer will need to make claims either shortly before or during running payroll, with the exception of their first claim. That is because the first claim may be backdated to the start date of the program. Many employers will make backdated claims since the HMRC did not start accepting claims until 20 April 2020, but claims could be for employees who were furloughed starting in March.

After the first claim, employers will need to follow the rule of making a single timely claim per claim period.  Employers should not submit multiple claims per claim period, which makes it important that the employer include all eligible employees in their claim. Employers should carefully review claim details prior to submission to ensure that it is accurate. If an employer has more than 100 employees who are furloughed and being claimed, they will be forced to upload a file that contains all the required claim information. If the employer has less than 100 employees who are furloughed and being claimed, the employer may enter details manually for each employee via the online claim portal.

As noted above, employers are responsible for determining the claim amount in their submission. The HMRC will rely on the amount the employer provides instead of computing it based on data the employer provides. However, the HMRC has the authority to audit employers. It would be prudent for any employer who is participating in the scheme to act as if they will be audited. In addition to maintaining any required records under the scheme rules, employers may want to consult with their own advisors to get tailored guidance to help prepare for a possible audit.  

How being on furlough may impact an employee’s statutory entitlements

Aside from determining what amount to pay furloughed workers, employers who participate in the UK scheme will need to give special consideration to statutory entitlements that are available to their workforce, or any benefits conferred to an employee under their employment agreement or a collective agreement. The government issued regulations, which came into force on 25 April 2020, to clarify how employers should calculate statutory entitlement pay for workers who have been furloughed.

In the UK, employers either need to look at an employee’s average weekly earnings or normal weekly earnings when determining whether an employee is eligible for a benefit such as paternity leave, and also for what pay the employee receives when using the entitlement. Employers are generally obligated to look back over a number of weeks when computing an employee’s average or normal weekly earnings. When an employee is furloughed, however, they are not receiving the same amount they would have if they had been working. The regulations make clear that if the lookback period includes weeks during which the employee was on furlough, the employer should treat those weeks as if the employee was not furloughed. In other words, the employer would replace the reduced furlough pay with the amount the employee would have derived from working that week under their employment agreement.

Other regulations were issued to address situations where an employee may be prevented from taking some or all of their annual leave due to COVID-19. Normally, if an employee has unused leave at the end of a year, they are not carried over into the next year. Under the regulations, if an employee has unused leave, they are entitled to carry it over into the next two years. There is an interesting quirk in this regulation – it applies to only 4 of the 5.6 weeks of the employee’s leave entitlement.

Employer considerations for the UK’s Coronavirus Job Retention Scheme

Employers will need to think about whether placing an employee on furlough may prevent the employee from using some or all of their leave. In addition, a recent, non-COVID-19 change went into effect on 6 April 2020 that increased the annual leave pay calculation from a twelve-week to a 52-week lookback period. Employers will need to consider how to treat furloughed weeks in the 52-week lookback period. For instance, the employer will need to decide whether to use the employee’s furlough pay or the amount that they would have earned had they been working.

Employers may find more details about the UK scheme here.

Ireland – Temporary COVID-19 Wage Subsidy Scheme

The government of Ireland implemented an emergency scheme that operated between 15 March to 25 March 2020, under which employers were refunded €203 per week for each employee it retained on payroll. After that program ended, the Temporary COVID-19 Wage Subsidy Scheme (Ireland scheme) came into effect.

Details of the Temporary COVID-19 Wage Subsidy Scheme (Ireland scheme)

The Ireland scheme started on 26 March 2020 and will be in operation for 12 weeks. Employers register for the scheme with Revenue, and then manage the program through payroll submissions. Employers will be reimbursed by Revenue, generally within two working days after receipt of the payroll submission. Revenue has also been encouraging employers to make sure they have provided updated bank details in the Revenue On-Line System. Revenue has been unable to make more than 1.3 million in payments to over 600 employers because they lacked the employer’s banking information.

Eligible employers under the Ireland scheme

Unlike the UK scheme, the Ireland scheme is only available to employers who have experienced at least a 25 percent reduction in revenue and are unable to meet their normal payroll costs. For some businesses, it will be obvious that there has been a sufficient level of loss of revenue. For instance, if a business has had to close because of public health guidance, it is likely they will have experienced more than a 25 percent loss.

For employers that remain open for business and are generating revenue, the key indicator is whether the employer’s turnover is likely to decrease by 25 percent for the second quarter of 2020. An employer may demonstrate such a loss through evidence of a reduction in customer orders. Revenue has provided the following guidance about a reduction of customer orders:

• For retail businesses, including pubs and fast-food restaurants, at least a 25 percent reduction in overall sales
• For business that rely on “bookings” such as hotels, at least a 25 percent drop in bookings for the relevant period
• For passenger transportation services, at least a 25 percent drop in bookings for passenger trips or a 25 percent reduction in passenger journeys or a 25 percent drop in ticket sales
• For service provers such as call centers, at least a 25 percent drop in call volumes
• For energy producers, at least a 25 percent drop in energy consumption
• For businesses that service equipment, at least a 25 percent drop in service visits made or service jobs completed

If one of the above does not apply, some other reasonable basis may be used to gauge whether there has been a sufficient drop in business. At this stage in the program, Revenue is not asking for specific proof. But if an employer is unsure whether they qualify, they are encouraged to consult with Revenue. Revenue’s intent is to ensure that all employers who are experiencing significant loss are able to register and quickly receive payment.

Claiming eligible employees

Employers who want to participate in the scheme are required retain employees on their payroll. Employees may only be claimed if they were on their employer’s payroll on or before 29 February 2020 and were included in payroll submissions from 1 February 2020 to 15 March 2020. However, if an employee was laid off after 29 February 2020, they may be rehired and put back on payroll, which will make them eligible.

Unlike the UK scheme, employees who are being claimed are permitted to continue working for their employer, but could have their hours or pay reduced. Under normal conditions, when a worker is laid off or has their hours reduced, they can claim redundancy after four weeks or more, or six weeks over the past 13 weeks. However, under emergency legislation an employee will not be able to claim redundancy if they were laid off or had their hours reduced due to COVID-19.

The Ireland scheme’s tiered approach to employer reimbursement

When the Ireland scheme first launched, employers were being reimbursed €410 per eligible employee per week. This lasted through 4 May 2020, at which point the reimbursement structure changed. There is now a tiered subsidy amount based on whether an employee’s average net weekly pay was above or below €586 per week and how much the employer is paying the employee, as set forth in the following tables:

If an employee had an average net weekly pay in excess of €960, but that pay has since been reduced, the employee may be claimed under the scheme using the rules described above.

Average net weekly pay for purposes of the subsidy amount

When it comes to an employee’s average net weekly pay, Revenue will use data in the payroll submission and make the following calculation:

• Take Gross Pay and subtract Income Tax Paid, USC Paid and Employee PRSI paid
• Total this figure for each pay date in January and February, and divide by the number of insurable weeks
  • If total weeks exceeds 9, use 9 as the divisor
  • If there were no weeks, use 9 as the divisor
  • The calculation will result in Average Revenue Net Weekly Pay

This is different than in the UK scheme, where employers calculated the claim amount. That said, many employers in Ireland may already be performing average weekly calculation and may notice some cases where the above calculation does not match their internal numbers. Revenue, however, does not want to make adjustments and will always use the same calculation for all employees who are being claimed under the scheme.

What employers should be aware of about Ireland’s Temporary COVID-19 Wage Subsidy Scheme

Employers should carefully review all the guidance for reporting through payroll. Employers should be filing on or before the day employees are paid. If the employer submits more than 4 days early, it will not be processed until four days before the pay date. The scheme cannot be applied retrospectively, and an employer cannot amend submissions that have already been provided. When Revenue receives the payroll submission, it will calculate the subsidy amount based on the information that is provided. At some point in the future, Revenue will reconcile refunds made to an employer, looking at the difference between the subsidy the employee was eligible for than the refund the employer received. If needed, adjustments on future refunds will be made.

Income tax and PSRI on the wage subsidy

Employers should understand how income tax and PRSI applies to the wage subsidy as well as any “top-up” payments made by the employer. When the subsidy payment is made by Revenue, income tax and USC will not be applied. However, this does not mean that there will be no tax liability. Instead, any liability will be reviewed at the end of year.

Likewise, employee PRSI does not apply to the subsidy payment. If the employer is providing a top-up payment, the employee PRSI will be reduced from 10.5% to 0.5% on the top-up payment amount, subject to the thresholds that Revenue set. If the wage subsidy combined with the top-up payment exceeds the threshold, the employee will no longer be eligible the subsidy and the employee reverts to PRSI class A1, from class J9.

Other employer considerations

For employers who find themselves unable to pay their workers, they will no longer be eligible for participation under the Ireland scheme. These employers will need to notify Revenue and then stop making payroll submissions for the wage subsidy. Employers will need to cease employment with individual employees and provide such details to Revenue including the date on which the subsidy ended for the employee. It is important that employers make timely notice to Revenue about this because it will help any former employees apply for a COVID-19 Pandemic Unemployment Payment, which is a temporary entitlement that is available to persons who are out of work due to COVID-19.

It is also important to note that the Ireland scheme has not made changes to underlying employment law. As such, any employees who are being claimed under the scheme continue to be eligible for any statutory entitlements or employer-provided benefits. There have not been any rules or guidance issued to address questions employers may have about how to manage entitlements that may be impacted by the scheme or COVID-19 generally. Employers should consult with their own advisors if they are unsure how to handle employee entitlements for employees who are being claimed under the scheme, especially employees who have had their hours or pay reduced.

Employers may find more details about the Ireland scheme here.

Ceridian provides periodic and selected compliance updates that may have relevance to many of our customers. Ceridian provides this information to customers for general information purposes only. This information should not be construed as legal, tax or other advice specific to any individual or organization. Please consult your appropriate adviser for such specific advice.