Beware the hidden cost of furlough abuse

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Furlough, as a concept, only came to these shores a few weeks ago, introduced under the Coronavirus Job Creation Scheme to help employers to keep staff on their books. With an estimated 25 per cent of the UK workforce now furloughed, it has arguably been a runaway success. But is it open to abuse – and what are the likely consequences? Lawyer Richard Fox explains

To be eligible, employers are required to keep records of those they put on furlough for a full 5 years. That is going to give HMRC a significant period of time to review applications to make sure there have been no abuses.

Given its anticipated cost – currently thought to be in excess of £40 billion – they are likely to be assiduous in weeding out those who have taken unfair advantage.

Richard Fox of Kingsley Napley
Richard Fox: timely warning

One potential area of difficulty lies in the fact that under the scheme, once furloughed, an employee cannot be asked to do any work that “makes money” or “provides services” for the organisation.

That applies also to any organisation “linked or associated” with the employer. What if a company has put out to furlough the majority of its workforce, and an enquiry comes in that cannot easily be fielded by those left “in charge”?

Is it OK to ring up a furloughed employee and get some advice? That may be at the “lower end” of the scale. But what if one or two orders start to come in and a company, desperate to seize on any opportunity to rejuvenate its business, wishes to utilise the services of one or two employees, yet all are on furlough?

Given its anticipated cost, they are likely to be assiduous in weeding out those who have taken unfair advantage

By calling them in, those employees will be rendered ineligible for the scheme. The cost of that ineligibility may make it uneconomic to fulfil the order. There may be a temptation, therefore, to make a “side” arrangement with the employee.

A similar quandary may arise for an employer when asked to “pitch” for a new contract. The relevant employees are all out on furlough. Is it OK to call some in simply to work on the bid? Is that “making money” or “providing services” for the employer? The employer may feel it is not, as there is nothing material coming in at that stage.

There are other issues which are arguably of the “good Samaritan” variety. Currently, those on maternity or sick leave cannot easily take advantage of the scheme. But what if such an employee sees financial advantage in being put on furlough and an employer is willing to oblige?

To what extent is it possible for an employee, by prior agreement with an employer, to make a short notice application to come back to work and be put immediately on furlough where they will earn more at the Government’s expense?

the individual employee and the company who made the inappropriate application will be at risk of sanction

These and other issues are bound to emerge over the next few weeks and months. What, practically then, should an employer do to protect itself?

To commit an offence of fraud you have to have been “dishonest”. There are two relevant tests to be satisfied. First, what was the actual state of an individual’s knowledge or belief as to the facts, and secondly, was the individual’s conduct honest or dishonest to the standards of ordinary decent people.

Both the individual employee and the company who made the inappropriate application will be at risk of sanction. Moreover, in the case of SMEs it is often easier to prove that someone senior has been involved in decision making who is the company’s controlling mind. Financial penalties and in the worst cases, criminal records may be given.

Inevitably, some employers are going to get caught on the wrong side of the line. The best advice to avoid that trap is to take (and be seen to take) great care to abide by the rules.

Employers should take advice where appropriate, record that advice contemporaneously, and in a detailed and auditable way, and then record the course of action they have chosen to adopt and the reasons for doing so.

Turning a blind eye, or hoping no one notices any potential transgressions, is likely only to make matters more difficult in the long term.  The CJRS is designed to provide widespread support during a crisis, but the crisis will eventually pass.

When it does, the focus will turn to the cost – and it will be significant. It is reasonable to assume that the energy currently spent trying to preserve jobs, will shift to a searching review to weed out improper claims and to recover as much money as possible.

Employers should therefore take steps now to avoid getting in trouble in the future.

Richard Fox is a partner in Employment at Kingsley Napley LLP