Murray Keir: Furlough and the impact on salary sacrifice and death-in-service benefits

Murray Keir: Furlough and the impact on salary sacrifice and death in service benefits

The government introduced the Coronavirus Job Retention Scheme (GJRS) in March to tackle the effect that Covid-19 (Coronavirus) is having on employment in the UK. Great strides have been made in getting to grips with the operation of the GJRS in practice to provide employees with a salary while they are on furlough.

There has been some confusion, however, around the way in which the scheme impacts other employee benefits and what, if anything, employers can do to address those issues. Two of the main issues relate to the interaction with salary sacrifice arrangements and the cover provided by death-in-service policies.

Salary sacrifice

The government’s guidance confirms that the amount that can be claimed from the scheme is determined by reference to gross salary in the pay period prior to 19 March. For most employers, that is going to mean the salary that was paid in the February payroll period. It is common to use salary sacrifice arrangements for pension contributions. This is an arrangement in which employees agree to a reduction in salary of the amount they wish to contribute to their pension scheme in return for the employer increasing its contributions by an equivalent amount.

This saves national insurance (NI) contributions for the employees and the employer, but means the employee’s actual salary, and salary for furlough purposes, is reduced. While it is possible to end such arrangements prior to furloughing employees, any such changes will not increase the amount that can be claimed under the GJRS as those changes would post-date the February payroll period.

Where employers are intending to top up salaries above the amount that can be claimed under the GJRS, there may be scope to restructure the salary sacrifice arrangement in a way which increases the take-home pay of the employee. Any such changes, however, would have to be carefully considered and specific legal advice is recommended.

Death-in-service benefits

Placing employees on furlough could have a significant impact on the benefits payable from a death-in-service insurance policy. Such policies provide lump-sum payments in the event of an employee’s death while in employment. The payment made under the policy is usually a multiple of an employee’s salary. Employers will need to determine whether their insurance policy covers the death of an employee while on furlough (as that person could be deemed to no longer be “in service”) and, if so, whether that cover will be based on the employee’s salary prior to furlough or the employee’s furlough salary.

It is imperative that employers contact their insurer to determine the effect of furloughing employees. Where the policy does not cover the death of an employee while on furlough (or provides a limited amount of cover), an employer could be contractually obliged to meet any shortfall, depending on the terms of the contract of employment.

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Legal advice to determine the extent of the employer’s liability is recommended. Employers will want to ensure that they are not exposed to individual or multiple claims where the policy does not provide the appropriate protection and should also ensure whether their policy includes pandemic exclusion or total cover limits, particularly if employees are deemed to be in a high-risk category in terms of contracting Coronavirus.

Murray Keir is a pensions lawyer at Fieldfisher.