Introduction
Many scholars contributing to the UK Labour Law Blog over the past two months have examined a range of issues relating to the Coronavirus Job Retention Scheme (‘CJRS’) embodied in the Treasury Direction to HMRC (‘Treasury Direction’) (the updated version published on 22 May 2020 is available here, which amends the original version published on 15 April 2020, available here). This has included commentary on the mechanics of the CJRS, its lacunae and the eligibility criteria for furlough, all packed with analysis of its impact on the statutory employment rights of employees with a contract of employment (as defined in section 230(1) and (2) of the Employment Rights Act 1996 (‘ERA’) and common law case-law) and individuals engaged on ‘limb (b) worker’ contracts (articulated in section 230(3)(b) of the ERA, hereafter ‘limb (b) workers’). In the ensuing discussion, we do not intend to overlap with any of this first-rate content, and we leave to one side the topics that were the subject of these excellent exploratory and evaluative pieces. Instead, we focus on the effect of furlough on the common law rights of employees and workers. For obvious reasons, we assume that payments made by employers to employees are covered under the CJRS regime, and so the first issue we address is whether ‘limb (b) workers’ are eligible for furlough.
Are Limb (b) Workers Covered by the Treasury Direction?
In the UK, it is no straightforward task to determine whether the large number of ‘atypical’ workers such as zero-hours contract workers (hereafter (‘ZHCW’), gig economy workers, platform ‘crowdworkers’, etc. will satisfy the relevant definition of the ‘limb (b) worker’ contract in the ERA. Of course, such a ‘limb (b) worker’ contract is counterpoised somewhere between a contract of employment and the contract for services. There are two difficulties that present themselves in the context of a discussion about the eligibility of atypical workers for furlough under the CJRS. First, the no-man’s land that separates the two categories of the employment contract and the contract for services is more of a conveyor belt than a static field, forever engaged in a pulling motion, nudging atypical workers towards the territory occupied by the contract for services. And secondly, even if each of the atypical workers in the UK meet the tests for a ‘limb (b) worker’ contract, this does not automatically make them eligible for furlough under the CJRS.
There are four specific requirements in the Treasury Direction which serve to whittle down the number of limb (b) workers who will qualify. First, paragraphs 6.1(a) and 6.7 direct that the hirer must instruct workers to cease all work in relation to their employment and that the instruction must be embodied in a written agreement (which includes a collective agreement), or confirmed in writing by the employer (which may be by email): only then will the worker be deemed to be furloughed. As noted by Ford & Bogg on the UK Labour Law blog, the obvious problem here is that few hirers of atypical workers will have any incentive to ‘instruct’ them to cease work. This enables the hirer to remain silent to avoid any decision to furlough. For example, take ZHCWs. Here there is no contractual right to guaranteed hours of work and the payment of wages to a ZHCW is entirely contingent on the performance of an obligation imposed on the ZHCW to work, i.e. the consideration for wages is work actually performed, rather than a readiness and willingness to work. In such a case, the employing entity may say nothing when withdrawing working hours at the end of an assignment, in which case, the provisions of the furlough scheme are inoperative. Here, there will be no wages payment for the HMRC to reimburse, since there is no obligation on the hirer to pay a ZHCW if the hirer does not instruct the ZHCW to work and the ZHCW does not in fact work (see Ford & Bogg here for further analysis). Some commentators have suggested that the common law implied term of mutual trust and confidence and/or the ‘anti-avoidance’ implied term (see Aspden v Webbs Poultry & Meat Group (Holdings) Ltd. [1996] IRLR 521) may come to the rescue of the limb (b) worker in such circumstances (see S Brittenden here (PDF)). That may well provide employees who have not been furloughed with legal recourse against their employers, but it is not necessarily a useful route in the case of limb (b) workers, since it is presently unclear whether they are entitled to the benefit of common law implied terms in law: more later on this point.
Secondly, if paragraphs 6.1(a) and 6.7 are satisfied, paragraph 6.1(c) stipulates that the cessation must be attributable to the coronavirus disease. Again, this is problematic in the circumstances of limb (b) workers who are ZHCWs and also gig economy workers. Once the assignment has ended, the employing entity may say and do nothing. At that point, there would be nothing to suggest that the motivation for the cessation had any connection to coronavirus. Thirdly, there is the criterion in paragraph 5(a) that the limb (b) worker must have been on the employer’s PAYE payroll on or before 19 March 2020. Once again, the requirement for the worker to be on the PAYE payroll of the hirer/employer will exclude many atypical workers from the scope of the furlough scheme, albeit that it will not prevent agency workers from being eligible for furlough (owing to the provisions of sections 44-46 and 61R of the Income Tax (Earnings and Pensions Act) 2003 regarding PAYE payroll arrangements for agency workers, and paragraph 13.2 of the Treasury Direction). Disguised employees falsely misclassified as self-employed contractors under tax law will be excluded on the basis of paragraph 5(a), e.g. where a sham arrangement is embodied in a contract which expressly provides that the employee is self-employed and the hirer does not pay tax via PAYE to the HMRC to avoid the employee being treated as engaged on an employment contract. This will be a prominent problem as research by Citizens Advice suggests that as many as 460,000 individuals could be falsely classified as self-employed. A fourth reason that certain limb (b) workers will fall outside the CJRS relates to the condition in paragraph 6.7(c) that the hirer/employer must keep a written record of the furlough agreement, collective agreement or the written confirmation for five years until 30 June 2025. If the hirer/employer fails to retain this written record or mislays it, this requirement will be breached, resulting in the employer no longer having any entitlement to reimbursement from HMRC of (the whole or part of) the wages of its limb (b) workers and employees. In such a case, it is unclear whether HMRC will be entitled under the CJRS to claw back any sums paid out prior to discovery of the breach of paragraph 6.7(c) since the Treasury Direction is silent on this point.
As such, in short, since the CJRS is far from comprehensive, the correct response to the question posed in the sub-heading above would appear to be ‘Yes, but not that many will be’. And we leave to one side the question whether limb (b) workers could be eligible for relief under the separate self-employment income support scheme. What is most concerning about this conclusion is research by Adams-Prassl et al, which illustrates that atypical workers are more likely to suffer economic hardship from the Covid-19 lockdown, and to be low-paid, vulnerable, engaged on insecure contracts and belong to groups with protected characteristics.
Common Law Characterisation of Furlough
An issue of no little importance concerns the appropriate common law categorisation of furlough. There are three possibilities, namely that furlough entails the (i) full cessation of the work-wage bargain, (ii) full suspension of the work-wage bargain, or (iii) partial suspension of the work-wage bargain. Based on the text of paragraph 6.1(a) which directs that employees or limb (b) workers must ‘cease all work in relation to their employment’, one might argue that furlough is consistent with a cessation of the work-wage bargain. However, that would be wide of the mark and we argue that furlough cannot be treated as a cessation of the employment contract or a limb (b) worker’s contract. There are a number of reasons for this claim. First, paragraph 6.1(a) refers to the cessation of work in relation to the employment of the employee or worker, rather than the cessation of payment of wages, the contract or the relationship. On this basis, the obligation to pay wages, the employment contract and the employment relationship continue during furlough, albeit that the ‘work’ side of the work-wage bargain has been suspended. When considered alongside the absence of any consideration of, or any legislative provision covering (e.g. in the Coronavirus Act 2020), the preservation of an employee’s statutory continuity of employment, it provides support for the view that the employment contract is not terminated. If the intention had been for furlough to automatically interrupt the statutory period of continuous employment and the contractual relationship, legislation ought to have included a provision specifically confirming that so. The fact that no such statutory measure was enacted speaks volumes (see also the statement by D. Ferguson in the House of Commons Library Briefing Paper Number CBP 8880, 1 May 2020 (available here (PDF)) that “…being furloughed itself should not affect continuity”). An additional reason to reject the classification of furlough as a termination of the employment contract concerns the policy aims of the CJRS and the expectations which it fosters. The intention behind the CJRS is to obviate any need for employers to dismiss their staff during the lockdown period, so that they remain in employment and are ready to resume work once normal business begins. As such, furlough invites an implicit expectation that there will be a future resumption of employment, which is inconsistent with the notion that it leads to a full cessation. The alternative common law analysis would be to say that furlough entails a cessation, with the expectation of re-engagement when the lockdown is lifted. However, that would be incoherent, as by all accounts, the employer is entitled to terminate the contract of employment during the period of furlough for the reason of redundancy or otherwise (see D. Ferguson, ‘FAQs: Coronavirus Job Retention Scheme’ (2020) House of Commons Library Briefing Paper p 25 available here (PDF)).
If furlough is not a cessation, then what are the implications of it being categorised as a partial suspension of the employment contract? Here, the obligation to work has ceased, but the employer’s obligation to remunerate remains alive. Since there is an obligation for the resumption of employment in the future, common law rights and obligations continue in operation, such as those attributable to the employee’s duty of loyalty and fidelity and the employer’s and employee’s obligations of trust and confidence. And in the case of a partial suspension, the contract of employment is in sub-employment mode (see M. Freedland, The Personal Employment Contract p106-109). The significance of this conclusion lies in the fact that when in sub-employment mode, the case-law prescribes that the common law implied terms in law that impose obligations on the employer and the employee are attenuated or reduced in content and scope. And that jurisprudence would apply with equal vigour during the period of furlough (see RDF Media Group plc v Clements [2008] IRLR 207, Tullett Prebon v BGC Brokers [2011] IRLR 420 and Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2013] IRLR 344). We address the important issue of ‘attenuation’ in more detail below. But first we consider the question of the common law rights of limb (b) workers.
Common Law Implied Terms: Do they Apply to Furloughed Limb (b) Workers?
During furlough, the employer is likely to continue to exercise the managerial prerogative or rely on express powers in a manner that could adversely affect the interests of its employees. For example, it may remove bonuses without consultation, engage in harassment, threaten wage reductions or redundancy, suspend promotions rounds or other benefits, withdraw training, attempt to poach staff from competing firms, or threaten workers with detriments if they refuse to return to work prior to the partial or full lifting of the Government lockdown measures, etc. Likewise, the employer will require protection from the actions of its employees or limb (b) workers during furlough that threaten its property rights, such as sharing trade secrets or confidential information. In the case of the contract of employment, it is abundantly clear that the implied terms, such as the implied term of mutual trust and confidence and the implied term of fidelity and loyalty, will continue to function during furlough for the reason given above – namely that furlough can be treated as a type of suspension. These common law terms will also apply to disguised employees who have been miscategorised as self-employed contractors and find themselves re-characterised as employees by the courts because of sham contractual provisions. That will be the case even though both parties had not anticipated at the inception of their relationship that such terms would apply to their contract (albeit that the disguised employee will not be eligible for furlough in terms of paragraph 5(a) where the hirer has failed to pay their wages via PAYE). In the case of employment contracts, the principal issue is the extent to which the attendant rights protecting employees and employers are truncated (see below).
However, for limb (b) workers who have been furloughed, the precise legal position is enveloped in uncertainty. Problematically for limb (b) workers, some of the case-law suggests that the courts would be dismissive of the proposition that common law implied terms apply to their contractual relationship with a hirer. There are four separate cases where the claim was rejected that the implied term of mutual trust and confidence should be implied into non-employment contracts: Bedfordshire C.C. v Fitzpatrick Contractors Ltd. (1998) 62 CmLR 64 (highway maintenance contract); Jani-King (GB) Ltd. v Pula Enterprises Ltd. [2008] 1 All E.R. (Comm) 451 (franchise agreement); Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company [2015] EWHC 1322 (Ch) (property development promotion contract); and Mr H TV Ltd. v ITV2 Ltd. [2015] EWHC 2840 (Comm) (reality TV production contract). In each case, the courts characterised the relevant contracts in hand as analogous to commercial contracts and held that the ‘necessity’ test for the implication of an implied term in law was not met.
Of course, this does not mean that we should discount the possibility that the courts will abandon their hesitancy and recognise that the common law implied terms should be applied to the limb (b) worker contract. Like employees, they also suffer from an imbalance of bargaining power and are even more vulnerable, with the potential for great economic hardship as a result of the Covid-19 pandemic lockdown. As such, the policy considerations would tend to indicate that they should not be denied the protection of common law rights such as those conferred by the mutual trust and confidence implied term. Simply because the limb (b) worker contract is a statutory creature and not recognised by the common law should not prevent these relevant policy considerations from being afforded the weight they deserve to confer common law rights. Indeed, in the decision of the Court of Appeal in Tullet Prebon plc v BGC Brokers LP ([2011] IRLR 420), Lord Justice Kay held that a common law implied term of the contract of employment (in this case, the duty of fidelity and loyalty) would apply to impose an obligation on non-employees who had signed a ‘pre-employment forward agreement’ committing themselves to future employment with a new employer. The Court of Appeal ruled that such an agreement was ‘more akin to an employment contract than… a commercial agreement’ and as such, the implied term should be recognised. If one adopts the same reasoning, it is a short step towards saying that limb (b) workers ought to be entitled to the benefit of the common law implied terms on the basis that the relevant contract is analogous to an employment contract. The position will be the same where a limb (b) worker contract has been misclassified as a contract for services and the courts subsequently adopt the sham case law to recognise its existence (such as in Uber BV v Aslam [2018] EWCA Civ 2748, [2019] 3 All ER 489).
Of course, since the decision of the Court of Appeal in Tullet Prebon, the same ‘akin to employment’ test has been deployed in tort law to ascertain whether an employer will be held vicariously liable for the negligence of its non-employees (Christian Brothers [2012] UKSC 56; [2013] 2 AC 1 and Cox v MoJ [2016] UKSC 10; [2016] AC 660). And in Barclays Bank plc v Various Claimants ([2020] UKSC 13; [2020] 2 WLR 960, 971A-B), Baroness Hale rejected the claim that the distinction between an employee and a limb (b) worker should or could be aligned with the dichotomy between employment and relationships ‘akin to employment’. However, we would argue that we are not adopting ‘the akin to employment’ test here in the same terms or sense as it is used to determine the scope of an employer’s vicarious liability for non-employees. Instead, the policy implications for inserting common law implied contractual terms into limb (b) worker contracts are not co-extensive with those applicable in the case of the recognition of vicarious liability. For that reason, we would distinguish Barclays Bank.
Nevertheless, in light of the uncertainty, it may be more prudent for a furloughed limb (b) worker to err on the side of caution and claim that a term such as trust and confidence should be implied as a matter of fact, rather than law. This would entail the adoption of the ‘business necessity’ test in Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd. ([2015] UKSC 72; [2015] 3 WLR 1843) to the effect that the term is essential, since ‘without [it], the [‘limb (b) worker’] contract would lack commercial or practical coherence’ (1851D per Lord Neuberger). It has been recognised (by Lord Leggatt in particular) that there is greater scope than orthodox doctrine would tend to permit for terms in fact to be implied into relational contracts enjoining good faith, cooperation, fair dealing or mutual trust and confidence in contractual performance (see Yam Seng Pte Ltd. v International Trade Corp [2013] 1 All E.R. (Comm) 1321; Al Nehyan v Kent [2018] EWHC 333 (Comm)). In this way, there ought to be no impediment in principle in applying these standards to limb (b) workers. A relational contract has been defined as one which invites mutual collaboration between the parties, is entered into on an indefinite basis and is an ‘incomplete’ contract (in the sense that its terms do not cover every future eventuality in advance, are expressed at a high level of generality, and are characterised by flexibility and discretion in decision-making). We argue strongly that a limb (b) worker contract would certainly cross that threshold of ‘relational-ness’.
Of course, the preceding paragraphs have restricted the discussion to the recognition of the implied term of mutual trust and confidence in the limb (b) worker contract. An altogether separate question is whether the limb (b) worker’s contract would be subject to the implied term in law imposing a duty of fidelity and loyalty. We would hazard to guess that there would be less reluctance on the part of the courts to recognise this implied term. There are two doctrinal rationales for this claim. First, there is the ‘akin to an employment contract’ test in Tullet Prebon which would be adopted by the courts. Secondly, the courts are likely to accept the fidelity and loyalty implied term owing to its less open-textured nature and the extent to which it is expressed more narrowly than the trust and confidence implied term. However, although there is less uncertainty about the implication of the fidelity and loyalty common law term, as articulated expertly by Freedland: ‘… [limb (b) workers] would be subject to some implied obligations of fidelity, [but] they would in general be less exacting than those of employees with contracts of employment’ (see M. Freedland, The Personal Employment Contract p177). This takes us on seamlessly to the question of how much ‘attenuation’ of contractual obligations would be imposed under the implied terms in law.
Common Law Implied Terms: Attenuated During Furlough?
There is ample authority to the effect that the common law implied term of mutual trust and confidence and the employee’s duty of fidelity and loyalty may be attenuated, depending on the circumstances of the case, where the contract of employment is partially suspended, e.g. during garden leave. Examples include: Balston v Headline Filters Ltd (1987) 13 FSR 330; RDF Media Group plc v Clements [2007] EWHC 2892, [2008] IRLR 207 at para 107 per Bernard Livesey QC; Tullett Prebon plc v BGC Brokers LP [2011] EWCA Civ 131, [2011] IRLR 420 at paras 41-46 per Maurice Kay LJ; Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2013] IRLR 344 at 141–146 per Popplewell J; Thomson Ecology Ltd. v APEM Ltd. [2013] EWHC 2875 (Ch), [2014] IRLR 184 at para 21 per Mr John Martin QC. A disciplinary suspension and garden leave share many similarities with furlough to the extent that during each of these periods, the employee’s and employer’s engagements with each other are limited, the employer has no duty to provide the employee with a steady flow of work (because the work obligations of the work-wage bargain have been suspended), the employer remains obliged to pay (all or the majority of) the salary of the employee and the period will continue for as long as sufficient to protect the employer’s legitimate interests. The likely policy rationale for the truncation of common law obligations owed pursuant to these implied terms is that the employer’s engagement and contact with the employee (and vice versa) will be curtailed somewhat during a period of disciplinary suspension or garden leave, which applies with equal measure in the case of furlough. Of course, the greater the extent of the contact, the less attenuated the common law rights and obligations.
For the reason that furlough is an analogous situation to garden leave (with the exception that furlough entails the expectation of the future full resumption of the work-wage bargain) and disciplinary suspension, the legal position will likely be the same. As such, the nature of any communications between the parties will be accounted for in determining the reduction in the content and scope of the common law obligations, as well as the extent of any training undertaken by the employee (paragraph 6.8 of the Treasury Direction reserves the rights of employees in respect of training). To that extent, all will come down to the facts and circumstances of each furloughed employee or limb (b) worker, meaning that a higher threshold may be set for the establishment of a breach of the implied term of mutual trust and confidence to protect the employee, or the implied term of fidelity and loyalty to safeguard the employer’s property rights. For instance, where there is no contact at all between the parties save the payment of the wage or salary, the employer has excluded the employee or limb (b) worker from its business completely, or the employee or limb (b) worker has been instructed not to contact clients or colleagues, a persuasive argument will exist that the obligations imposed by the implied terms are extremely thin to the point of negligibility. The jurisprudence concerning the irrelevance of the state of the employee’s or employer’s subjective belief regarding the existence of such implied terms (Malik v BCCI [1998] AC 20) will also apply in ascertaining breach, as will the employer’s or employee’s ex post discovery of any breach of the implied terms (Boston Deep Sea Fishing & Ice Co. v Ansell (1888) 39 Ch D 339).
Breach of Common Law Implied Terms: Constructive Dismissal and Employer’s Remedies
Irrespective of the source of the mutual trust and confidence obligation imposed (i.e. whether it is implied in law or in fact) into the contracts of furloughed employees or limb (b) workers and the scope of any attenuation of the compass and content of the attendant obligations, in the event of breach, employees and workers will still be entitled to a limited range of remedies which are less than attractive. We would go as far as to say that if the employee or limb (b) worker on furlough is able to establish a breach during the period the CJRS scheme is in operation, he/she is situated in an invidious position. The employee must respond to the repudiatory breach of the implied term by resigning and claiming constructive dismissal at common law or as an unfair dismissal in terms of Part X of the ERA. As for the limb (b) worker, only the former option will arise here. However, it is questionable whether adopting either of these courses of action would be wise in the current climate. If employees or limb (b) workers decide to treat themselves as constructively dismissed during this economic downturn, this will entail entering into a sclerotic labour market, and is likely to leave them unemployed for a considerable period. The other option would be to remain in post and seek compensatory damages against the employer, or if the breach consists of the employer refusing or failing to furlough employees, they could compel the employer to furlough them in terms of the trust and confidence term (see S Brittenden here (PDF)). However, staying in post and claiming damages, or seeking to compel the employer to furlough, may be equally unappealing in the teeth of the current predictions of a tsunami of redundancies as soon as the lockdown is fully lifted. Legal action of this sort is unlikely to endear the employee or limb (b) worker to an employer in the thick of planning for staff lay-offs and when provisionally selecting for redundancy.
At the opposite end of the equation, there is the position of employers who discover that their furloughed employees are in breach of the implied term of fidelity and loyalty, e.g. by disclosing or exploiting trade secrets or working for a competitor. In such a case, the employer may likely dismiss, but will also be keen to seek an injunction/interdict to restrain the employee from working for a competing firm. The difficulty for the employer lies in the fact that the courts will be reluctant to grant an injunction if it is clear that the employee will suffer financial loss, idleness, starvation and/or hardship as a result of the injunction/interdict (see Sunrise Brokers LLP v Rodgers [2015] ICR 272 and Warren v Mendy [1989] 1 WLR 853). Once again, the common law remedies fail to match the promise of the common law rights.
Concluding Thoughts
The main purpose of this blog has been to communicate some of the common law implications of furlough pursuant to the CJRS. The first point to take away is that very few limb (b) workers will be eligible for furlough and the second is that the common law will treat furlough as a partial suspension of the contract of employment. We would suggest that the common law implied terms in law of the employment contract will apply during furlough to regulate the content and performance of the contracts of limb (b) workers, offering them a degree of protection. However, owing to the lack of certainty on this point, we claim that at the very least, trust and confidence, good faith, fair dealing and cooperation implied terms will be implied in fact into the contracts of limb (b) workers under the Yam Seng and Al Nehyan vein of jurisprudence. We also draw attention to the attenuation of the scope and content of the obligations of performance under the implied terms in light of the partial suspension of the employment and limb (b) worker contracts. But in the final analysis, the character and extent of such truncation and its limitations on the rights and obligations of employees and limb (b) workers are both highly fact-sensitive and will vary from one case to the next.
Of course, many or all of the issues addressed in this blog could well come sharply to the fore on the back of a post-furlough and post-redundancy tidal wave of disputes, which will make themselves keenly felt in both the employment tribunals and the courts. A recurrent theme has been the scope for hardship which may be inflicted on the limb (b) worker and employee, depending on the routes that may be taken by the courts in ascertaining whether implied contractual obligations apply at all, and if so, their content and ambit. In responding to these questions, we also flag up how no consistency of outcome can be predicted in advance, since many limb (b) workers and employees will either profit from, or fall prey to, the specific facts and circumstances of their own case.
About the authors:
David Cabrelli is a Professor of Labour Law at the University of Edinburgh. His teaching and research interests lie in the fields of employment law and labour law and he has published papers in a number of academic journals as well as a student textbook on employment law (now in its third edition).
Jessica is a professional legal researcher at the University of Edinburgh, specialising in UK and EU Employment Law.
(Suggested citation: D Cabrelli and J D’alton, ‘Furlough and Common Law Rights and Remedies’, UK Labour Law Blog, 8 June 2020, available at https://uklabourlawblog.com)
UK Labour Law 