Can contractors with public sector engagements and who are in scope (deemed employment) for IR35 purposes be furloughed?

Employees who are unable to work because they are shielding in line with public health guidance (or need to stay home with someone who is shielding) can be furloughed after 1 July 2020, as long as you have previously submitted a claim for them in relation to a furlough period of at least 3 consecutive weeks taking place any time between 1 March 2020 and 30 June.

Individual contractors who are not operating via an intermediary (eg sole traders) do not need to be assessed under IR35. However, you will always have the risk with those individuals that there is no intermediary – therefore if their tax status is wrong, HMRC are very likely to consider that responsibility for this would fall on the hiring company in any event.

There is not a magic number. It depends on the nature of the organisation, the work carried out, the organisational structure, the geographical spread, working patterns and conditions. We would give specific advice personalised to the organisation and taking all these and other factors in to consideration. There is no such things as too many MHFAs!

The Cabinet Office has published a useful Procurement Policy Note (“PPN”) on relief available to suppliers due to Covid-19 (available here). In brief, you should not be penalised by a public sector body, if, in the current circumstances, you are unable to comply (fully or partly) with your contractual obligations. Public sector bodies are expected to work with suppliers and, if appropriate, provide relief against current contractual terms. This is in order to maintain business and service continuity and avoid claims being accepted for other forms of contractual relief, such as the occurrence of a force majeure event.

The types of relief that may be available to suppliers to the public sector will depend on the existing contracts in place. Some contracts may have a payments by result mechanism, whereas others may be based on certain key performance indicators (KPIs) being met. Other contracts may not include any such mechanisms and therefore it will be a matter for discussion between suppliers and the public sector body.

The PPN provides that, rather than a supplier seeking to invoke a clause that would permit the supplier to suspend performance of its obligations (such as a force majeure clause), public sector bodies should first work with the supplier to amend or vary the contract. Any changes should be limited to the particular circumstances and considered on a case-by-case basis. Changes could include:

• Amending the contract requirements
• Varying timings of deliveries
• Relaxing KPIs or service levels
• Extending time for performance (e.g. revising a contract delivery plan), and/or
• Preventing the public sector from exercising any rights or remedies against the supplier for non-performance (e.g. liquidated damages or termination rights).

These should only be temporary variations and the contract should return to the original terms once the impact of the Covid-19 outbreak on the contract has ended. Discussions with the public sector body about any changes that are agreed should be documented, in a variation signed by both parties.

A public sector may also need to take account of regulation 72 of the Public Contract Regulations 2015, to ensure that any changes to a contract (even of a temporary nature) do not trigger a requirement to conduct a new tender process. Whilst this may be unlikely to be the case with temporary variations, suppliers should still bear this in mind when discussing any changes to a contract with a public sector body.

If you are a supplier to a public sector body and you are currently struggling to meet your contractual obligations, we recommend that you take legal advice as to whether it might be possible to take advantage of the flexible approach that the PPN requires public sector bodies to adopt – it could be that you can avoid service credits or other financial deductions, or the need to serve formal notices such as “force majeure” or other relief notices.

The guidance from the Government concerning private sector organisations is very different from the guidance for public sector and organisations that receive public funding. The guidance states:

“The government expects that the scheme will not be used by many public sector organisations, as the majority of public sector employees are continuing to provide essential public services or contribute to the response to the coronavirus outbreak.

Where employers receive public funding for staff costs, and that funding is continuing, we expect employers to use that money to continue to pay staff in the usual fashion – and correspondingly not furlough them. This also applies to non-public sector employers who receive public funding for staff costs. Organisations who are receiving public funding specifically to provide services necessary to respond to Covid-19 are not expected to furlough staff.”

This guidance isn’t particularly clear but it appears that there is a recognition that there are different types of organisations which could be caught by this:

1. Organisations who will be required to provide frontline services during the Covid-19 response. It is interpreted that NHS organisations such as NHS Trusts will fall firmly into this category. Employees of such organisations are expected not to be furloughed and to continue to work and be paid their normal salary in the usual way.
2. Organisations who receive public funding to provide services to respond to the Covid-19 crisis. These organisations are not expected to furlough their staff. The type of organisation that would fit into this category are those that have been commissioned to developing breathing apparatus or testing kits to meet the needs of the healthcare sector during the peak of the pandemic.
3. Organisations who receive public funds for staff costs to operate services. Employers are expected to continue to pay staff if the money to pay them is publicly funded. It is strongly inferred that this is irrespective of whether such staff have any work to perform. The type of organisation that is likely to fall into this category are GP practices, charities and private sector companies that have won contracts with the public sector.