Furlough Agreement (UK)

A Furlough Agreement in the United Kingdom sets the job duties, pay, hours, leave, and notice terms that bind employer and employee, and is shaped by the Employment Rights Act 1996.

The legal basis for furlough agreements in England and Wales rests on the Employment Rights Act 1996. Section 13 of the Employment Rights Act 1996 prohibits unlawful deductions from wages, meaning an employer who reduces an employee's pay without agreement exposes itself to a Tribunal claim. Section 95(1)(c) of the Employment Rights Act 1996 provides that an employee who resigns in response to a fundamental breach of contract — such as a unilateral pay cut — is treated as dismissed, enabling a constructive unfair dismissal claim. A written furlough agreement signed by the employee removes both risks by demonstrating consensual variation.

The Coronavirus Job Retention Scheme (CJRS), administered by HM Revenue and Customs (HMRC) under the Coronavirus Act 2020 and associated Treasury Directions, introduced widespread use of furlough agreements in the United Kingdom between March 2020 and September 2021. The CJRS required employers to obtain and retain written agreement from each furloughed employee as a condition of making a valid claim for wage support. While the CJRS has closed, furlough-style arrangements — temporarily standing employees down on reduced or nil pay by express agreement — remain a legitimate employment law tool in England and Wales for employers facing temporary downturns in business activity, seasonal fluctuations, or operational disruptions.

The Advisory, Conciliation and Arbitration Service (ACAS) confirms in its guidance on lay-off and short-time working that such arrangements are lawful where the employment contract expressly permits them through a lay-off clause or where the employee provides written consent. Regulation 13 of the Working Time Regulations 1998 guarantees employees a minimum of four weeks' statutory annual leave, and regulation 13A provides an additional 1.6 weeks; both continue to accrue during furlough and must be paid at the correct rate. The Pensions Act 2008 auto-enrolment obligations also continue — Section 3 of the Pensions Act 2008 requires employers to maintain pension contributions on qualifying earnings throughout the furlough period. Section 39 of the Equality Act 2010 prohibits selecting employees for furlough on the basis of any protected characteristic; discriminatory selection exposes the employer to uncapped compensation claims before the Employment Tribunal. Forms-legal.com provides this template as a starting point for United Kingdom-compliant documentation.

A Furlough Agreement in the United Kingdom is needed whenever an employer seeks to temporarily reduce or cease an employee's work due to a downturn in business demand, financial pressures, seasonal fluctuations, or operational disruption — without ending the employment relationship. Preserving the employment relationship through a furlough arrangement avoids the cost and disruption of redundancy, including statutory redundancy payments calculated under section 162 of the Employment Rights Act 1996 by reference to age, length of service, and weekly pay, and retains experienced staff who can be recalled when business conditions improve.

For a furlough arrangement to be lawful in England and Wales, either the employment contract must contain an express lay-off or short-time working clause giving the employer the contractual right to stand the employee down, or the employee must provide written consent to the temporary variation of their contractual terms. Most standard employment contracts in the United Kingdom do not contain express lay-off clauses, making a written furlough agreement essential in the majority of cases. Without written consent, the employer risks claims for unlawful deduction from wages under section 13 of the Employment Rights Act 1996 and constructive unfair dismissal under section 95(1)(c) of the same Act before the Employment Tribunal. Compensation for unfair dismissal is uncapped where the dismissal is connected to a protected characteristic under the Equality Act 2010.

A written furlough agreement also serves important practical purposes: it confirms the start date and anticipated end or review date of the furlough period; it records the agreed pay level during furlough and the method of calculation; and it confirms what the employee may and may not do during the furlough period. HMRC scrutinises employer payroll records as part of its compliance work, and a well-documented written agreement protects the employer in any HMRC enquiry into the correct payment of income tax and National Insurance under the Pay As You Earn (PAYE) system. Employers must also consider the collective consultation obligations under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA 1992) if the proposed furlough affects twenty or more employees at one establishment within ninety days — failure to comply with collective consultation obligations can result in a protective award of up to ninety days' pay per affected employee, payable by order of the Employment Tribunal. Where the employer is insolvent, the Insolvency Service administers redundancy payments through the National Insurance Fund under Part XII of the Employment Rights Act 1996.

A Furlough Agreement in the United Kingdom should address the following key elements to satisfy employment contract law requirements under the Employment Rights Act 1996, protect both employer and employee, and withstand scrutiny by the Employment Tribunal or HMRC.

Parties and background: The agreement should identify the employer and the employee by full legal name, confirm the employee's job title and continuous employment start date, and briefly explain the business reason for the furlough — for example, reduced customer demand, temporary closure of a facility, or supply chain disruption. A clear business reason supports the employer's position if the arrangement is later challenged. Employers should retain a record of the business rationale alongside the signed agreement for at least six years in line with HMRC record-keeping requirements under the Taxes Management Act 1970.

Furlough period: The start date of furlough and, if known, the anticipated end date or review date should be stated. The agreement should confirm that the furlough period may be extended by mutual agreement or ended earlier by the employer on reasonable notice. ACAS recommends keeping furloughed employees regularly informed of any changes to the anticipated end date to maintain engagement and trust.

Pay during furlough: The agreed pay level — whether full contractual pay, a percentage of normal pay, or a fixed amount — must be clearly stated together with payment dates. Under regulation 13 of the Working Time Regulations 1998, employees continue to accrue statutory holiday entitlement at their normal rate during furlough. The agreement should address how holiday pay is calculated if the employee takes annual leave during the furlough period. Holiday pay must reflect normal remuneration including regular overtime and commission under the principles established in Bear Scotland Ltd v Fulton [2015] IRLR 15 (EAT). Section 27 of the Employment Rights Act 1996 defines wages for the purposes of the unlawful deductions provisions, and any agreed furlough pay reduction must be documented in writing to avoid a claim under Section 13.

Prohibition on working: The agreement must confirm that the employee is not required to perform any work for the employer during the furlough period. Flexible furlough — where the employee works reduced hours and is furloughed for the remaining hours — should be expressly addressed if applicable, with the agreed working hours clearly specified and kept as a record for at least five years for HMRC purposes.

Continuation of employment rights: The agreement should confirm that all statutory employment rights continue during furlough, including: the right not to be unfairly dismissed under Section 94 of the Employment Rights Act 1996; statutory sick pay under Section 151 of the Social Security Contributions and Benefits Act 1992; pension auto-enrolment continuation under Section 3 of the Pensions Act 2008; and the right to be accompanied at any disciplinary or grievance hearing under Section 10 of the Employment Relations Act 1999. The employer must not select employees for furlough on discriminatory grounds under Section 39 of the Equality Act 2010.

Return to work: The notice period for ending the furlough and the process for returning the employee to their substantive duties should be confirmed. The agreement should also address what happens if the employer determines the role is no longer required — in that case, the employer must follow a fair redundancy process under Part XI of the Employment Rights Act 1996, including individual consultation, suitable alternative employment searches, and payment of statutory redundancy pay calculated under Section 162 of the Employment Rights Act 1996 by reference to age, length of service, and weekly pay capped at the statutory maximum. Forms-legal.com provides this template as a starting point for United Kingdom-compliant documentation.