Furloughing, Fraudulently… Blending Employment and Criminal Law

The Scheme

The Government, specifically HMRC, introduced the job retention scheme, or the ‘furlough’ scheme, in record quick time. It went live on 20 April 2020 and after one or two tweaks, its qualification period was backdated to include employees who were on the payroll from 19 March 2020.

As most of us know by now, the scheme works by paying 80% of an employee’s salary (up to a cap), on condition that they do not work. The 80% is paid by way of grant to the employer who then passes this on to the employee through the normal pay run. The employer can choose to ‘top up’ the employee’s salary to 100%, or not.

For those that haven’t used it, there is an online portal, where various, quite simple details are plugged into the system, and the claim is generated in this way. There is little cross checking at this point. Much of the system relies on placing trust in employers to fill things out properly, to make claims based on real figures. The scheme also allows corrections to be made if mistakes are spotted later on by the employer.

Slow Baked is Better?

But like any scheme, whether it is introduced quickly, or slowly, someone will always find a way to defraud the system. Where systems are introduced slowly, generally, the manner of committing a successful fraud is convoluted, unsuccessful frauds are generally based on a straightforward lie, easily disproved.

Baked-In Safeguards

The furlough scheme is different. It was introduced at high speed, with little warning and ordinarily this would mean that successful frauds would be or could be committed more easily. But in this case, two significant safeguards prevent a more tactical approach to committing the fraud. By basing the claim process, for each individual employee, on the previous year’s PAYE system, in one stroke, the creation of truly fictitious employees, the most obvious route to commit fraud, is thwarted. Nobody last year had thought ahead to create a cache of fictitious employees and had similarly thought ahead to pay tax for those fictious employees, in the event a future scheme may base its calculation on their existence.

It really is a very neat system.

But there is a smaller group of employees, who weren’t employed this time last year, those who only gained employment in the few months running up to the introduction of the new scheme. Their furlough payment is calculated differently, using average wages from the previous few months. As above, for these employees, they had to be employed by 19 March 2020. As the furlough scheme began to be discussed late February/early March (with little explanation as to its future shape or requirements) for a fraudster to exploit it using the fictitious employee methodology, it would have taken incredible powers of foresight to create a significant number of fictitious employees ‘just in case’. More so because the original cut-off date announced by HMRC on 23 March 2020 was 28 February 2020, making it even more unlikely that a fraudster would have thought to act quickly enough to take advantage of this method.

Again, a very neat system.

A Smaller but Subtler Fraud

No doubt, there will be a few employees who had left employment, either voluntarily or otherwise during these initial periods. Subsequently, fraudulent employers have ‘resurrected’ these ex-employees in order to claim based on their ‘ongoing’ employment.

But if those employees claim benefits (based on not having a job), or they obtain employment elsewhere, when HMRC begin a process of comparing and contrasting in the future, which they inevitably will, it will not take too long for the majority of these anomalies to reveal themselves. HMRC will also find it easier to ‘evidence’ the fraud in these circumstances, because the ‘real’ person, who has unknowingly been resurrected by a former employer, will have little incentive not to confirm the fact that they had left employment and had not worked there since. After all, they’re no longer an employee of the fraudulent business and weren’t involved in the fraudulent act, why lie?

The Bigger Issue

If the above types of fraud would have been difficult to engineer, or at least easy to spot if attempted, where does that leave the dishonest employer?

The short answer is to make claims for furloughed employees who have not really been furloughed. This fraud will happen in lots of different ways, but each with the same effect:

  • the worker given admin duties rather than their usual role;
  • the worker told to work but using their personal email address;
  • the worker paid a limited ‘cash in hand’ (tax free) on top of their furlough amount, to continue to work as normal;
  • the worker pressurised to work on threat of redundancy;
  • the worker deployed to do tasks at a sister company or different premises;
  • the worker paid half their salary to work, cash in hand (tax free), but the employer keeps the 80% furlough;
  • the worker re-deployed to undertake domestic or gardening tasks at the employer’s home;

 

… and dozens of similar examples.

But there’s a huge flaw in every one of these flavours of this type of fraud:

The human.

The Employment Relationship and the Human

Dishonest employers will often treat their employees poorly, if not now, in the future.

Even if the employer doesn’t treat the worker poorly, that worker may become genuinely redundant in the future, or may face competence or disciplinary issues in the workplace. Employment practitioners are well-used to the disgruntled worker, when faced with some work-related misfortune, raising a grievance and dragging things up that are many months, or many years old, which appear wholly unrelated to the topic at hand.

A worker who becomes disgruntled may well make an anonymous report to HMRC about the prior fraudulent abuse of the furlough scheme. What this means is that the real effect is that the employer who compels, convinces or conspires with a worker to abuse the scheme will be forever beholden to them.

And let’s not forget the worker who discovers a favoured fellow worker was ‘topped up’ to 100% by a grateful employer, whilst they themselves only received the flat furlough of 80%.

What Are the Risks?

Employers

To the employer, the risks are obvious, they could be prosecuted for fraud or cheating the public revenue. Both carry hefty prison sentences and, of course, the length of sentence will depend on the nature of the offence, the amount of money defrauded from HMRC and other matters such as sophistication and efforts to cover the fraudster’s tracks.

It may also be an aggravating feature that the fraud was committed on a system that was designed to assist genuine businesses, facing a once in a lifetime, existential threat to it and the ongoing employment of its workers. It’s a little like stealing from the charity box, and it is conceivable that it would be viewed equally dimly by the judiciary.

But there are other risks too.

Workers

Workers who agree to take part in this fraudulent enterprise, even under a degree of coercion, may well be charged with conspiracy to commit fraud. They don’t need to be the eventual beneficiary to be a party to an agreement to commit fraud. And for there to be a true defence of coercion/duress, evidence in this regard would have to be very, very strong indeed. It is a defence rarely made out, even under threat of physical harm.

But it is also easily conceivable that workers may get themselves into trouble in other ways. The worker who faces disciplinary, or redundancy, or has another workplace complaint, the “don’t sack me, otherwise I’ll tell” approach. Putting to one side the repugnant connotations of this approach, the don’t tell or else can be given a criminal label, ‘Blackmail’.

It is no defence to say that the threat was to expose someone else’s criminality; it is still blackmail if the notional blackmailer was seeking to extort a particular outcome for their own or someone else’s benefit (the law on blackmail is more complicated than that stated but the law as stated above is sufficiently accurate for the purposes of this e-bulletin).

Further Risks

But there are also risks to employment lawyers, employers and workers alike. It is easy to envisage a scenario where an employment lawyer is asked to draft or approve a settlement agreement, purportedly concluding the employment relationship between employer and worker, on terms including confidentiality about furlough-related matters.

The furlough-related matters may not be specified, they may be left unparticularised between employer and worker on a nod nod, wink wink, basis as between them. The lawyer may know nothing about the details but nevertheless advises that the agreement is ‘watertight’.

The difficulty with this approach is that settlement agreements do not bind the hands of an employee if they choose to ‘whistle-blow’: in this case, making a disclosure to the authorities about illegal behaviour in the workplace (abuse of the furlough scheme). There are many hoops for a worker to jump through to ‘qualify’ as a whistleblower, but they are not particularly difficult to navigate.

So this returns us to the point made earlier, an employer who chooses to defraud the furlough scheme where they compel, convince or conspire with a worker or workers, is forever beholden to them.

Conclusions

The job retention scheme is surprisingly robust, particularly for a scheme that was designed, constructed and implemented in just a few weeks.

A number of flaws in the scheme persist and some of these flaws are significant. These flaws will, and no doubt are, being exploited by dishonest employers to defraud the scheme. However, what’s interesting is that the type of fraud which will not be discovered by rudimentary cross checking, is very difficult for an employer to commit on their own, they need their worker’s help. 

The second an employer involves another in their own dishonest plan, the likelihood of discovery exponentially increases.

In the next 12 months, it is envisaged that there will be a good deal of work for lawyers both in the criminal and employments fields.

Richard Shepherd

Richard is the Head of Albion’s Employment Team and also maintains a fraud and regulatory crime practice.