COVID-19: Can Directors be Furloughed?

07 May 2020

Author: Le-ann Campbell
Practice Area: Corporate - M&A, COVID-19

Boardroom

The introduction of the government’s unprecedented Coronavirus Job Retention Scheme (CJRS) appears to have been universally welcomed as an innovative way of enabling employees to maintain an income on special leave or ‘furlough’, while allowing employers to reduce and recover their wage and NIC liabilities during the COVID-19 pandemic.

The latest guidance from the UK government on the CJRS was updated on 4 April 2020 to clarify how it applies to office holders, including company directors, and salaried members of LLPs.The guidance now expressly confirms that people in these positions may be furloughed.

This article sets out the specific considerations for furloughing company officeholders, which includes company directors and company secretaries and salaried members of LLPs. For guidance on the furlough scheme as it relates to employees generally, please see the Legal Update in our COVID-19 Legal Update hub alongside other topical updates relating to COVID-19.

Can directors be furloughed?

Yes, provided the other conditions to accessing the CJRS are met.The Guidance makes it clear that office-holders, including company directors, are eligible to be furloughed where they are paid through PAYE and were on the payroll on or before 28 February 2020.If furloughed, any possible claim would be for 80% of salary paid to the director via PAYE (capped at £2,500).

How does a company decide to place directors on furlough?

The decision must be made by the company acting through its board of directors. A board meeting will need to be called (and held by telephone or video call) or the board will need to make a written decision in accordance with the company’s articles of association.

It is important to note that the director who is being furloughed will have a conflict of interest and deemed to be “interested” in the furlough arrangement for the purposes ofcompany law and the company’s own articles of association (if applicable). Subject to what the company’s articles of association say on the matter of conflict of interests, the director may or may not be able to count in the quorum or vote on the decision to place him or her on furlough.

The board will be required to record the decision in writing (in a board minute for example) and communicated in writing to the director(s) concerned.

Does the CJRS apply to directors who are shareholders and receive part of their remuneration in salary and part in dividends?

Only basic PAYE income, and not bonuses, dividends or commissions, will qualify under CJRS. Any possible claim will be for 80% of a director’s “wages” only (paid via PAYE). The grant paid to them will be calculated based on their regular, contractual pay, such as wages, compulsory commission and past overtime and will not include discretionary commission, bonuses, non-cash payments, benefits in kind or dividends.

What about the directors’ duties under company law?

Whilst on furlough, an employee cannot undertake work for their employer.For directors, there is a carve-out from this requirement: they can continue to undertake “particular duties to fulfil the statutory duties they owe to their company”.

Company directors owe duties to their company set out under Companies Act 2006. The most relevant duty is the duty to promote the success of the company for the benefit of its members (shareholders) and employees.At times of actual or potential financial distress, which businesses are finding themselves in as they weather the COVID-19 storm, an additional duty for directors to have regard to is the interests of creditors and company debts which cannot simply be ignored . Failure to act with reasonable skill, care and diligence in this regard could mean directors being held personally liable to contribute to a company’s deficit in a later insolvency process. We have prepared a concise Legal Update on the changing nature of Directors’ duties during COVID-19 and the possible onset of insolvency.

What type of activities can directors undertake if furloughed?

The Guidance states that if directors need to carry out particular duties to fulfil statutory obligations they owe to their company (we expect the Guidance has in mind here more administrative matters, for example, filing company accounts, confirmation statements and other compliance tasks.), they may do so provided they “do no more than would reasonably be judged necessary for that purpose”.However, furloughed directors may not do any work they would normally do “to generate commercial revenue or provide services to or on behalf of their company”.To do so would risk disqualifying any claim for furlough director wages under the CJRS, or a clawback on a later audit.

Whilst it is clear that any “customer-facing” activities and new business generation would be prohibited under the scheme, it is not yet clear what operational functions “providing services to or on behalf of their company” is intended to capture.Clearly if a director is essentially doing his or her “day job” would be outside the terms of the scheme. However, there may be strong arguments for arguing that in participating in strategic or crucial operational decisions on behalf of the business as it navigates its way through the COVID-19 pandemic a director is not primarily providing services to the company as such, but is discharging her or his statutory duties. It is hoped that further Guidance will clarify the permitted parameters of furloughed director activities as a matter of urgency.

What is the process for members of LLPs?

Only members who are designated as “salaried members” under the Income Tax (Trading and Other Income) Act 2005 are considered employees for tax purposes and are therefore, eligible to be furloughed.

The process for furloughing salaried members will depend upon the specific terms of the LLP agreement.These are usually bespoke documents and the decision-making process may require the unanimous consent of all the members or it may be a decision reserved to a management board.

It may be necessary to make changes to the LLP agreement itself to provide for the rights, obligations and treatment of a furloughed member. Again, the process for amending or varying the LLP agreement will be set out in the agreement itself.

How much of a salaried member’s profit share will be covered by the furlough scheme?

For an LLP member who is treated as being employed by the LLP, the reference salary for the scheme is the LLP member’s profit allocation, excluding any amounts which are determined by the LLP member’s performance, or the overall performance of the LLP.

What should companies or LLPs do now?

Please contact our COVID-19 team members or your usual Carson McDowell contact for further information on the CJRS and to discuss the implications for your business in furloughing staff and managing the legal and practical risks of doing so.

This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your particular circumstances.

If you have any queries the Corporate team at Carson McDowell would be happy to help.

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