The Scheme opened for applications on 20 April 2020. This article looks at the Scheme in the context of company directors and the specific considerations that will apply. For a more general overview of the Scheme please refer to our legal update COVID-19 Job Retention Scheme.
Can a company director be furloughed?
The short answer is yes to the extent that they are paid via PAYE and that other conditions of the Scheme are met. Directors would have had to be on the company payroll on or before 19 March 2020. However furloughing a director must be seen in the broader context of directors’ duties which will make the decision more complex. See further detail below.
How much can an employer claim in relation to directors' pay?
The Scheme relates to 'regular' wages (paid via PAYE) up to a maximum claim of £2,500 a month. It does not cover discretionary payments such as bonuses and commission payments or other benefits in kind not paid via PAYE such as share options, company dividends and similar.
What process must be followed?
The decision to furlough a director is one to be made by the company acting by its board of directors. So, in the current times, this will mean a virtual board meeting or a written resolution of the board; in all cases taking into account any requirements of the company's articles of association on board decisions and meetings. Note, in particular, that a director who is to be furloughed will be 'interested' in that arrangement so the articles of association will need to be checked for rules around quorum and voting.
Any decision to furlough a director must be noted in the company records and also, of course, communicated in writing to the director(s) concerned.
How does the decision to furlough a director sit with the duties of the board as a whole?
In coming to the decision to furlough a director the board of directors must be aware of their statutory duties; in particular the duty to promote the success of the company for the benefit of its members as a whole. The board must therefore consider whether the decision to furlough a particular director is in the best interests of the company. Certain directors will, for example, have a very specialist skills set and the board must consider whether the absence of such a director, by virtue of being on furlough, will negatively impact on the board’s ability to manage and direct the company through the current difficult economic times.
What activities can a furloughed director undertake and how does this sit with their duties as a director?
One of the key principles of the Scheme is that employees who are furloughed will not be able to perform any work for their employer. Company directors, however, owe a number of statutory duties to their company which are not suspended during the period of the furlough. This includes their on-going duty to promote the success of the company, to exercise reasonable care, skill and diligence and to avoid conflicts of interest. There is therefore a potential tension between the conditions of the Scheme and the duties of directors more generally.
Government Guidance in relation to the Scheme recognises this tension and provides that in fulfilling their statutory duties a furloughed director must not do any more than would “reasonably be judged necessary for that purpose”. In particular, the Guidance provides that a director must not carry out work of a kind which in normal circumstances they would carry out to generate commercial revenue (i.e. client facing activities and similar) or provide services to or on behalf of their company. It has been specified by Treasury Direction that certain purely administrative functions (such as the filing of company accounts) fall outside the definition of work for the purpose of the Scheme rules.
In practice therefore great care will need to be taken as to the activities of any director during the period of their furlough. In general terms, a furloughed director should avoid taking part in key commercial or strategic decision making activities of the company and will very much need to take a 'back seat' during the period of furlough. That said, they should be kept fully informed of key developments within the business in order that they may consider their broader statutory duties as a director.
It is hoped that further guidance will follow in due course to give more practical guidance to boards and individual directors as to how to navigate their way through the requirements of the Scheme. In the meantime, it is possible that a number of boards will decide not to furlough directors owing to the gap in managerial and organisation skills that will often result.
For further information please contact Pamela Blore or another member of Birketts' Corporate Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2020.