With very strong take-up of the Government's Coronavirus Job Retention Scheme (the "Scheme"), there can be little doubt it has helped avoid immediate, large scale redundancies across many sectors. But can it benefit directors?
The rules of the Scheme make it clear that furloughed staff cannot carry out any work in relation to their employment, including work that provides services to or generates money for their employer (or any linked or associated organisation). This has prompted directors to ask whether they can be furloughed and, if so, what they can and cannot do whilst on furlough, to ensure they are fulfilling their duties as officers of the company.
Why does this matter?
Executive directors owe a range of duties to the company beyond those of other employees. Furlough will not change this, and furloughed directors should continue to fulfil their directors' duties, even though they are prohibited from carrying out their employment duties.
This presents problems. It may well be in the company's best interests for some directors to be furloughed; directors are usually well paid and the employing organisation can claim some or all of their salary through the Scheme. However, being unable to work or be involved in the management of the company can mean the individual director is not able to fulfil their director's duties, which is especially worrying if the business is suffering during difficult circumstances.
What is the Government's position?
In its guidance for employers, the Government has helpfully clarified that:
- directors paid via PAYE can be furloughed; and
- furloughed directors can still carry out activities which are "necessary" to fulfil their statutory duties to the Company.
This activity should be limited to that needed to "fulfil the statutory obligations they owe to their company" and should not be "more than would be reasonably be judged necessary for that purpose". Guidance is also clear that a director must "not do work of a kind they would carry out in normal circumstances to generate commercial revenue or [provide] services to or on behalf of their company".
The Treasury Direction, which has also been issued to HMRC in connection with the Scheme, also confirms that a limited range of duties are allowed, specifically:
- work done to fulfil a duty or obligation arising from an Act of Parliament relating to the filing of company accounts; or
- provision of other information relating to the administration of the director's company.
Although it's still relatively vague, this guidance should help reassure directors that they can deal with compliance matters and may be able to undertake other limited activities whilst on furlough, provided that work doesn't generate revenue or relate directly to normal business activities.
What should you do?
As with any other decision, your board should consider what is in your company's best interests and record your reasons in a formal board resolution. We recommend the rationale for furloughing a director should be particularly carefully reasoned, documented and retained.
Give affected directors written guidance about what they can and cannot do whilst on furlough, and take care to monitor any activities in which your furloughed directors are involved, to ensure they don't stray beyond that required to fulfil their statutory duties.
The board should also consider nominating one or more directors or members of the management team (provided they are not furloughed) to deal with sales or customer enquiries, and consider how essential board decisions will be made if furloughed directors cannot be involved.
Summary
Our view is:
- Furloughing directors is possible. However, careful thought needs to be given to balancing the director's statutory duties and the requirement on a furloughed employee not to carry out any work in relation to their employment.
- Before deciding to furlough directors, companies should look at the board structure and quorum requirements (particularly any potential conflict issues) and consider how decision making will be managed.
- It is unlikely that all directors of a particular company should be furloughed at the same time, as some directors will be needed to cover activities not permitted during furlough.
- Board minutes should record the rationale for furlough, and clear guidance should be given to furloughed directors as to what they may and may not do during the furlough period.
- Mechanisms should be put in place to direct work and employee enquiries to the remaining 'active' directors, and to make sure furloughed directors are sufficiently informed to be able to discharge their statutory duties.
Originally published 1 May 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
