The Government announced basic details of the new Coronavirus Job Retention Scheme (CJRS) on 20 March 2020. This scheme enables business whose operations have been severely affected by the current COVID-19 pandemic to furlough employees and apply for a grant that covers up to the lower of 80% of an employee’s regular wage and £2500 a month (plus associated employer national insurance contributions and minimum auto-enrolment pension contributions on that amount).
Following the Government announcements on 12 May and 29 May (details from our Employment team here), the current plan is for this scheme to run till 31 October 2020. Employers can use the scheme in its current form up to end of July and can claim back up to 80% of salary up to £2500 per month for a further month beyond the previous expiry date of 30 June. From 1 August the CJRS grant will be tapered. Furloughed employees will continue to receive the same level of financial support, but employers will be required to make up the difference between the reduced grant and the amount received by individuals. Furloughed staff will also be able to work part time, with employers being responsible for paying normal pay for the hours worked (and employer NICs and pension contributions due on these amounts). From 1 July, there will be no minimum period of furlough leave (provided any “furlough arrangement” must cover a period of at least a week). The CJRS will also be closed to new entrants, meaning that 10 June 2020 is the last date on which an employee may be furloughed for the first time.
In this Corporate briefing, we answer a few key questions on how the furlough scheme could apply to directors.
Q: Are directors potentially covered by the CJRS?
A: Yes, provided the other conditions to accessing the scheme 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 19 March 2020. An RTI submission notifying payment must have been made to HMRC on or before 19 March 2020. If furloughed, any possible claim would be for 80% of salary paid to the director via PAYE (capped at £2,500).
Q: Does the CJRS apply to directors who are shareholders and receive part of their remuneration in salary and part in dividends?
A: Any possible claim will be for 80% of a director’s “wages” only (paid via PAYE) and does not extend to dividends. This has been echoed by the Institute of Chartered Accountants of England & Wales (ICAEW). There are specific provisions in the Guidance for working out the amount of the claim where the relevant wages are variable. Though these do not specifically reference directors, we would expect the same principles to apply to all eligible individuals. Broadly, where an employee has been employed for 12 months or more, the higher of the employee’s earnings for the same month in 2019 and average monthly earnings over the 2019-2020 year should be used. If employed for less than 12 months, the average monthly earnings since starting work are to be used. For employees that started in February 2020, their earnings so far should be calculated on a pro-rata basis.
Q: If a director is furloughed, how does this impact on the director’s statutory duties owed under the Companies Act 2006?
A: Statutory duties under the Companies Act 2006 will continue to apply, and there is no option to suspend them during the period of furlough leave. So the director will still owe general duties to the company, including to promote the success of the company for the benefit of its members as a whole, to avoid conflicts of interest and not to accept benefits from third parties. In particular, the duty to exercise reasonable care, skill and diligence may be impossible to fulfil during a period of furlough leave. A director on furlough will also retain other more administrative duties (such as preparing and filing accounts, reporting, calling meetings) and retain responsibilities for the actions of the company as an office holder.
Q: What type of activities can directors undertake if furloughed?
A: 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), they may do so provided they “do no more than would reasonably be judged necessary for that purpose”. The updates to the Guidance published on 29 May also clarified that directors can also claim under the CJRS, pay salary or wages to employees and (in most cases) perform the duties of a trustee or manager of an occupational pension scheme without breaching the terms of the CJRS. However, comparable to the similar employee restriction, furloughed directors may not do any other work of a kind 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. Care should be taken here. Whilst it is clear the first limb is directed at external “customer-facing” activities and new business generation, the Guidance on what operational functions “providing services to or on behalf of their company” is intended to capture is still very limited. Its breadth seems likely to rule out a furloughed director playing any role in shaping strategic direction and crucial operational decision making as the business weathers the Coronavirus storm. This limitation, at precisely the time when board skill and experience is likely to be needed the most, may act as a disincentive for a company to place directors on furlough.
Q: What is the process for furloughing a director?
A: The Guidance states that, where a company (acting through its board of directors) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, the board can resolve to furlough such directors. This should be recorded as a formal decision of the board, and communicated to the director in writing. Pending further guidance on what directors can and can’t do while they are furloughed, and clarity on how this sits with their statutory duties mentioned above, it is difficult to see how such decision can be safely taken by a board at the moment. In addition, non-furloughed directors would need to consider whether effectively placing one of their number “out of action” for the duration of furlough is consistent with their own duties to the company to promote its success for the benefit of members etc. In any event, as the new HMRC portal to make an application under the scheme will not be open until mid to late April, the better view may be to wait and see how the Guidance in this area develops before committing.
Q: How do the rules apply to sole directors (e.g. of a personal service company)?
A: The Guidance notes that “directors” includes salaried individuals who are directors of their own personal service company. It is difficult to see how a sole director could decide to furlough him or herself because of the requirement not to generate commercial revenue or provide services to or on behalf of the company. In practice, if a sole director (without other employees) is furloughed, this leaves nobody in the company to carry out any work, such as dealing with invoices, managing cash flow, trying to generate new business and handling queries. Also, it is common for a director/shareholder of a personal service company to receive a small salary as an office-holder (set near the statutory minimum), with company profits paid out as dividends. The furlough grant would only cover 80% of the PAYE salary element. It would not include any dividend income. The Government has specifically been made aware of the issues that PSC contractors have encountered in accessing Coronavirus financial support. It is therefore hoped that a sensible and inclusive approach is adopted to assist this sector.
Although in principle the Guidance makes clear that directors can be furloughed, there is a great deal of uncertainty as to how this will apply in practice. One alternative to furloughing with respect to larger boards may be to reduce the working hours and salary of one or more non-critical directors (and the Guidance states that if employees are working reduced hours, they would not then be eligible for the furlough scheme).