Ami Naru Partner and Head of Employment and Emma Shakespeare Senior Associate and Head of Corporate Governance at Travlaw highlight the issues companies face when considering whether to place board directors on furlough and offer clear answers to the many questions which are being raised. The same considerations apply to salaried members of an LLP.
Can directors be placed on furlough leave?
Yes, provided the director was on PAYE on 28 February 2020 salaried company directors are eligible for furloughed leave. Non-Executive Directors (NEDs) are not eligible for furloughed leave. As with workers/employees, directors must agree to be furloughed, unless their service contract allows the company to do so unilaterally.
Furloughed directors will continue to be officers of the company; they do not cease to be a director.
What steps does a company need to take?
The company, acting through its board of directors should fully discuss any proposal to furlough a director at a duly convened and quorate virtual board meeting. The company’s articles of association (and if relevant, any shareholders or joint venture agreement) should be checked to see whether the director whom it is proposed to furlough can attend and/or vote at the meeting. In reaching a decision, the board will need to consider their statutory duties under Chapter 10 Companies Act 2006. Briefly, these include:
- Duty to promote the success of the company;
- Duty to exercise independent judgement;
- Duty to exercise reasonable care, skill and diligence;
- Duty to avoid conflicts of interest;
- Duty not to accept benefits from third parties;
- Duty to declare interest in proposed transaction or arrangement.
In reaching a decision, the board must balance the financial benefit against any risks to the business, and should take into account the role of the director and the skills and experience which he or she brings. The board should, as always, act in the best interests of the company, for the benefit of all shareholders. Consideration should be given to the delegation and management of the director’s workload in his or her absence (see below).
Each board director should come to their own decision as to whether or not to furlough is the right choice in the circumstances. Any decision reached should be formally documented as a board resolution together with full minutes explaining the reasons for such decision, noted in the company records and communicated in writing to the director(s) concerned. The director’s agreement should be sought and if given, it should ideally be evidenced in writing. All records should be maintained for a minimum of 5 years.
What financial support will a director on furlough leave receive?
Salaried company directors are eligible to receive financial support from the Government through the Scheme equal to the amount of their salary paid through PAYE up to the cap of £2,500 or 80%, whichever is lower.
Often, directors receive a combination of salary and dividends; it is only the salary that is paid. Dividends will continue to be payable in the ordinary way, subject to distributable reserves.
What work can a director can do whilst furloughed?
Directors should not do work of a kind they would carry out in normal circumstances or which generate commercial revenue, neither should they provides services to or on behalf of the company whilst on furlough leave.
It is likely that, amongst others, activities such as dealing with suppliers, taking work calls, engaging in work related social media, marketing the business for survival would amount to work, which is prohibited whilst a director is on furlough leave.
What about a director’s statutory duties/ responsibilities?
The guidance is clear that a director’s statutory duties can be carried out while on furloughed leave. However, our view is that this concession should be narrowly construed; directors should only undertake the minimum duties necessary to ensure that the company is not in breach of its obligations under the Companies Act.
For example, duties such as preparing returns e.g. VAT returns; maintaining the company’s statutory records; dealing with Companies House; or preparing statutory accounts, could be examples of such necessary duties. In addition, thought should be given as to whether these statutory duties could be undertaken by a director not on furlough. Where a furloughed director needs to carry out particular obligations to fulfil the statutory duties owed to their company, they may do so, provided that they do no more than would reasonably be judged necessary for that purpose.
Can a director on furlough leave attend board meetings?
This is a very interesting question and one which is not, currently, expressly covered in the published guidance and it is a difficult line to draw. However, given that the director will continue to be a board director and in view of the fact that the statutory duties will continue to apply, our view/advice is that directors on furlough leave should attend board meetings, in a manner akin to a NED. They will in any event be entitled to receive notices of and attend all meetings; their presence may even be required for a quorum without changes being made to the company’s articles of association. It is our view that directors should, while on furlough leave, ensure they are regularly provided with up to date financial and other key business information and all agendas/ packs in advance of board meetings in the usual way. In attending board meetings, directors should continue to be mindful of their statutory duties as described above.
What if a director is working reduced hours?
In such circumstances, the director will not qualify for the Scheme, as they cannot undertake any work whilst on furlough leave.
If you would like to discuss your specific circumstances or have any further questions, please contact
Ami Naru, Head of Employment
or call 0113 258 0033
Emma Shakespeare, Head of Corporate Governance & Corporate
or call 0113 258 0033