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 recoup their wage and NIC liabilities during the period COVID-19 restrictions are having an acute effect on many businesses. We reviewed how the scheme is designed to operate in our recent briefing here – and we will be providing further updates in response to further guidance.
The devil will, as ever, be in the detail. No legislation to put the CJRS on a formal footing has been tabled, and it is unclear at this stage whether this will happen. Whilst various versions of the official guidance for employers and employees have been published, with the latest update appearing over the weekend (4 April 2020), detailed official guidance is still urgently awaited on various issues, including as to how the scheme will work for directors, and to what extent those on furlough will be able to carry out legal and fiduciary duties associated with their appointments.
Directors can be furloughed
The latest guidance makes clear that office holders (including company directors, and members of limited liability partnerships (LLPs) are eligible to be furloughed and to receive support through the CJRS. As with other participants in the scheme, they must meet the eligibility criteria, which include:
- PAYE employee
By no means are all directors employed by their companies, and those that are - particularly in owner-managed businesses - many only receive a small portion of their remuneration as income. Only basic PAYE income, and not bonuses, dividends or commissions, will qualify under CJRS. (Self-employed directors may instead qualify for the government’s Self-employment Income Support Scheme).
- No work to be undertaken
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”.
What constitutes “statutory duties”?
The exception to the ‘no work’ requirement is an acknowledgment that directors will have ongoing responsibilities arising from the office they hold: furlough is available if they only undertake their statutory duties as directors and no other work connected with their employment.
Directors are subject to a multitude of duties, the core body of which are codified in the Companies Act 2006, including the duty to promote the success of the company for the benefit of its shareholders and employees. At times of actual or potential financial distress – which businesses are finding themselves facing if they are looking at claiming under the CJRS – an additional duty for directors to have regard to the interests of creditors is engaged, and they will need to keep a particularly close eye on the business. Getting this wrong opens the door to directors being held personally liable to contribute to a company’s deficit in a later insolvency process.
There are many more legal requirements that a director must comply with in order to avoid personal liability, some of which are enshrined in statute and others which arise under common and equitable law, such as fiduciary duties, and obligations under health & safety, environmental and employment legislation.
While the government has now announced its intention relax restrictions on wrongful trading, thereby protecting directors from some of their personal risk with the aim of encouraging businesses to weather the storm of the pandemic, those proposals do not remove personal liability altogether. The UK’s insolvency regime is highly developed, and wrongful trading - albeit often foremost in directors’ minds - is just one part of the picture as we considered in our briefing here.
This begs the question: how will “statutory duties and obligations” be interpreted when claims under the CJRS are subsequently considered by HMRC, and what therefore are directors permitted to do without disqualifying themselves from the scheme?
Activities confined simply to filing requirements would seem to be safe - but what of issuing and chasing bills, checking on security arrangements for shuttered premises, ensuring essential supplies are delivered, reviewing the company’s financial position, keeping relationships with customers warm? These all arguably go towards meeting the director’s on-going responsibilities, but the further the director expands their role, the greater the chance of HMRC refusing to reimburse under the scheme.
The updated guidance has clarified this to a limited degree. Furloughed directors may carry out particular duties to fulfil their statutory duties, “provided they do no more than would reasonably be judged necessary for the purpose”. It remains unclear however exactly what they can do without endangering the ability to make a claim in respect of them under the CJRS, but the guidance does specify that is not to include work “to generate commercial revenue, or provide services to or on behalf of their company”.
While more detailed official guidance is worked through, we suggest some practical options to consider.
- Recording the decision to furlough
The latest guidance states that furlough arrangements for office holders should be adopted formally as a decision of the company. The board should take the opportunity to record what roles those furloughed will continue to undertake in their capacity as directors (e.g. billing and credit control). Contemporaneous notes are always best practice – and here if directors are able to point objectively to certain actions fulfilling previously defined directorship obligations, it will support the company’s CJRS claim.
- Allocating duties
By virtue of their appointment, all directors are subject to the same duties, and held to at least the same minimum standards as any other, whether or not an employee, an executive or non-executive, or on furlough or otherwise. With adequate corporate governance procedures in place though, it makes good business sense to split roles where appropriate. For businesses that are being scaled back but not mothballed during the pandemic, responsibility for work generating commercial revenue should be allocated to non-furloughed directors.
- Rolling on and off furlough
The scheme is flexibly designed to enable employees to come off and return to furlough in accordance with business need, so long as each furlough period is at least three weeks, and the scheme is still operating (it is currently open until the end of May 2020, but that may be extended). Currently, there is no minimum period in which an employee has to have returned before being entitled to a further period, so there is scope for furloughed directors to return for short periods - for example, to attend board meetings which cover commercial as well as other issues – before being furloughed again. Care would need to be taken that no work was done beforehand (such as reading board papers) so as not to fall foul of the ‘no work’ requirement.
- Resignation and reappointment
It may be appropriate for certain directors to resign their office during the furlough period (particularly if an extended period), with a view to being reappointed on their return, so as to clarify where certain of their duties will finish and resume. Companies House records would need to be updated accordingly. There will be further considerations here: for example quorum provisions requiring a minimum number of directors, and directors will need to be aware that acting as a ‘de facto’ or ‘shadow’ director could still attract liability.
- Alternatives to the CJRS
For directors who are not employees, or those for whom it is not feasible to fit within the CJRS, an alternative may be to look at reduced remuneration and/or hours by agreement. The company would in that case not claim under the scheme, but would have the flexibility to make its own arrangements. There may already be scope in the director’s service contract for this, and in any case changes to arrangements can be made by discussion and consent – and of course documented.
The package of government support measures will no doubt continue to evolve as the effects of the pandemic develop. The new guidance indicates that the Government will be looking to take a pragmatic stance on the application of these measures to ensure they meet in practice the needs of business and society at large, although furloughed directors will need to proceed with care to ensure they fall within the scheme.