On 4 April HM Revenue and Customs published new guidance on the Coronavirus Job Retention Scheme (CJRS). Up until now, there has been much debate over whether Directors can be furloughed under the CJRS. Nabila Chikhi and Emilie Cole discuss the furloughing of directors and what work they can still do when on furlough as statutory office holders.
Can a company director be furloughed? The government has published further guidance about office holders and company directors on 5 April but there was some confusion before that.
Coronavirus and furlough
When the government first published guidance on the Coronavirus Job Retention Scheme on 26 March, some questions remained unanswered – including whether directors were eligible to the CJRS.
Directors were only mentioned in the Self-Employed Income Support Scheme as not being covered by the SEISS but by the CJRS for their salary: “Those who pay themselves a salary and dividends through their own company are not covered by the [SEISS] but will be covered for their salary by the [CJRS] if they are operating PAYE schemes”.
On 1 April, Ben Kerry, head of labour and markets at HM Treasury, also confirmed on a CBI webinar that directors might apply for the Coronavirus Job Retention Scheme provided they are on PAYE payroll. In addition, he said that directors would be able to continue undertaking their statutory duties while being furloughed. But some questions still remained unanswered and the Institute of Directors asked the government to urgently clarify the extent to which a furloughed director can act to save their company.
Eventually, on 5 April the Government gave further guidance about office holders and company directors in their CJRS:
“Office holders can be furloughed and receive support through this scheme. The furlough, and any ongoing payment during furlough, will need to be agreed between the office holder and the party who operates PAYE on the income they receive for holding their office. Where the office holder is a company director or member of a limited liability partnership (LLP), the furlough arrangements should be adopted formally as a decision of the company or LLP.
“As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme. Company directors owe duties to their company which are set out in the Companies Act 2006. 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 decide that such directors should be furloughed. Where one or more individual directors’ furlough is so decided by the board, this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned.
“Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”
What we understand from this further guidance is that the conditions for directors to be furloughed are similar to those for the employees:
- They would need to have been on PAYE on 28 February 2020 and to be considered as worker/employee. But is there an automatic assumption that they are a worker/employee?
- They can’t work for the company while being furloughed but can fulfil their statutory duties. What amounts to statutory duties and to work?
When is a director also considered to be a worker or employee?
If a director is also shareholder and takes only a low salary which is topped up by dividend, only the salary element would be covered by the CJRS. There have been widespread concerns about this as the majority of directors pay themselves a very low amount under PAYE (an average of £719).
There is not an automatic assumption that you are an employee of your own limited company. Some court judgments – Farleigh v Secretary of State for Trade and Industry (2000]) EAT – have suggested that a sole shareholder of a company cannot be considered an employee. It depends on whether there is an employment relationship and whether there is a distinction between the director’s role as an officeholder and that of the employee.
The controlling mind of the company could not also be an employee, if they were one and the same person because they can’t make decisions about themselves. So it would depend on the facts of the case and whether there is evidence of an employment relationship.
There is a difference between executive directors who tend to be employees and non-executive directors who tend not to be employees. Where a director is an employee, they will be eligible for furlough under the CJRS in respect of those elements of their pay that are wages.
A person appointed director of a company is an office-holder and is not, by virtue of that appointment alone, also an employee of the company. For employment law purposes, it will be a question of fact whether or not a director is an employee or a worker. Payments to directors are subject to PAYE deductions. Given that reimbursement of wages costs under the CJRS will be made by HMRC, the CJRS will be made available for individuals whose remuneration is subject to PAYE system, which would include directors (even if they are not employees).
Directors of a company are not as such employees of the company. By virtue of their appointment they become office-holders. A Director however can enter a service agreement with the company and thereby become its employee as well as a director of it.
What amounts to statutory duties and work?
Directors might be able to continue undertaking their statutory duties while furloughed such as filling up their accounts, etc. which would not count as doing work. The statutory duties of directors are very limited. There are seven:
- Duty to act within powers
- 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
Statutory duties can be carried out but no services or revenue-generating work.
Activities that would be considered as work, and therefore restricted whilst on furlough: talking to customers, talking to suppliers, marketing your business to keep your business going, posting on social media, taking work calls. Directors would be well advised to notify all the company’s suppliers, customers that the business is suspended until the end of the coronavirus restrictions.
The company may need to consider what are the director’s duties as an officeholder and his/her duties as an employee. If there are statutory duties that the company requires to be performed during the proposed ‘furlough’ period, the company may need to consider whether these can be carried out by the director without breaching the requirements of the CJRS or whether these will can be carried out by another director who is not furloughed.
If directors are still working even for a reduced hours or pay, they will not be able to claim via the CJRS.
This article does not constitute legal advice. Legal advice should be sought to address specific circumstances. Information on COVID-19 is changing daily.