There has been a lot of uncertainty as to whether the Job Retention Scheme is applicable to company directors or not. The guidance has now been updated and expressly confirms that the directors may be furloughed as long as they are paid via PAYE.The position will be the same as for other employees who are eligible under the scheme. The usual criteria will apply:

• 80% of director’s usual wage costs will be covered (capped at £2,500 per month) as well as NICs and pension contributions on the subsidised wage;
• Directors should have been on PAYE on or before 28 February 2020;
• Initial furlough reimbursed is for 3 months but can be extended;
• Furlough must be for a minimum initial period of 3 weeks.

The grant paid to the directors will be calculated based on their regular, contractual pay, such as wages, compulsory commission and past overtime. The calculation will not include discretionary commission payments or bonuses, non-cash payments or benefits in kind. Basically, it will not cover any payments made to the directors outside of the PAYE system.

Furloughed directors cannot to do any work that they would carry out in the normal circumstances to generate commercial revenue or provide services to or on behalf of the company. However, they can take part in volunteer work or training.

However, furloughed directors will still be appointed directors and so will need to comply with their duties under the company law. The company will need to consider these duties when making the decision whether to furlough their directors. For example, section 172 of the Companies Act 2006 provides that a director must promote the success of the company for the benefit of its shareholders as a whole considering the likely consequences for various stakeholders and the impact on the environment, the reputation of the company and the company’s success in the long term.

Other relevant duties include the duty to exercise independent judgement – directors should ensure that they are not simply implementing the commands of others such as major shareholders or investors – and the duty to avoid conflicts of interest. A director who is potentially to be furloughed may not be able to participate in the decision making process.

The directors should be permitted to still comply with their duties but no more than is reasonably necessary. It is arguable that in order to do so, it is reasonably necessary for the directors to be involved in the running of the business almost on a daily basis. It is yet to be seen how this will be achieved in practice.

Each director will need to come to their own decision as to whether or not furlough is the right choice for them in the circumstances.

The decision to furlough must be made by the company acting through its board of directors. Therefore, a board meeting will need to be called, alternatively the board can  make a written decision – in accordance with the company’s articles of association.

The director who is being furloughed will be “interested” in the furlough arrangement for the purposes of the company law. Depending upon what the company’s articles of association says, the director may or may not be able to count in the quorum or vote on the decision. Each of the directors will need to consider their duties when coming to the decision.

Once the decision is made, it will need to be noted in the company’s records and communicated in writing to the directors concerned.

For more advice please contact us on info@barnes-law.co.uk.