Can a company director or secretary or LLP member be furloughed?

Written on 7 Apr 2020

The UK government's guidance on the Coronavirus Job Retention Scheme was updated on 4 April 2020 to clarify how it applies to office holders, including company directors, and salaried members of LLPs.  The guidance now expressly confirms that people in these positions may be furloughed. 

This insight sets out the specific considerations for furloughing company officeholders – which includes company directors and company secretaries - and salaried members of LLPs. For guidance on the furlough scheme as it relates to employees generally, see this insight.

Can all company officeholders and salaried LLP members be furloughed?

Yes in theory, but the grant can only be claimed if and to the extent they are paid via PAYE.

What is the decision-making process for companies?

The decision must be made by the company acting through its board of directors.  So a board meeting will need to be called (and held virtually) – or the board will need to make a written decision – in accordance with the company's constitution/articles of association.

The director who is being furloughed will be "interested" in the furlough arrangement for the purposes of company law.  Depending upon what the company's constitution 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 (see more on this below).

Once made, the decision will need to be noted in the company's records and communicated in writing to the director(s) concerned.

If the company is listed on the Official List of the London Stock Exchange, the decision will amount to an "important change to the role, functions or responsibilities of directors" which must be notified to the market under Listing Rule 9.6.11R.  The notification must be made as soon as possible and in any event by the end of the business day following the decision.  Companies admitted to AIM would be advised to do the same - although the board change notification requirement under the AIM Rule 17 is more narrow (only applying to resignation, dismissals or appointments), the decision is likely to be announceable under other reporting requirements such as AIM Rule 11.

What about the directors' duties under company law?

Company directors owe duties to their company set out under company law.   The directors will need to consider these duties when making the decision whether to furlough one or more of their number.

The most relevant duty is the duty to promote the success of the company for the benefit of its members (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 longer term.

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

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 (see more on this above).

What can a furloughed director do for the company?

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

However, a furloughed director will still be an appointed director and so will need to comply with his or her duties under company law.  They are permitted to do this no more than is reasonably necessary.  This is likely to be a difficult line to draw in practice – we anticipate that furloughed directors will be in a position akin to non-executive directors.

How much of the directors' remuneration will be covered by the furlough scheme?

The position will be the same as for other employees who may be eligible under the scheme. The grant paid to them will be calculated based on their regular, contractual pay, such as wages, compulsory commission and past overtime. The calculation will not include discretionary commission (including tips) payments or bonuses, non-cash payments or benefits in kind. It will also not cover any payments made to the directors outside of the PAYE system.

What is the process for members of LLPs?

Only members who are designated as "salaried members" under the Income Tax (Trading and Other Income) Act 2005 - and so are employees for tax purposes – are eligible to be furloughed.

The process for furloughing salaried members will depend upon the specific terms of the LLP agreement.  These are usually highly bespoke documents - the decision-making process may require the unanimous consent of all the members or it may be a decision reserved to a management board.

It may be necessary to make changes to the LLP agreement itself to provide for the rights, obligations and treatment of a furloughed member. Again, the process for making changes to the LLP agreement will be set out in the agreement itself.

How much of a salaried member's profit share will be covered by the furlough scheme?

For an LLP member who is treated as being employed by the LLP, the reference salary for the scheme is the LLP member’s profit allocation, excluding any amounts which are determined by the LLP member’s performance, or the overall performance of the LLP.

What should companies or LLPs do now?

Please contact your usual Osborne Clarke contact for a copy of our updated guide covering frequently asked questions and suggested actions for employers considering claiming under the scheme and to discuss the implications for your business in furloughing staff and managing the legal and practical risks of doing so.