Updated: Jun 26
What does “Furlough” mean?
Since the outbreak of the Coronavirus and subsequent enforced restrictions in the UK, the term “furlough” has crept into everyday vocabulary for many. To furlough a member of staff is for a business or employer to temporarily stop them from working – usually when business or personal circumstances make performing the employee’s role impossible, or at least very difficult. But, is it possible for a company director or a shareholder to be furloughed?
What is the Job Retention Scheme?
The UK the government swiftly introduced the Job Retention Scheme for all businesses concerned about being unable to retain and pay the wages of their employees. Instead of mass unemployment arising as a consequence of the slowdown of the economy the furlough scheme was introduced. For further information explaining how the government will support businesses go to Gov.uk.
Can Company Directors be Furloughed?
Salaried company directors can be furloughed, as long as they are paid via the PAYE (Pay As You Earn) scheme and meet the criteria necessary for employees, namely:
Be employed on 19th March 2020;
Be individually notified to HMRC on a Real Time Information (RTI) submission on or before 19th March 2020.
The main difference between an employee and a director being furloughed is the allowance of the continuation of duties for the company. Company directors, as a part of their role, owe duties to their company as laid out in the Companies Act 2006. Should your board of directors deem that it’s compliant through statutory duties for one or more salaried directors to be furloughed, this is acceptable.
Company records should be updated if and when a director is placed onto furlough. The company articles of association, which detail how a company is run, owned and governed, will need to be reviewed and revised. The articles determine the roles and responsibilities of each director, and therefore, if it is accepted that they will be unable to fulfil their usual duties, this should be recorded.
A director can carry out their required duties necessary to fulfil the statutory obligations they owe to their company, so long as they don’t do more than would be judged as reasonable. They should not, for example, take on the role of a sale advisor, thus generating commercial revenue for their business, if this is not something that is usually in their remit day to day.
Furloughed directors are likely to return to active employment for their company prior to staff members, ensuring the business is prepared for the return of employees. Business documentation may need to be revised as a result of the impact of the pandemic. Serenity Law offers assistance with the review of articles of association and advice on director’s duties, you can book a 15-minute free consultation by clicking here. You can also find further information about our corporate services here.
Can Company Shareholders be Furloughed?
Shareholders have the responsibility of ensuring the company is well managed by monitoring performance and agreeing/objecting to business decisions. In Private Limited Companies, which are limited by shares, there are a number of types of shareholders, who have different entitlements depending on the type of shares they hold. These include:
Ordinary shareholders – This is the most common type of shares and the shareholders have no particular rights or restrictions attached to their investment. Ordinary shareholders are entitled to voting rights and have the right to receive dividends if available after preference shareholders receive theirs. If the company is to be closed, the ordinary shareholders are usually last to be paid.
Non-voting ordinary shareholders – These shareholders have the same conditions as ordinary shareholders; however they don’t have the right to vote under certain circumstances (or sometimes at all).
Redeemable shareholders – This type of shareholder agrees to their shares potentially being bought back by the company at a later date – either on a fixed, agreed date, or when the company chooses.
Preference shareholders – These shareholders tend to have the right to preferential treatment when the time to distribute annual dividends arises. They receive a fixed dividend, so they aren’t impacted by increases/decreases in company profits and don’t have voting rights. Preference shareholders will have the right to receive their dividends before ordinary shareholders if the business is to be closed.
Cumulative preference shareholders – This type of shareholder has the right to carry forward their dividend to the following years, if their dividend cannot be paid in one year as expected.
According to the Institute of Chartered Accountants of England and Wales, there is currently no scheme in place to support shareholders of a business, should dividends reduce as a result of the Coronavirus. In the case of a shareholder receiving part remuneration in the form of a low salary from the company, and part in dividends, the salary will be covered under the Job Retention Scheme and the shareholder can claim 80% of their wage when furloughed (up to £2,500 per month).
The UK government has been quick to react to the unprecedented impact of the Coronavirus pandemic, already extending the Job Retention Scheme by a month in response to on-going economical concern. Read more about the extension here.
We, at Serenity Law LLP, keep up to date with the latest advice and legislation communicated by the government to enable us to support you and your business. We can assist with advising Directors on their duties, revising articles of association or reviewing shareholders agreements. We are experienced in revising and renegotiating terms of agreement for businesses around the world. To learn more about how we can support your business through the continuation of the pandemic, contact the team.