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The Plight of the Furloughed Director

Written by Paul Wallis
4th Apr 2020

It is safe to say that we are in unchartered waters, and the tide changes almost daily. I wrote this article on the 3rd April and there were changes issued by the Government on the 4th April. This is, therefore, the updated version.

Like Roald Amundsen in December 1911 and Neil Armstrong in July 1969, we are treading the first steps on previously untrodden ground. Which means that, there are many things happening in the UK, like furlough working, that are new to us and therefore, there are no experts!

Conflicting advice

Having researched dozens of articles written by leading employment lawyers and HR specialists over the past week, it is clear that some advice, whilst not wrong, is conflicting.

The reality is that we will not know exactly what is right-from-wrong until the first case is brought before the courts in the future, and be sure, there will be cases brought by disgruntled (ex)employees of:

  • unfair furloughing
  • unlawful reductions in salaries
  • cases against directors who were working whilst on furlough
  • cases where the employee claims that consent was not given or even asked for before being furloughed
  • breach of contract
  • unfair dismissal

These will all happen at some point.

The ambulance-chasers who have bombarded us with their annoying PPI adverts on the radio and TV now have very little to do, so this will be their opportunity.

And to balance the argument, some employers will flaunt the rules, take advantage of the situation and will deserve to be prosecuted.

At the same time, people’s attitudes in response to the situation will evolve and develop over time, from initially accepting the logic and impact of isolation and lockdown, e.g. Day 1 - I’m fine with being furloughed (“Great still get paid, no work, at home with the family”) all agreed verbally, to beginning to realise the reality, to full awareness of the personal impact, e.g. Day 90 - I’ve not been paid/been made redundant (“I’m angry/scared and after all I can get”). Therefore, it is risky to assume that a team member who is happy to be furloughed today will behave in the same way in 6 months’ time, especially if their role is permanently impacted.

On Friday 20th March, the Chancellor of the Exchequer announced the introduction of the Coronavirus Job Retention Scheme in an effort to help employers avoid the need to make mass redundancies as a result of the impact of COVID-19.

These guidelines are well documented, so I am not going to repeat them, but we must ensure that we follow the correct process.

Furloughing is similar to Redundancy

Furloughing staff has been likened to the redundancy process: the business does not have sufficient work for all staff and must therefore, cut costs. The director(s) must make sound judgement based on many certain criteria on who to make redundant, ensuring that there is no possible case for discrimination. Consultation with employees is a must-do and accurate records should be maintained. Furloughing should follow a similar process.

Employers may be able to justify giving preference to employees in vulnerable groups because, whilst potentially discriminatory, given the circumstances, this is likely to be objectively justifiable. 

Seek Consent

The business should seek consent to furlough. Now, some employment lawyers and HR specialists will say that, if there is a lay-off clause in the contracts of employment, then this is sufficient. Others will say that this is not. So, what should you do? Seek consent is the obvious answer here. If the experts cannot agree, what chance have you? Seeking consent takes a small amount of your time now and could save you considerable time and money, not to mention damage to brand reputation, later.

If you ask for consent and do not need it, what have you lost? If you do not ask for consent and you did need it, what could you lose?

And let’s face it, we all seem to have an abundance of time presently. In fact, if we could float time on the stock market, we would all be very rich!

Communication is key and you must retain records for 5 years.

Furloughing a director

One big question is, can a director be a furloughed worker? At the time of writing this article, you will not find an absolute definitive answer. Unless the government are presently making a speech as I am typing! Well, as it turned out, they were, and guidance has now been issued.

For small businesses, especially owner-operating limited companies, the problem is what is work and what is my legal duty as a director? It is hard for a director to justify being furloughed, especially if they are the sole director. 

“I cannot afford to pay myself as there is no money coming in, but I am not permitted to ensuring that I have a business left when this is all over!!”

Or are you? Again, the experts cannot agree!

What is clear is that for a director to be furloughed, they must be an employee. Although, non-executive directors can now be furloughed if paid via the PAYE system, as they should be.

Where a company has a number of directors, it may be more straightforward; furlough the majority of the directors, leaving one or two to continue to plan for the future and spend time on improving the business. For example, by taking customer calls, preparing quotations, updating websites and improving IT systems. That way you will still have at least one continuing director, and this must be formally recorded in board minutes

Carrying out the legal duties of a director, i.e. filing accounts, filing the confirmation statement, etc., can now be completed whilst on furlough.

Whether the definition of “promoting the success of the company”, one of the seven legal duties, can be extended to marketing and quoting for jobs is presently unclear.

It would be wrong to just assume that a director is an employee of their own company, as there are a number of cases which defined the subject. Two cases in particular:

  • Secretary of State for Trade and Industry v. Bottrill [1999]. It held that Mr Bottrill was an employee of the limited company on the facts. Mr Bottrill was the sole shareholder but, the court held that any control he had over the company was merely theoretical, apart from the main fact being that Mr Bottrill had signed a contract of employment with the company.
  • Farleigh v. Secretary of State for Trade and Industry [2000]. It was held by the Employment Appeal Tribunal that a sole shareholder could not be an employee of his own limited company for the purposes of a redundancy payment from the National Insurance Fund.

So, questions to ask include:

  • Is there a genuine contract of employment between the director and the limited company?
  • Was a ‘statement of written particulars’ issued?
  • What did each party do in pursuance of the contract?
  • Does the contract actually give rise to an employment relationship?
  • How was remuneration accounted for as fees or wages?
  • How and for what reasons did the contract come into existence (for example, was the contract made at a time when insolvency was foreseeable)?

The government could decide to neatly skip over these issues and make it absolutely clear that a sole director owner would qualify as a furlough worker, we await!

Insolvency Rules

The next things on every director’s, and business owner’s, mind presently is insolvency!

It is understandable that, as a director of a business, one might be very concerned about whether the business is trading insolvently, as it has little or no income as a direct result of Covid-19. With this, the possibility of a case against the director for wrongful trading.

Fortunately, the government will temporarily suspend the wrongful trading provisions in the Insolvency Act 1986 for 3 months retrospectively from 1st March 2020, to give company directors time and confidence to continue trading without the threat of personal liability should the company ultimately fall into insolvency.

Viable Business

It is important to remember that, if the business was viable before Covid-19, then why would it not be a viable business after?

Key considerations and practical points for directors to consider as part of the effective management of their duties include:

  • cashflow forecasting
  • stakeholder engagement
  • professional advice
  • deliverability of the plan, and
  • most importantly to create a paper trail

Cashflow

Accurate and up to date cashflow forecasts are key to a company’s ability to navigate financial difficulties successfully and are also important to directors personally in discharging their duties.

Stakeholders

It is essential to keep key stakeholders informed. It may also be the case that certain stakeholders will ultimately be asked to provide additional financial support to the company.

Advice

If directors have any doubt about the financial viability of their company, they should seek independent professional advice as soon as practicable.

Recovery Plan

Taking all of the above into account, the director(s) will no doubt need to put together a plan to navigate the coming months and any financial issues which may arise during that period. The key question which the director(s) should continually ask themselves is whether they reasonably consider that the current restructuring/reorganisation plan is deliverable. As soon as that plan is no longer deliverable, the director(s) must reformulate the plan accordingly, which might include filing for formal insolvency proceedings.

Paper Trail

Given the current uncertainty, it is important that the director(s) regularly document their actions and decision processes and enter these into their formal board meetings which set out the company’s current financial position, the proposed plan, its deliverability, and the rationale for the decisions that are being made by the board at any given time. 

Conclusion

With all the conflicting advice and ambiguous government guidance we have today, during these unprecedented times, it is unlikely that you would be criticised for making your best endeavours to keep your staff employed and your business running, but you must still comply with relevant laws and regulations, including The Coronavirus Act 2020.

Maintain accurate records now, as relying on your memory in months or even years to come if questioned by the HMRC or an employment tribunal, is very unwise.

And remember, no one is an expert.

"More business is lost every year through neglect than through any other cause".

Rose Kennedy

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