Can directors be furloughed? A case of being a little bit pregnant
The support given by the government to pay 80% of furloughed employees salary is a welcome one – especially for employees who can manage the reduction and self-isolate accordingly.
Many owners, directors and employees would rather keep working but due to a combination of the circumspect rules, peer and government pressure to remain at home and the economic reality of cessation of trade for many businesses means that this is an impossibility.
But is it as simple as that for directors?
And while some legislation is being tweaked to mitigate the impact on companies of the covid-19 coronavirus pandemic, this isn’t the case when it comes to directors duties.
Firstly, in theory directors can be furloughed in the same way as any other employee if they’re paid entirely or proportionally through the PAYE system.
Hold the champagne however, as a condition of being furloughed is that the employee is not allowed to undertake any work for the company. How then can this be compatible with the essential duties a director has to undertake?
Thankfully, it can be.
Directors have a legal fiduciary duty to their company and they simply could not operate or function without a legal director in place to oversee them.
So a skeleton crew, potentially even of one, is required to keep a hand on the tiller and oversee regular activities such as keeping books and tax details up-to-date, overseeing any essential banking or financial transactions or collecting and sending post.
Now, there may be some middle ground that could be occupied where a company goes into a kind of “hibernation” where a director wouldn’t have anything to do with day-to-day business operations but they would manage the essential matters.
In short, a sole director can furlough and the company can remain in existence, as long as the company doesn’t carry out any commercial activities.
For owner managed business, how does furloughing compare to redundancy?
This is a key point and should be considered by every cash starved sole director unable to trade through Covid-19. What will you be paid under the furlough vs what would you get from the government’s National Insurance Fund.
This director is receiving £11500 per annum through PAYE (with or without dividend payments on top)
Furloughed net monthly salary entitlement estimate £766.67
Net estimate total x 3 months £2300.01
Redundancy Entitlement calculation
This director is 49, has 8 years’ full service with the company and works full time (40 hours per week). They receive £11500 through the PAYE (with or without dividends) annually.
Redundancy entitlement £4,185.60
Notice entitlement £,2790.40
Total entitlement £6,976.00
Crucially, if this director has been unable to pay themselves in the last months, should the company go into liquidation, they will also be able to claim arrears of pay (up to 8 weeks), any outstanding holiday (up to 6 weeks), and if no notice was received or notice was worked and not paid, the above entitlement would apply.
This calculation would apply if they earned less than £11500 through PAYE or up to approximately £18000.
There are a lot of unintended consequences playing out as the covid-19 coronavirus pandemic unfolds, not least when it comes to the irresistible force of running a business meeting the immovable object of existing legislation.
One of the traditional advantages of being a sole-trader or smaller business is that you have the agility lacking in larger and more bureaucratic company structures to make changes but even this is being stretched against the possible and legal bounds of business activity.
Fortunately, there’s an expert ear you can turn to that can help you evaluate your ideas to help your business survive and ultimately thrive in unchartered waters.
Contact us today to arrange a free initial virtual consultation with one of our team of expert advisors.
They remain constantly available to work with you on understanding the unique issues facing your company and to give you friendly, professional advice on how you can best navigate through them.