03 Apr 2020

This week has seen further measures announced by the Government to support business and individuals as the effects of the restrictions imposed start to be truly felt. In the charities sector, both individual charities and industry bodies are beginning to fully estimate the cost of the pandemic.

This week's bulletin focusses on some updates from the themes we explored last week as well as further developments from the last seven days, including on pensions and directors' duties.  We are also shining a spotlight on some particular issues for charities working in the Arts and Education sectors.

Insight updates

Job Retention Scheme – furloughing employees

Three weeks ago, did we even know the meaning of furlough? This week, it's one of the most commonly used words in our vocabulary.

Charities announce that they are furloughing staff. Upsetting? Definitely. But it demonstrates a responsible approach to the management of finances by charities during this time, when income streams are uncertain and financial planning is almost impossible.

Your trustees should understand your charity's approach to the management of costs and this should include an informed decision on furloughing staff. These decisions are designed to preserve the future of the charity and its workforce and it is entirely legitimate for trustees to take difficult decisions in these unprecedented times.

In last week's bulletin we summarised the Government's 'Job Retention Scheme', furloughing. Since then further details have been provided including restrictions in place where employers receive public funding for their staff costs. 

The Government's guidance states that "where employers receive public funding for staff costs, and that funding is continuing, we expect employers to use that money to continue to pay staff in the usual fashion – and correspondingly not furlough them." 

It has been confirmed that this applies to non-public sector employers who receive public funding for staff costs, and therefore charities could fall within this restriction.

However, this expectation articulated by the government only applies where public funding is received for staff costs. Charities who receive public funding should still therefore be able to use the furloughing scheme:

a) for any staff whose costs are not met by public funding; and
b) where public funding is received for the provision of certain goods or services, but the funding is not provided for staff costs. In these cases you should of course consider whether you are still able to provide these goods or services in light of current restrictions and any staff furloughing, and what impact this will have on funding already received and/or future funding under the terms of the agreement in place.

The guidance also goes on to state that "in a small number of cases, for example where organisations are not primarily funded by the government and whose staff cannot be redeployed to assist with the coronavirus response, the scheme may be appropriate for some staff."

This also gives charities that are not primarily funded by the government the option of using the furloughing scheme, where it is appropriate to do so.

If you receive some or all of your funding from public sources, and are considering furloughing any of your staff members, you should therefore consider if this restriction applies in light of the above and clearly document the decision you have reached and your reasoning. 

We are receiving many practical questions around furloughing and the impact on sickness and holiday, maternity absence and fixed term workers. 

Please get in touch if you want more detailed advice.

Impact on pension arrangements

Charities offer a wide range of different pension arrangements for their employees (from participation in public sector schemes, provision of defined benefit (DB) pensions (either through a standalone plan or a master trust) to operating defined contribution (DC) plans or making auto-enrolment compliant contributions to a group personal pension). No matter what pension arrangements charities have in place, there will be Covid-19 implications to consider.

We have been dealing with many queries on what the Government's Job Retention Scheme means for pension contributions (both charity contributions and employee). Some commonly covered points to flag are:

  • Depending on the contribution rate, the full cost of the charity's usual contribution in respect of a furloughed employee may not be covered by the grant. This leads to consideration needing to be given as to whether the excess contribution still will be (or must be) made during the period of furlough.
  • Where charities use a 'salary sacrifice' arrangement for pension contributions, this also has an impact on the extent to which furlough will reduce wage costs.
  • Where employees are furloughed (or otherwise, given employees may look to enhance income during the pandemic for a variety of personal reasons) they may want to explore temporarily opting-out of pension saving. Whether this is permissible (together with the implications of this) depend on the nature and governing documentation of the pension arrangement. It is important to note that where charities cease to employ active members of a DB plan (which could happen as a result of such employee opt-outs), large debts can become due if the plan has a funding deficit (there are ways of managing these debts under statute but being aware of when such debts could arise is imperative).

We have concentrated here on the furlough scheme given it is so current and we are seeing plenty of enquiries coming through. However, the COVID-19 implications for charity pension plan sponsors (and the trustees of their pension arrangements) are far wider and will continue to have a legacy once the pandemic is over. The good news is that various pensions regulatory bodies are issuing statements and guidance acknowledging the crisis and indicating some relaxations of usual requirements may be permissible. There are ways in which certain cash flow can be preserved in the charity during the pandemic, rather than being paid in to pension arrangements at the usual level, however, care must be taken to continue to comply with the statutory regime and restrictions in the governing documentation. 

Please do get in touch if you require more detailed advice.

AGMs

In our last bulletin we summarised the guidance produced by the Chartered Governance Institute (CGI) for companies planning their AGM. Since then, the Government has published the compulsory Stay at Home Measures prohibiting, among other things, public gatherings of more than two people.

The CGI published supplementary guidance on 27 March (which has been 'blessed' by the Government). This covers a number of key issues. For charities considering their AGMs, of particular relevance is: 

  • Members will not be able to attend general meetings in person while the Stay at Home Measures are in force.  Attendance at a general meeting by a member (other than one specifically required to form the quorum for that meeting) is not 'essential for work purposes'. Members should instead be encouraged to vote by proxy.  You should take appropriate steps to ensure members are informed that attendance at the AGM in person is not permitted because of the Stay at Home Measures. This will be particularly important if you have a large (and often passionate) membership, as effective communication to large groups often presents practical and administrative challenges
  • If members are not able to attend the general meeting, a quorum will still be required to conduct business. The quorum requirement will be set out in your governing document. Where possible, the quorum should be made up of one person physically present at the meeting plus enough proxies given to that person to form a quorum. If your quorum requires more than two people to be physically present in person, for any members whose physical presence is required, the fact that their presence is necessary in order for a quorum to be formed means that their presence is 'essential for work purposes'. But you will need to make sure you do not put public health at risk and social distancing measures must be in place. 

Where your charity has a small membership, making decisions via the written resolution procedure is likely to be the most straightforward option. In any event, stay in touch with your members throughout and let them know what you are doing.

On 28 March 2020 BEIS announced that new legislation will shortly be introduced permitting companies required by law to hold an AGM (i.e. publicly traded companies) to do so online or postpone them. Although the text of this legislation is not yet published, if these permissions are extended to other types of company, this could provide additional flexibility for charitable companies wanting to hold their AGM fully online. We will provide further updates on this in the next bulletins. 

'Wrongful trading' suspension

Under the UK's corporate insolvency rules, a company director can be personally liable to their company's creditors if the company continues to trade in circumstances where that director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration. These rules apply to charitable companies.

In recent weeks, as the government has announced a raft of measures designed to sustain struggling businesses during the pandemic, directors of charitable companies and for-profit businesses alike have been faced with a difficult balancing act – take advantage of the government's support and continue operating (wearing the risk of personal liability if their company subsequently collapses), or put the company into potentially premature insolvency proceedings.

Last week the Business Secretary announced a temporary suspension of the wrongful trading rules for three months, to be applied retrospectively from 1 March 2020. This will give hard-pressed charitable companies breathing space as they seek to take advantage of the various means of support available to them. This is a welcome development, and should provide comfort to directors of charitable companies concerned about personal liability should the worst happen. Charity directors should not become complacent – their fiduciary duties under company law remain in place (including, in an insolvency situation, the duty to act in the best interests of their company's creditors), and they will still be subject to Insolvency Act prohibitions concerning fraudulent conduct and misconduct in winding up. Closer and more regular review of cash flow should be a priority for trustees. Keep a record of your discussions and meet more regularly. 

Charity Commission guidance – further updates

The Charity Commission's guidance on coronavirus guidance for the charity sector was updated on 1 April 2020 to include information about whether a charity's objects permit that organisation to help the effort to tackle COVID-19, and sources of support from other organisations. In summary:

  • The Commission highlights a number of charitable purposes that might allow a charity to offer support and states that trustees of charities with other objects may also be able to adapt and respond to COVID-19 either directly or indirectly. If a charity's existing objects do not allow you to help you may be able to amend your objects, but this should be subject to careful consideration. Let us know if you are looking to do this and we can guide you through it.

Sector focus

COVID-19 leaves no charity unharmed, and we will try to touch on how this is impacting on the sub-sectors within our sector.

Arts charities

Along with health and social care charities, the arts sector has been amongst the hardest hit by this crisis – entire theatre and opera seasons cancelled, concert halls and galleries closed down, museums' doors shut for the foreseeable future, all with enormous financial consequences for an already stretched sector and the individuals working in it.  

Arts Council Funding

Last week Arts Council England announced a £160 million emergency response package to support organisations and individuals across the cultural sector.  The support will take the form of three separate funding programmes, each earmarked for specific purposes, as follows:

  • £90 million for National Portfolio Organisations (NPOs), which are relatively large national bodies including theatre companies, dance, music and combined arts organisations
  • £50 million for organisations outside the National Portfolio
  • £20 million for individuals working in the sector. 

Applications for grants under the second and third programmes open on 9 April 2020. The mechanics for NPOs to access funding has not been published at the date of writing. 

Philanthropic giving

Many arts charities rely on philanthropic giving as well as public funding through bodies such as the Arts Council, and these charities are concerned that individual donations will dry up as the economic impact of the pandemic develops. 

It is the case that after the 2007/08 recession, donations to charity by individuals reduced from an estimated total of £11.2 billion in 2007/08 to £9.9 billion in 2008/09.  One would expect an equivalent fall as a result of the current pandemic, however there are ways arts charities can bolster their donation income in the short term, for example by asking individuals who have purchased tickets for cancelled performances to consider "donating" the cost of their ticket rather than asking for a refund. This needs careful management and communication.

Charities should also continue to communicate with their donor base through traditional and especially social media throughout any period of closure, to ensure they are present in donors' minds. Trustees have a duty to consider how they can adapt their strategy to meet current need. Charities can still reach their beneficiaries, and agility will be key to survival.

Workforce

Employees of charities in the creative arts sector can benefit from the furloughing scheme set out above and in previous briefings.  However a significant number of individuals working in arts charities are engaged on a self-employed basis.  Charities within the sector have therefore been keen to learn of the measures being taken to protect those individuals. 

In a widely anticipated briefing last week, the Chancellor announced measures in support of the self-employed which, broadly, bring parity with employed workers in terms of the extent of financial support available.  Unlike the scheme for employees, however, this scheme relies on individuals engaging with HMRC directly and does not require input from the charity itself.

Although not of direct benefit at an organisational level, this financial support will be vital for all arts organisations wishing to retain their highly skilled workforce. The existence of the scheme and (when they become available) details of its implementation should therefore be brought to the attention of self-employed workers within arts charities as a matter of priority.

We are also aware of some larger arts organisations extending their employee assistance programmes to the self-employed individuals with whom they work on a regular basis, providing some much needed support for them at this unprecedentedly challenging time.

Education charities

Online learning: With students and teachers having more access to technology than ever before, a number of education providers are fortunate to be able to use online tools to continue to support students in their learning. As well as logistical and administrative challenges this no doubt throws up, we also wanted to highlight two key areas education charities taking advantage of online learning should be aware of:

  • Intellectual property rights – You should ensure that all resources and materials used by staff to support online learning are covered by a suitable copyright licence (if you do not own the intellectual property rights in the materials used) and that permissions already obtained to use any existing resources, which staff are now using in new or innovative ways, is broad enough to cover this new type of use. If you are unsure we would recommend checking the terms of your usage licence in the first instance and seeking any additional permissions that may be required
  • Safeguarding – With teachers teaching from their own homes and potentially providing students with more means of contacting them, it is important for education providers to have assessed the increased safeguarding risks that this could present, including from the perceived breakdown in certain 'teacher/student' barriers and reduced oversight of online activities. Appropriate mitigations will then need to be put in place and safeguarding procedure documents updated and communicated to staff. Education providers should also consider whether students are still able to effectively report safeguarding concerns when they are not physically present on site, and any appropriate measures to ensure students can still be protected from harm.

Key workers in Schools: Some staff will be key to the running of your organisation but will be able to perform their job remotely. However, some staff may need access to one or more of your physical sites to perform their job, for example a teacher looking after the children or other government-defined key workers, or an estates manager responsible for maintaining physical security of the site. Where some of your staff are still required to be on site to work, you should ensure that you continue to meet your employment law and health and safety obligations to them (including, where appropriate, providing them with the equipment required to carry out their job) and provide them with a suitable form of identification and verification, so if they are challenged on their movements in going to or from work, they can provide suitable documentation.

We are keen to hear from you as to what you would like to hear about in future briefings and similarly if you would like to share stories/experiences with other readers.