Furlough Leave: Cut Costs & Extend Runway

Being a founder is hard! You have to come up with a compelling idea, turn it from dream into reality, find investment, build a team, launch a product, iterate till you reach product-market fit, and then raise again, until you’re generating enough revenue to cover costs.

And then a pandemic came along to mess up your plans.

If your business is fortunate enough to have enough cash in the bank to give you a runway of at least 12 months and/or is generating enough revenue so your burn rate is low enough that you won’t need to raise again in the next 12 months then you’re in a great position to weather this current storm.

If not, the question is what to do next, because raising investment in the coming months is going to be tougher than before.

So, let’s start with a sobering fact:

If you reduce your costs by 50% when you have 1 month’s runway left, that buys you 1 month of extra runway.
If you reduce your costs by 50% when you have 12 month’s runway left, that buys you another 12 months.

This means if you aren’t generating enough revenue to cover your costs, and it’s going to be a while before things return to normal (which, unfortunately, looks to be the case), you may be better off reducing costs right now in order to give you enough runway to weather the storm, rather than procrastinating to see how things will pan out over the coming months before cutting costs.

The usual approach, lay people off

One way to do this is, of course, to lay people off. That will certainly cut costs in the medium term, but in the short term you may be paying out more in redundancies. And, when business picks up, which it inevitably will, you’re stuck competing with every other company to hire good people again, and paying hefty recruiting fees. Plus, since few companies are hiring right now, it’s really tough on your employees, you’re leaving them incomeless at a time when there’s little immediate alternative for them.

The alternative, put your team on furlough leave

An alternative option that’s now available is to place staff on furlough leave, which is basically putting them on paid leave, where that leave is 80% paid for by the UK government.

The advantage of furlough leave is that you don’t need to terminate anyone, and as soon as things pick up, it’s back to work as normal (well, as close to normal as can be under the circumstances). And, by putting employees on furlough leave instead of terminating them, you know they’re still being paid, at least in part. And, if you don’t want the employee to suffer any reduction in salary you can top that government payment you wish (and the company has the funds to do so).

Furlough leave isn’t perfect, of course. Fewer people working day-to-day for your company means fewer people building things. It’s a short-term option until the company can get everyone back on-board again. But for many companies it may be the best option available right now.

Even companies with adequate bank balances and revenue may find they simply don’t need certain job functions or roles while everyone is working from home, and may pause those roles until your team, and your customers’, are back in the office.

What exactly is furlough leave?

Properly known as the Coronavirus Job Retention Scheme, this UK government scheme was launched to help businesses reeling from the coronavirus pandemic. The government will repay 80% of the salary of employees who agree not to work for your company for the duration of the leave period, up to a gross salary of £37,500 per annum, or £2,500 per month.

How to put team members on furlough leave

If you need to put team members on furlough leave, SeedLegals is the one-stop platform to do that:

Sign up on SeedLegals
Create your company (we automatically pull in the details from Companies House).
Go to Quick Agreements
Click to create a new Furlough Notice
Fill in the email and name of the person you’re creating the furlough notice for.
We’ll guide you through a few options, such as the furloughed employee getting just the 80% government grant, or topping up to their existing salary, or somewhere in between.
Once you’ve finished, the furlough notice is automatically created.
Click to share it with the employee.
The employee logs onto SeedLegals, reviews the agreement and e-signs it, even on their phone.
Job done!

The furlough notice generated on SeedLegals contains important legal wording that varies the terms of your existing employment contract with that person – most articles forget to mention this, but it’s super-important. The furlough notices created on SeedLegals don’t require the original employment agreement to have been created on SeedLegals, though once you’ve seen the process we hope you’ll use SeedLegals for all your other agreements.

But… what about the founders…?

Putting employees on furlough leave is one thing, but what if the company doesn’t even have money to pay the founders, can they furlough themselves? The answer is yes they can, so long as they were also PAYE employees as of 28 Feb 2020. Since furloughed workers can’t do any work for the company until 1 July (they are able to split furlough days and working days after that date), that means the company goes into hibernation until the founders unfurlough themselves. Note that while they’re furloughed they can still (and indeed must) continue to perform any statutory obligations they have as directors, such as doing the company annual filings, etc.