Are directors employees of a company?
Company directors are often employees, but their employment status can vary depending on individual circumstances. By default, directors, like company secretaries, are classified as ‘office holders.’
When someone is appointed as a company director, they automatically assume the role of an office holder. This applies regardless of whether they have an employment contract or receive payment from the company.
However, an office holder can also be an employee. But how can it be determined if a director is also an employee of the company, and why is this important?
Why does employment status matter?
Determining the employment status of a director is important for two key legal reasons:
- Employment Law: Employees (and to a lesser extent, ‘workers’) are entitled to various legal rights, including minimum wage, maternity leave, redundancy payments, and more. Employers must adhere to these rights and fulfill their legal duties to ensure fair treatment and compliance with the law.
- Tax – It’s essential for both the company and the employee to understand their responsibilities concerning PAYE, interactions with HMRC, and other tax obligations.
It’s important to note that a person can be classified as an employee for employment law purposes but self-employed for tax purposes. This article will specifically address how to determine if a director is an employee under employment law.
When are company directors employees?
In many cases, companies are founded and owned by a single individual who also serves as the sole director. In such instances, there is often little need to establish an employment relationship or create an employment contract between themselves and the corporate entity. As a result, they are typically considered just an office holder, not an employee.
However, when directors are hired and compensated for their services, they often have what is known as a director’s service agreement (or service contract). This agreement is similar to an employment contract and usually outlines terms that would be included in a standard employment contract, along with additional duties specific to their role as office holders.
Directors with a written service agreement are generally considered both employees and office holders, though this is not always the case (as discussed further below).
When does a service agreement not confer employment status?
Generally, directors who have a service agreement (or employment contract) are classified as employees.
However, non-executive directors (NEDs), who primarily take on advisory or mentorship roles, often do not aim to establish an employment relationship with the company. If they have a service agreement, it might be necessary to revise the contract’s wording to avoid implying employment status. When done properly, a director can hold a service contract without being considered an employee.
Can directors without a service agreement be employees?
The absence of a written service agreement does not automatically exclude a director from being classified as an employee. Determining employment status requires assessing various factors, such as the nature of their duties, their level of control over work, and the extent of the company’s obligations towards them. These factors help clarify whether a director’s relationship with the business aligns more closely with that of an employee.
A director is likely considered an employee if most of the following conditions are met:
- They have to work regularly.
- They work a minimum number of hours.
- They receive a consistent salary or wage.
- The company controls their working hours and responsibilities.
- They cannot send a substitute to perform their work.
- They can join the company pension scheme.
- The company’s HR policies, such as disciplinary procedures, apply to them.
- They work at the company’s business premises.
If a dispute between a company and a director goes to an employment tribunal, the court will assess these factors. A well-drafted director’s service contract can help clarify this issue in advance.
Do you have any other question?
In this article, we’ve explored the question: Are directors employees of a company? As we’ve discussed, the answer can vary based on the circumstances.
If you want a director to be classified as an employee, it’s advisable to establish a written service contract. However, if you are the sole director and shareholder, going through this process may be unnecessary since there’s little benefit to being classified as an employee for employment law purposes. For instance, it’s unlikely you would ever need to enforce employment rights against your own business.
Whatever your decision, we strongly recommend seeking advice from a professional, such as an accountant or HR expert.
For more details, check out the Startxpress Help Center and Blog. If you need assistance, contact us at support@startxpress.io! We’re here to help make managing your business as smooth as possible.
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