Are Directors Employees

Ava Flores
• Wednesday, 04 November, 2020
• 8 min read

Company directors without service contracts are not automatically considered to be employees (or workers) for the purposes of employment law regulations. In the case of a limited company that just has one director who is also the sole shareholder, there is generally no advantage to the director being classed as an employee for employment law purposes, simply because they are unlikely to enforce any of their employment rights against their own company.

directors board employees
(Source: mdsupply.com)


However, without a service contract, the mere fact of being paid a salary does not mean directors will be classed as employees for employment law purposes. Some directors take a salary in addition to drawing dividends, as a method of minimizing their tax burden.

Directors who are paid no more than £8,788 in salary per year (the for the 2020-21 tax year) are not required to pay Income Tax or National Insurance contributions to their salary income. So, for the purpose of tax efficiency, many sole directors will pay themselves a salary within the secondary threshold and top up their income with dividend payments.

So, if a director is paid more than this lower earnings threshold, they will be considered as an employee for tax purposes by HMRC, even if they are not considered an employee for employment law purposes. He has a particular interest in legal tech, DIY law and the ways in which technology can help individuals and small businesses to better understand and assert their legal rights.

Many people assume that board members are paid employees of a nonprofit organization or for-profit corporation, but this is not true. Decades ago, it was considered commonplace for board members to receive a pension and other benefits typically associated with employees, but times have changed.

They supervise and oversee how the organization walks out its mission and vision, so they are considered a governing body rather than employees. In nonprofit organizations, it is common to have a requirement that board members give or fundraise a certain amount of money per year to hold their seats.

employee angestellter direktor meeting director
(Source: dreamstime.com)

Board members are not considered employees of the organization, even though they may be compensated for participation on retainer or with per-meeting fees. Board members are typically outside experts and leaders who hold full-time positions of leadership outside in their chosen profession.

Retirement and health insurance for board of directors are a personal responsibility and not provided by the organization. For instance, most nonprofit organizations do not compensate their board members at all because they want to show donors that their money is going to make a difference rather than paying fees.

Just because a company director does not have a written service agreement, this does not automatically preclude them from being classed as an employee. If a dispute between a company and director ends up in an employment tribunal, the court will consider these factors.

So it’s a good idea to have a properly drafted director’s service contract in place, which may resolve this question in advance. He is in charge of ensuring all departments meet their targets to allow us to provide all of our customers with an exceptional level of service.

Outside of work, John spends time with his wife, young son and cat. Importantly, however, it was found by the court in Anderson v James Sutherland (Peter head) Ltd SC 203 that a person who acts as a directorate an employee in certain circumstances.

directors board senior management
(Source: www.1460.hk)

(Anderson v James Sutherland (Peter head) Ltd SC 203) In advancing this principle as part of Australian jurisprudence, Justice Hudson in Lincoln Mills (Must) Ltd v Golf VR 193 at 197-8 stated: The duties of a managing director as such are those of an executive officer, and in relation to the performance of them he is subject to thecontroland directions of the whole board.

His remuneration and term of office are also matters to be fixed and determined by the whole board and as the cases shew the fixing and determination thereof will bind the company to the managing director in contract, just as it would be bound to a manager or other executive officer not occupying the position of a director.’ For instance, under section 15A(2) of the Superannuation Industry (Supervision) Act 1993 (CTH) a ‘person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate’ will be considered, and must be treated as, an employee of that company.

The existence of the relationship is a question of fact determined on the basis of the particular circumstances of the particular case. (Hollis v ABU PTY Ltd (2001) 207 CLR 21) A necessary requirement to a finding of the existence of an employment relationship, including one between company and director, is that the relationship is governed by a contract of service and not a contract for services.

(see Lincoln Mills (Must) Ltd v Golf VR 193, 198) The latter will be characterized as an independent contractor relationship. In these circumstances, relevant aspects of employment law (including statutory protection as to unfair dismissal and redundancy) apply in addition to the law relating to directors.

Like all directors powers, granting a service contract must be done bona fide for the benefit of the company. Both the Model Articles and Table A contain relevant provisions.

directors director board
(Source: www.internationalbusinessmentors.com)

Note, however, that CA 2006, sec188 requires any fixed term contract (which cannot be terminated by notice) to be approved by an ordinary resolution in general meeting. (3) Subject to the articles, a director's remuneration may- (a) take any form, and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director.

(2) But if paragraph (3) applies, a director who is interested in an actual or proposed transaction or arrangement with the company is to be counted as participating in the decision-making process for quorum and voting purposes. (3) This paragraph applies when- (a) the company by ordinary resolution misapplies the provision of the articles which would otherwise prevent a director from being counted as participating in the decision-making process; (b) the director's interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or (c) the director's conflict of interest arises from a permitted cause.

The directors may provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any director who has held but no longer holds any executive office or employment with the company or with anybody corporate which is or has been a subsidiary of the company or a predecessor in business of the company or of any such subsidiary, and for any member of his family (including a spouse and a former spouse) or any person who is or was dependent on him, and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit. Where proposals are under consideration concerning the appointment of two or more directors to offices or employments with the company or anybody corporate in which the company is interested the proposals may be divided and considered in relation to each director separately and (provided he is not for another reason precluded from voting) each of the directors concerned shall be entitled to vote and be counted in the quorum in respect of each resolution except that concerning his own appointment.

There is no inherent reason why a company director cannot be an employee at the same time, in fact I suspect that is normally the case from a legal perspective. Had it been the case that the evidence demonstrated that Mr and/or Ms Middleton had ceased working for Build West in May or June 2016, the unfair dismissal claims would have been made substantially outside the 21-day legislative time limit.

However, the correspondence to both Mr and Ms Middleton of 19 October 2016 clearly suggests that they were regarded by Build West, until that date to be employees. “I write to advise you that you have been made redundant from Build West PTY Ltd, effective immediately, and as such, your employment has terminated.

bank digital transformation staff banking mean does union indian banks checklist technology express
(Source: indianexpress.com)

As a result, I have concluded that, until 19 October 2016, Mr and Ms Middleton were regarded as employees and that the letter of that date purported to dismiss them. Accordingly, I am not prepared to accept the Build West contention that Mr and Ms Middleton could not be regarded as employees ”.

Small companies are now required to disclose the number of employees in their year-end accounts. Incorrect accounts disclosures could incur penalties of £20,000 per worker and £10,000 per day.

Directors don’t automatically qualify as employees of a company. To optimize their tax position they will typically pay themselves a small salary (£8.4k) topped up with dividends.

IT EPA/03 states that office holders are treated as employees for tax purposes. Therefore, the tax position is that directors earning a small salary (£8.4k) are employees of the company.

Director’s salaries no matter how small are included on the employment pages of the self assessment tax return. A full time director of a small company could easily work 40 hours a week.

directors board
(Source: mslbd.org)

Based on this small salary and the minimum wage they can’t work over 21 hours a week. For small companies especially if there are external shareholders it wouldn’t be unusual.

Therefore, they should be added to the number of employees in the year-end accounts disclosure. Directors with contracts of service should be included in the number of employee’s disclosure.

Take a typical limited company run by a husband and wife both who are over 25 years old. Their accountant however doesn’t know the correct disclosure under the Companies Act.

Stating the number as 2 is informing the authorities that the 2 directors do have contracts of employment. Failing to pay the minimum wage can incur penalties of up to £20,000 per worker.

Assuming the minimum wage would take them over earnings of £10,000 per annum, this would trigger auto-enrolment requirements. Failure to comply with the pension authorities can incur penalties of up to £10,000 per day.

results election map general elections loss maps votes conservative mapsofworld
(Source: www.mapsofworld.com)

But confessing to errors in the accounts with HMRC are a route you want to avoid. Companies House has a free service which anyone can use to view year-end accounts.

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(Source: www.gensler.com)

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