In short, company directors are often employees but in many instances, they are not – as their employment status depends entirely on individual circumstances.
By default, directors are known as ‘office holders’ (along with company secretaries).
If someone is appointed as a company director, they will automatically become an office holder, irrespective of whether they have an employment contract or even if they get paid by the company.
However, an office holder can also be an employee. But how can one decide if a director is also an employee of the company – and why does it matter?
Why does employment status matter?
There are two legal reasons why determining the employment status of a director is important:
- Employment law – employees (and ‘workers’ to a lesser extent) have a whole multitude of legal rights (e.g. minimum wage, maternity rights, redundancy, etc.) and employers have various duties which they need to uphold.
- Tax – it’s crucial for both a company and employee to be aware of responsibilities regarding PAYE and dealing with HMRC, etc.
It should be noted that it is possible for someone to be considered as an employee for employment law purposes but self-employed for tax purposes. This blog will focus on determining whether a director is an employee for employment law purposes.
When are company directors employees?
Since many companies are founded and owned by one individual who also acts as the sole director, there is often little reason to create an employment relationship or put in place an employment contract between themselves and the corporate entity. In this case, they will not be considered an employee – just an office holder.
But often directors are hired and paid for their services. In this scenario, they will often have what is known as a director’s service agreement (also called a service contract). This is very similar to an employment contract and generally sets out terms that would otherwise be contained in a standard employment contract, along with additional duties relating to their role as office holders.
Company directors with a written service agreement will normally be considered employees as well as office holders (but this is not always the case – see below).
When does a service agreement not confer employment status?
In general, directors who have a service agreement (or employment contract) will be classed as employees.
But non-executive directors (or NEDs) – who often act in more of an advisory or mentorship role – may not intend to have any employment relationship with the company. If they have a service agreement, it may be necessary to modify the wording of this contract to ensure it does not confer employment status. If done correctly, a director may have a service contract but may still not be an employee.
Can directors without a service agreement be employees?
Just because a director does not have a written service agreement, this does not automatically preclude them from being classed as an employee. Various factors should be taken into account to determine if someone who works for a business has employment status.
For example, a director is probably an employee if most of the following are true:
- they are required to work regularly
- they work a minimum number of hours
- they get paid for time worked
- they are entitled to holiday pay and other benefits
- they cannot send a substitute to carry out their work
- they can join the company pension scheme
- the company’s HR policies apply to them, for example, disciplinary procedures
- they work at the company’s business premises
If a dispute between a company and a director ends up in an employment tribunal, the court will consider these factors. So a properly drafted director’s service contract may resolve this question in advance.
And there you have it.
Today we have discussed the question – are directors employees of a company? As you now know, the answer may vary depending on the circumstances.
If you want a director to be classed as an employee of a company it is a good idea to put in place a written service contract.
However, if you are the sole director and shareholder, it may be a waste of time to go through this process as there is no advantage to being classed as an employee for employment law purposes. For example, it is doubtful you would ever want to enforce any employment rights against your business.
Regardless of what you decide to do, we would always recommend you take advice from a professional, such as an accountant or HR expert.
If you have any questions, please leave them in the comments section below, and we will get straight back to you.