Hi there, Nicholas Campion here from 1st Formations, and welcome to another episode of
Whiteboard Thursday, where we provide advice on a wide range of business and company matters. If you
find this video useful and you enjoy it, please give us a like and share it with your friends
and colleagues. But for now, let's get started. Today, we're going to consider the question -
are directors employees of a company? In short, company directors are often employees, but in
many instances they aren't, 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'll 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?
OK, so let's first of all consider the issue of employment status and why it matters.
There are two legal reasons why determining the employment status of a director is important.
The first of which is employment law - employees and 'workers' to a lesser extent, have a whole
multitude of legal rights, for example minimum wage, maternity rights, redundancy and so forth,
and employers have various duties which they need to uphold. And the second reason
is tax - it is crucial for both a company and employee to be aware of their
responsibilities regarding PAYE and dealing with HMRC. It should be noted that it is also possible
for someone to be considered as an employee for employment law purposes but self-employed for tax
purposes. This video focuses on determining whether a director is an employee for employment law
purposes. So, without further ado, let's tackle the question of when are company directors employees?
Since many companies are founded and owned by one individual who also acts as the sole
director, there's 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 as employees - 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,
however, this is not always the case. So, just 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 - as they're sometimes called -
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 doesn't confer employment status. If
done correctly, a director may have a service agreement but may still not be an employee.
OK - so far, we have established that a director with a written service agreement is generally
considered to be an employee, but can directors without a service agreement be employees? Well,
just because a director doesn't have a written service agreement,
this doesn't 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're
entitled to holiday pay and other benefits; they can't send a substitute to carry out their work;
they can join the company pension scheme; the company's HR policies, such as the disciplinary
procedures, apply to them; and of course, 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's 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's no advantage to being classed
as an employee for employment law purposes. For example, it's 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 in the meantime be sure
to subscribe to our channel to get more advice on limited companies, reporting requirements, and tax
obligations. We're always happy to hear from you, and we cannot wait to help. Until next time, cheerio.