As a director of a company, it’s important that you know whether you’re just a director, or a director and an employee.
Why does it matter?
There are two main reasons why you need to know if you’re an employee:
(i) to avoid any fines for incorrect filings and
(ii) for clarity on your employment rights.
Avoiding fines
Filing incorrect information at Companies House or with HMRC can cost you dearly in fines.
Every year, you’ll file your company’s year-end accounts at Companies House. In those accounts, you disclose the number of employees in the company, so you need to know whether or not you’re including directors in that head count. It may seem like a small point, but you can incur £20,000 per worker in fines for getting it wrong!
Then you’ve got tax issues to think about. Directors pay a different rate of National Insurance Contributions than employees. You need to know how you’re categorising directors so that payroll is set up correctly and you’re reporting accurate figures to HMRC.
Know your employment rights
Employees rights are enshrined in legislation. They receive certain benefits and protection such as paid maternity leave, sick pay, redundancy payments and the right to claim for unfair dismissal.
If you want employment rights, you need to make it clear that you’re an employee as well as a director.
Why would I choose to be a director and not an employee?
On that basis, it seems as though you have nothing to lose by being an employee as well as a director. But there are perks to being a director, that you may not want to forego in favour of the benefits available with employee status.
Remuneration: Directors can pay themselves in a tax-efficient manner, such as taking a lower salary and topping it up with dividends. If you use these other methods to top up your salary, you’re more likely to be considered a director only (with no employee status).
Flexibility: Do you control the hours you work, and take holiday when you want without consulting anyone else? That sort of flexibility may be evidence that you do not have employee status.
How to clarify your status
If you’re working in the business, you’re automatically an employee, right? Unfortunately it’s not that straightforward.
The legal status of a company director is an office-holder who owes statutory, and common law duties to the company. Historically, people who hold office have not generally been viewed as employees. That’s because the rights and obligations of an office-holder are defined by the office itself.
You’re only an employee if you enter into an employment contract. As a director, your employment contract is often referred to as your ‘service agreement’. Or you might have a service contract and an employment contract, just to make sure.
If you want to minimise any ambiguity around whether or not you’re an employee as well as a director, make sure you enter into an unequivocal contract of employment.
These things aren't always as straightforward as they sound! If you’d like to speak to a legal adviser about your directorship / employment status please contact us. Get in touch for a free, no-obligation conversation.
