Briefly put, CIC directors are frequently employees but also might not be since their job status is entirely dependent on individual circumstances.
Along with company secretaries, directors are referred to as ‘office holders’ by default.
Whether or not someone has an employment contract with the firm or if they receive compensation from it, if they are selected as a company director, they will automatically become an office holder.
However, a person in a position of authority can also work as an employee.
But how does one determine whether a director is also a firm employee, and why does it matter?
What does their employment status matter?
Figuring out the employment status of a director is significant for two legal reasons:
- Employment Law: Both employees and ‘workers,’ to some degree, have legal rights, like minimum wage, maternity rights, redundancy, and so on.
- Meanwhile, employers have several responsibilities they must meet.
- Tax: Understanding the obligations related to PAYE and liaising with HMRC is essential for both the company and the employee.
It’s worth mentioning that a person can be classified as an employee under employment law but as self-employed when it comes to taxes.
This discussion focuses on the classification of a director as an employee under employment law.
When is a director an employee?
Section 230 of the Employment Rights Act of 1996 defines an employee as someone who is part of or works under a contract of employment. Even though directors usually don’t have employment contracts, they often have what’s known as service contracts. These are pretty much the same thing and usually grant the individual employee status.
If company directors don’t have service contracts, they aren’t automatically regarded as employees (or workers) according to employment law rules. Nevertheless, directors can be categorised as employees if they fulfil most of the criteria used to figure out whether someone working for a business is an employee.
When it comes to a limited company with only one director who is also the sole shareholder, there’s generally no benefit in having the director considered an employee for employment law reasons. This is mainly because they’re unlikely to assert any employment rights against their own company.
When does a service agreement not constitute an employment agreement?
In general, directors who have a service agreement (or employment contract) will be classified 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 still not be an employee.
Can directors without a service agreement be employees?
A director’s lack of a written service agreement doesn’t immediately rule out the possibility of being regarded as an employee. Determining if someone working for a business has employment status involves considering various factors.
For instance, a director might be an employee if several conditions are met. These might include the requirement to work on a regular basis, put in a set minimum number of hours, and be paid for the time worked. They may also be eligible for holiday pay and other benefits and be unable to send someone else to do their job. Being able to join the company pension scheme, falling under the company’s HR policies like disciplinary procedures, and working at the company’s business site are other factors that might be considered.
If a disagreement between a company and a director reaches an employment tribunal, these factors will be evaluated by the court.
Having a well-drafted director’s service contract might clear up this issue before it gets to that point.
An Example to Illustrate This Situation, Let’s take the case of Sarah, a director at TechWave CIC
Though she didn’t sign a formal service agreement when she took her position, her working conditions clearly show she’s an employee. Sarah works at the company’s main office and puts in at least 40 hours a week, like any other full-time employee. She’s paid an hourly wage and receives holiday pay and additional benefits such as health insurance. Sarah doesn’t have the option to send a substitute to perform her tasks, and she’s an active member of the company’s pension scheme. She’s also subject to TechWave’s HR policies, including the disciplinary procedures.
When a dispute arose over her employment status, the conditions mentioned above played a crucial role in the employment tribunal’s decision.
The court considered these factors and concluded that Sarah was indeed an employee.
Had there been a properly drafted service contract in place from the start, this question would have been resolved without legal proceedings.
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