In Short
- Directors can be both officeholders and employees, depending on their roles and contracts.
- Executive directors are typically employees, while non-executive directors often are not, unless specified.
- Misclassifying a director’s status can lead to tax and legal complications.
Tips for Businesses
Clearly define each director’s role and employment status in written contracts. For executive directors, ensure employment terms are in place, including salary and benefits. For non-executive directors, specify their advisory role and compensation structure. Regularly review these arrangements to maintain compliance with employment and tax laws.
Many businesses hire directors to help lead and guide their companies. However, determining the legal status of these directors as employees or self-employed contractors is sometimes unclear. Getting this wrong can have major implications for tax, employment rights, and a company’s legal obligations. If a director is incorrectly classified, the company could face unexpected tax bills, employment tribunal claims, or other legal issues further down the line. This article will explain the key factors that must be considered to determine if a company director is legally an employee or operating as a self-employed contractor.
What is a Company Director?
Before looking at the employment status issue, it is important to understand what a company director actually is. A director is an officer appointed to the board of a company and is responsible for setting its overall strategy and direction. They have ultimate executive responsibility for managing the company’s operations and affairs.
Directors owe key duties to the company, including:
- a duty to act within their powers and follow the company’s Articles of Association;
- a duty to promote the success of the company;
- a duty to exercise independent judgement;
- a duty to exercise reasonable care, skill and diligence;
- a duty to avoid conflicts of interest; and
- a duty not to accept benefits from third parties.
These duties create a close relationship of trust between directors and the company. All directors owe these duties, regardless of their employment status, and so the actual employment status depends on other factors too.
Is the Director an Office Holder?
Under the Companies Act 2006, all directors are considered office holders of the company. However, the distinction lies in whether they are executive directors or non-executive directors, which affects their employment status:
- Executive Directors (e.g., CEOs, CFOs): They typically hold both an office and an employment role within the company, as they are actively involved in the day-to-day management. As a result, they are generally subject to PAYE for tax purposes and are also likely to be classified as employees under employment law.
- Non-executive Directors: They act primarily as advisers to the Board and do not participate in the day-to-day operations of the company. While they are still office holders, they are generally not considered employees for employment law purposes unless there is a specific employment contract in place.
Control Over the Director
A key employment test is the level of supervision, direction, and control that the company exerts over the director and how they perform their work. Hallmarks of an employment relationship include the company controlling:
- what specific work duties and tasks are carried out by the director;
- where the director’s work must take place (e.g. company premises);
- when the director must work (set workdays/hours); or
- how the director should go about completing their work.
In contrast, genuine self-employed contractors have much more autonomy and independence over how, when and where they work. So if directors can essentially decide their own working arrangements with few real constraints or supervision from the company, they are more likely to be classified as contractors rather than employees.
Mutuality of Obligation
For an employment relationship to exist, there must be a continuing mutual obligation for the company to provide paid work, and for the worker to personally carry it out. This is known as “mutuality of obligation.”
With employees, there is an ongoing expectation and obligation that work will be provided on an ongoing basis, which the employee will complete as part of their regular duties. However, companies only have an obligation to pay contractors for specific agreed pieces of work or projects once completed satisfactorily. There is no ongoing obligation for more work.
Financial Risk
A key distinction between employees and the self-employed is the financial risk involved in the work. Employees generally bear little to no commercial or financial risk aside from potentially losing their jobs if they underperform.
In contrast, genuine contractors are taking on significant financial risk and responsibility through having to:
- manage and cover their own operating costs, expenses and overheads;
- invest in their own equipment, tools or premises required for the work;
- correct any defective or substandard work in their own time and costs; and
- take on potential liability for business losses, poor work or negligence.
Employee Benefits and Working Arrangements
While not definitive factors on their own, the types of employee benefits and working arrangements provided to a director can also shed light on their employment status:
- directors receiving employment benefits like paid holiday, sick leave, pension, etc., point to employment;
- exclusivity requirements preventing directors from working for others suggest employment;
- provision of significant company equipment/premises signals employment; and
- directors being part of the company’s grievance/disciplinary processes implies employment.
Whereas a lack of any employment benefits, the ability to work for multiple companies, the use of their own equipment, and being outside the company’s formal procedures all point more towards self-employment.
This guide will help you to understand your corporate governance responsibilities as a director, including the decision-making processes
Key Takeaways
All company directors owe fiduciary duties, creating a close relationship with the company. Directors appointed as statutory office holders do not automatically make them employees under employment law. Executive directors are usually employees due to their role in the company, while non-executive directors are not, unless they have a separate employment contract.
Employment suggests company control over what work is done, where, when and how. In contrast, contractors have autonomy in their working arrangements with little supervision. Ultimately, it is the overall context and reality of the working arrangement between the director and company that determines employment status – not any single factor alone. The different factors must be assessed together to reveal if the relationship is one of employment or self-employment.
LegalVision provides ongoing legal support for companies through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
An employee director works under the company’s close supervision and control, with stable ongoing duties and receives employment benefits, typically a CEO or CFO. A contractor director operates more autonomously, taking financial risk, only performing specific agreed work, and receives no employment benefits, typically a non-executive director who is providing ad hoc advice to the rest of the Board.
The main factors are whether they hold a statutory office, the level of company control over their work, whether there is an ongoing mutual obligation for work, the extent of financial risk taken on, and whether employment benefits/arrangements are provided. A director’s fiduciary duties also suggest employment.
Directors’ key fiduciary duties include acting within powers, promoting company success, exercising independent judgment, reasonable care/skill, avoiding conflicts, and not accepting benefits from third parties. All directors owe these duties regardless of whether they are employees or contractors, but their role in and involvement with the business will affect what they are required to do in order to ensure they are meeting their duties.
We appreciate your feedback – your submission has been successfully received.
