When is a Company Director an Employee or a Contractor?

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, they may face unexpected tax bills, employment tribunal claims, or other legal issues in the future. This article explains the key factors that must be considered to determine whether a company director is legally an employee or operating as a self-employed contractor.

What is a Company Director?

Before examining the employment status issue, it’s essential 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 judgment;
• 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. Thus, their actual employment status also depends on other factors.

Is the Director an Office Holder?

Under the Companies Act 2006, all directors are considered officeholders 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) 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 subject to PAYE for tax purposes and are also likely to be classified as employees under employment law.

Non-executive directors, on the other hand, 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 and subject to PAYE for their director fees or payments, they are not considered employees for employment law purposes unless a specific employment contract is 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 on the part of the company to provide paid work, and on the part of 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-upon pieces of work or projects once they are completed satisfactorily. There is no ongoing obligation for more work.

So if a director’s role is relatively stable and permanent, involving regularly expected work and duties to the company rather than a series of one-off projects or contracted pieces of work, this points more towards an employment relationship.

Financial Risk

A key distinction between employees and the self-employed is the financial risk associated with their 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.

So, if a company director is genuinely taking on meaningful financial risk by being responsible for managing costs, equipment, and potential losses related to their work, this is a strong indicator of self-employment rather than employment.

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.

While a lack of employment benefits, the ability to work for multiple companies, the use of one’s equipment, and being outside the company’s formal procedures all point more towards self-employment.

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Key Takeaways

All company directors owe fiduciary duties, creating a close relationship with the company. Directors appointed as statutory office holders are subject to PAYE for tax purposes. However, this does not automatically render them employees under employment law. Executive directors are typically employees due to their role within the company, whereas non-executive directors are not, unless they have a separate employment contract.

Some of the key differences are as follows:

• employment suggests company control over what work is done, where, when and how;
• contractors have autonomy in their working arrangements with little supervision;
• employees work under an ongoing mutuality of obligation; contractors do not;
• contractors take on significant financial risk, managing costs and bearing losses; and
• benefits, equipment, premises, and company policies can also indicate employment opportunities.

Ultimately, it is the overall context and reality of the working arrangement between the director and the 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. If you have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

What is the difference between an employee director and a contractor director?

An employee director works under the company’s close supervision and control, with stable, ongoing duties, and receives employment benefits, typically similar to those of a CEO or CFO, for example. A contractor director operates more autonomously, taking financial risk, and only performs specific agreed-upon work. They typically receive no employment benefits, often serving as non-executive directors who provide ad hoc advice to the rest of the Board.

What are the main factors in deciding if a director is an employee or a contractor?

The main factors are whether they hold a statutory office, the level of company control over their work, if 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.

What duties do company directors owe?

Directors’ key fiduciary duties include acting within their powers, promoting the company’s success, exercising independent judgment, exercising 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. However, their role in and involvement with the business will affect what they are required to do to ensure they are meeting their duties.