3 Questions To Ask To Decide Whether You're A Director Or An Employee
When you’re the director of a company, there are certain legal obligations you need to meet. One of these is deciding the number of employees you have working at the company; this is important when looking at both employment law and your tax obligations.
So what questions should you be asking to determine whether someone is a director or an employee?
1. Do you get paid for the work you complete?
There are four different ways a director can get paid for their work. These are: having a salary, dividend payments, using a director’s loan, or claiming allowable expenses.
While directors can receive a salary, this doesn’t automatically mean they are classed as employees. Directors can pay themselves in a tax-efficient manner, such as taking a lower salary and then topping up their income using their dividends. This can mean that going by their salaries, they are paid less than the minimum wage for their hours worked.
If you use these other methods to top up your salary, you will likely be classed as a director rather than an employee.
2. Do you control the company, or does the company control you?
This one might seem simple, but it can be quite nuanced. Take a small team of three people in the company, you all likely have an input in the day-to-day running of the company, as well as some form of input into the direction the company is going to take in the future. So how can you differentiate between who has control over the company and who is being controlled by the company?
Think about some of the following:
- Are you able to control the hours you work without needing approval from anyone else?
- Can you take a holiday without needing to consult anyone else?
- When you’re working, is there anyone who needs to tell you how to carry out your work and supervise the quality of the work you produce?
If you don’t need to answer to anyone, you’re likely a director rather than an employee.
3. Is there a contract in place that’s similar to an employment contract?
Employees are hired under a contract that denotes their salary, working hours, position and other statutory entitlements.
If you’re a director, you probably won’t have an employment contract, but you may have a Director Service Agreement, which can act in much the same way.
Director Service Agreements are longer and more complex than an employment contract, but they act in much the same way. They are used to confirm the employment status of the director, but they also have additional provisions within them, such as:
- Post-termination restrictions
- Garden leave
- Additional benefits
- Termination of the directorship
Even if you don’t have a signed Director Service Agreement in place, you can still be classed as an employee if your engagement with the company meets the correct criteria.
Why is it important to know whether I’m a director or an employee?
There are two main reasons you need to know whether you are classed as an employee or a director:
- Employees are entitled to employment rights, such as paid maternity leave and sick pay
- Directors have to pay a different rate of National Insurance Contributions (NICs) than employees
It can have severe ramifications for both you and the company if you are not being recorded correctly. It can lead to legal and financial problems if, for example, it’s found you’re not being paid minimum wage, or if you’re not entitled to maternity pay after you’ve taken it.
If you’re unsure, it may be worth investing in advice from a professional, such as your accountant, to ensure you’re accounting for things correctly.
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