Is a Director an Employee of a Company?
All limited companies need to have at least one director, even if this director is the only person in the company, they may not be classed as an employee. Directors are known as officeholders rather than employees.
There are certain conditions in which a director can be classed as an employee, and these will be looked at in this post.
When is a director classed as an employee?
An employee is defined as “an individual who has entered into or works under… a contract of employment" in Section 230 of the Employment Rights Act 1996. Directors aren’t usually provided with employment contracts, however, they may be operating under a service contract. A service contract can provide a director with a status of employment.
A company director without a service contract is not automatically considered to be an employee for the purposes of employment law regulations. Even with this being the case, directors can be classed as employees if they meet the majority of the criteria which are used to determine if someone who works for a business is an employee.
If you are a sole director who is also the sole shareholder within the company, you may find that there is no advantage to being classed as an employee for employment law purposes (you are unlikely to enforce any of the employment rights against your own company).
Are directors considered employees if they take a salary?
Directors who do not take a salary (e.g. they take dividends instead) are less likely to be considered employees compared to those who are on payroll. However, unless there is a service contract in place, this doesn’t necessarily mean that the director is classed as an employee for employment law purposes.
Some directors take a dividend in addition to their salary as a method of minimising their tax burden. Directors who are paid no more than £8,788 in salary per year are not required to pay Income Tax or National Insurance contributions.
Is a director self-employed?
Company directors are not considered to be self-employed in relation to companies where they hold office as directors. Although they can be both directors and employees, it is not possible to be a director and also self-employed for the same company.
However, an individual can be a director of one company while being self-employed within a different business.
It is possible to be classed as an employee while being a director of a company, however, there are several steps you will need to go through first, such as making sure you have a service contract in place. Also, remember, if you are the sole director and shareholder of a company, it might not be worth the time for you to go through the process.
It’s important to seek advice from an accountant or HR consultant to weigh up the advantages of this for you.