The answer is that a Director may be an Employee or may be just a Director. If you are not sure what applies to you, please consult with a good tax accountant. This article will outline some of the considerations that you may take into account when answering this question.
If you have set up a limited company you’ll know you will need at least one director. Even if this one director is the only person within the company they still won’t be classed as an employee. This is because directors are known as officeholders, not employees.
However, there are certain times where a director may be classed as an employee. We’ll go into more detail about these conditions later in the article.
Directors are officeholders, not employees
The majority of the time directors are classed as office holders, not employees. Directors do not automatically count as employees of a company.
However, in certain circumstances, officeholders can also be classed as an employee if they are ‘employed under contract’ by the company.
When can a director be classed as an employee?
In section 230 of the Employment Rights Act 1996 an employee is defined as
“an individual who has entered into or works under… a contract of employment”. The keyword here is a ”contract of employment” as directors aren’t usually provided with employment contracts.
However, in certain circumstances directors can be operating under a service contract which can provide the director with a status of employment.
If a company director doesn’t have a service contract this does not mean they are automatically considered to be an employee under employment law. Directors can be classified as employees if they meet most of the criteria which are used to determine if someone who works for a business can be considered an employee.
Are directors considered employees if they take a salary?
If the Directors do not take a salary, and pay themselves via dividends instead this will make them less likely to count as employees, especially when compared to those on the payroll.
Again though unless there is a service contract in place, this doesn’t necessarily mean that the director is classed as an employee under employment law.
It’s not uncommon for some directors to take dividend payments in addition to their salary. This is mainly done as a method of minimising their tax burden.
For example, any Directors who are paid no more than £8,788 in salary per year will not need to pay income Tax or National insurance.
Although it may seem confusing it is possible to be classed as an employee while being a director of a company.
To be classed as an employee a director will need to have a service contract in place. Please seek advice from an accountant or HR consultant if you are unsure of anything.