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Is a Director an employee of a company?

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Directors are responsible for running a company and making decisions about its management. They have a number of different legal duties including to act in good faith, exercise reasonable care, and promote the interests of the company. Some Directors may also be employees of their company, provided certain conditions are met. Our Employment Law team today discusses a variety of the different types of Directors that may work for a company, Director Service Agreements, and Directors’ employment rights.

Types of Director

Whether a Director is an employee may depend on the type of Director they are:

  1. An Executive Director is an individual who has been duly appointed as a Director to carry out executive functions of the company. Executive Directors are full-time or part-time employees of the company and will usually have a Director Service Agreement with the company which serves as their contract of employment.
  2. Non-Executive Directors are individuals who act as independent advisors, usually on a consultancy basis. Non-Executive Directors may attend board meetings and advise on decisions, but they are not employees of the company, and are usually self-employed.
  3. A de facto Director is an individual who has not officially been appointed as a Director of the company, but nevertheless acts and is treated like a Director. They may be an employee if they have a contract of employment, or if their relationship with the company meets the conditions of an employment relationship.
  4. A Shadow Director is a person from whom the Directors, or the majority of Directors, are accustomed to taking direction. An example of this may be a major shareholder of the company who often tells the Directors how to act, but has not been appointed as a Director themselves.

There are also situations where an individual may not have been officially appointed as a Director, but nevertheless will be considered a Director and hold similar duties and obligations.

Director Service Agreements

Many Directors will have a Director Service Agreement with their company. This agreement serves as the Director’s contract of employment and confirms their employment status. Director Service Agreements tend to be longer and more complex than the employment contracts for more junior employees and may contain additional provisions covering areas, such as:

  • Post-termination restrictions;
  • Garden leave;
  • The holding of company shares;
  • Additional employment benefits; and
  • Termination of the directorship.

Even if a Director does not have a signed Director Service Agreement, they may still be found to be an employee if their engagement with the company meets the criteria of an employment relationship.

Employment rights of Directors

Directors who are employed by the company will be entitled to the same employment rights as other employees, including:

  • Right to paid family leave;
  • Right to be paid SSP;
  • Right to paid annual leave;
  • Right not to discriminated against; and
  • Right to equal pay for equal work performed by a member of the opposite sex.

If a Director is removed from their directorship position, this does not necessarily terminate their employment. If the Director has at least two years’ employment service, the employer would still need to follow a fair procedure and act reasonably in deciding to dismiss, or else risk an unfair dismissal claim.

Director Service Agreements should contain provisions outlining the process to be followed if either the directorship or employment relationship is terminated. For example, the agreement could require the Director to resign from their directorship in the event their employment is terminated.

If you have questions regarding the employment status of a Director of your business, or require a Director Service Agreement, contact our Employment Law Team on 023 8071 7717 or email employment@warnegoodman.co.uk.  

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.