Should Directors Have Employment Contracts?
Posted on 17th February 2025 at 14:42
We've recently seen another firm of accountants recommending that all directors should have employment contracts. That advice runs contrary to our approach, so let’s break it down and explain why we strongly disagree.
Understanding Director Status
According to gov.uk, a person appointed to a company position without a contract or regular payment is considered an office holder rather than an employee. The key distinction here is that an office holder is not subject to employment laws unless they have an employment contract.
If a director becomes an employee, they are then subject to additional obligations, including:
National Minimum Wage (NMW)
Working Time Directive
Auto-Enrolment Pension
Different National Insurance (NI) rules
Here’s why that matters:
National Minimum Wage (NMW)
Employees must be paid at least the minimum wage, which rises to £12.21 per hour from April 2025. Imagine the financial impact on a company if a director had to be paid for every hour worked at that rate.
HMRC guidance (NMWM05140) confirms that NMW does not apply to company directors unless they have an employment contract. Instead, directors receive remuneration based on their role as an office holder, typically set out in the company’s articles of association.
Working Time Directive
This legislation limits the standard working week to 48 hours. Most directors work far beyond that, often exceeding these limits.
However, ACAS confirms that the Working Time Directive does not apply to directors, as they have control over their own schedules.
Auto-Enrolment Pension
While having a pension scheme is advisable, if a director has an employment contract, they must comply with auto-enrolment rules, creating unnecessary admin for small companies.
National Insurance & PAYE
Directors benefit from an annual NI allowance, meaning they can structure payments efficiently. Employees, however, receive a monthly allowance, which resets each month, leading to potential tax inefficiencies.
The Key Takeaway
A director’s role is one of governance, not employment. Having an employment contract turns a director into an employee, making them subject to additional payroll and compliance burdens. Instead, directors should receive pay as a ‘director’s fee’ rather than a salary.
So, if you’ve been advised to create an employment contract for yourself as a director, think again!
Need tailored payroll and HR advice? Reach out to the team at Property Tax Advice: info@property-tax-advice.co.uk.
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