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Points to note regarding Directors

Napthens - September 6th 2013

An executive director is likely to be deemed an employee; but there are often additional considerations to be borne in mind for an individual who is an employee but also an office holder.

Here are some helpful insights to assist you with some frequently asked questions regarding directors:

Does 'a week's pay' include dividends paid to Directors?

In cases where a director is making a claiming for unfair dismissal, there may be issues as to whether dividends will be included as part of the director’s remuneration. In such instances, the Tribunal will adopt a specific formula for calculating “a week’s pay” when calculating an award. 

The issue of whether a dividend is to be included as part of the director’s remuneration will ultimately be a question for the Employment Tribunal to determine. The Tribunal will take into account issues including whether the director receives the payment as a result of their employment or as a result of their shareholding as the latter would continue to be received after their employment terminates.

It would therefore be sensible that you do not include dividends as part of their employment, but as genuine dividends, so that such sums are not included in a “week’s pay”.

Is a director always entitled to the NMW?

A common question as many businesses for tax reasons pay executive directors, who are also shareholders, a salary up to the personal allowance and top this up by way of dividends. However executive directors are entitled to receive at least the National Minimum Wage, as they are an employee.

It would be wholly artificial to attempt to apportion any remuneration wholly to their office holding function, in an attempt to avoid an obligation to pay NMW. In addition you could not agree to contract out of applying the NMW in any service agreement, this is expressly referred to under section 49 National Minimum Wage Act 1998 - which clarifies that any attempt in the regard would render the term void.

As such executive directors should be paid a salary that at least complies with the NMW to avoid issues should relations to turn sour in the future.

What happens to an executive director’s employment if he is removed as a director of the Company? 

Much depends on what your service agreement says and the role of the director within the business. Some service agreements are drafted such that a removal or resignation as a director of the Company results in the termination of the director’s employment as well. However such clauses, if relied upon by the Company, will inevitably result in a claim for unfair dismissal (or constructive) particularly where the reason for resignation or removal would not ordinarily justify dismissal. 

Other service agreements provide that removal or resignation as a director does not cease the executive’s employment thereby leaving it open for the Company to determine whether or not dismissal from employment can be justified on the basis that removal or resignation is such that it fundamentally undermines the executives position/primary reason for employment or that there has been a breach of trust and confidence.

If there is no service agreement in place then removal of the executive director position as a director of the Company, or his resignation from office will not automatically terminate employment and dismissal will have to be considered on the facts of the case.