Are directors subject to the national minimum wage ?
AT least one area of government thinks they may be
The national minimum wage [ NMW ] and recently introduced National living wage apply to all companies in the UK regardless of whether they are family owned and managed or sole director companies. It also applies whether the company is profitable or not...no distinction is drawn.
Why is this important? Because many family or sole director companies use a method of extracting cash from their company by way of paying a small salary, usually £8k to maintain their NI contribution record but avoid any employees and employers NI then take out the rest of their earnings in dividends. This tax saving strategy largely depends on being able to pay this low salary level. If NMW provisions apply then the minimum salary level rises to around £13k assuming a minimum 30 hrs working week, incurring significant NI contributions and calling in to question the strategy versus say operating as a sole trader.
The typical duties of a director are things we would normally associate with the running of the company, examples include attending board meeting, formulating company strategy, drafting resolutions, dealing with the companies accounting records and filings, dealing with the companies banking facilities and entering into contracts on the company’s behalf.
A director of a company is not a worker as defined by the legislation, under common law a director is an ‘office holder’ and as such a director is exempt from NMW NLW legislation with regard to the activities they carry out as a director.
What about other things that a director might do which might ordinarily be considered as ‘working’ in the business for example operating machinery, serving in a shop, giving advice to clients etc etc ? ...the list is endless but things which are distinctly to do with the business earning its revenue. As the directors are employees of the company then like all employees they will have an employment contract. Although most employees have a written contract of employment there is no legal requirement for a contract of employment to be in writing and if a written contract does not exist then there is a ‘deemed’ contract of employment and it’s here that the waters start to get a bit murky.
Clearly if a written contract of employment exists between the company and the director then the company must abide by its obligations regarding NMW. This situation might seem unlikely but could easily happen in a family business if an employee is subsequently invited to join the board and the contract of employment is not terminated.
That leaves ‘deemed’ contracts. The companies act does not define and hence restrict the duties that can be carried out by a director which means any work a director does for the benefit of the company can be considered as part of the director’s job as an office holder. And as a result do not fall under the NMW provisions.
This position is reinforced by a statement from the department for work and pensions and HMRC stating that they would not recognise unwritten contracts of employment for directors. This view has now been extended to the pension’s regulator who accepts that directors without a written contract of employment are outside of the scope of workplace pensions and auto enrolment .
This treatment of directors especially for small family businesses aligns more closely with the treatment of sole traders but of course contrasts with the position regarding IR35 where a directorship as an ‘office holder’ is effectively ignored.
What about family members employed by the company, for example the partner who does the books ? If they are not a director or company secretary then they are a ‘worker’ and have a deemed contract. If they receive any remuneration then they fall under the NMW provisions and auto enrolment. Voluntary workers, those who work for no remuneration are exempt from NMW provisions. This was intended to cover volunteer charity workers for example.
It’s important to emphasise that whilst the latitude regarding directors duties provided in the companies act is enshrined in law the interpretation taken by HMRC and the pension’s regulator is simply that...an interpretation not backed by law.
The tax credit department within HMRC appear to have a slightly different view of matters and talk about a distinction between ‘director’s contracts’ and ‘employment contracts’ and appear to be attempting to force a division between director’s duties and the director as a worker.