Is a director an employee?

In my last article I discussed the eligibility of TUPE on the asset sale of an insolvent company.  However, a regular question I receive from directors is, “Can I claim (redundancy) entitlements on the insolvency of my company?”

Generally speaking, in the existing (Court of Appeal) precedent on this point the Secretary of State claimed in ceasing to trade his company a director made himself voluntarily unemployed.  This argument was furthered by asserting where the director was also a shareholder of that company he was not an employee and accordingly, falls outside the scope of the Employment Rights (Consolidation) Act as it was at the time.  Therefore, a director should not be entitled to claim from the redundancy funds. 

However, the court dismissed the argument put forward by saying that to follow such claims means promoting (unlawfully) continuing to trade or alternatively the director being punished by not being able to recover his entitlements as a result of fulfilling his duties and ceasing to trade in accordance with statutory guidelines. 

Furthermore, if a director could prove employment status then he was entitled to claim just like any other employee, irrespective of any shareholding.  To this end, the principal areas that determine whether a director is an employee entitled to claim from the redundancy payments office are:

• Does the director have a contract of employment, whether written, oral or implied?
• Is the money claimed owed by the insolvent company?
• Did the director work at least 16 hours a week for the company?
• Was his role more than merely non-executive?

Admittedly, a director will be required to do additional form filling over what other employees have to complete but if the above criteria is met then a director can claim all employee entitlements under the Employment Rights Act just like all those who received that dreaded message they are being made redundant.

Gary Pettit is a Licensed Insolvency Practitioner and a Director at Marshman Price which has offices in both Northampton and Wellingborough.  Should you wish to take early advice if your business is suffering financial difficulty, then Marshman Price can be contacted on (01604) 259574 or (01933) 270918 or via www.marshmanprice.co.uk.

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