Directors/Shareholders & Employee Status
The right to claim statutory redundancy pay and statutory notice pay only applies to workers who are deemed to be employees. Workers who are categorised as self-employed will not have any entitlements to redundancy pay or statutory notice.
The entitlement to redundancy pay and notice pay often arises when a business becomes insolvent. Assuming that the business is technically insolvent and unable to pay redundancy pay or notice pay, the government will effectively step in and these. This is administered by the Redundancy Payments Service (RPS).
One issue that has arisen in relation to payments from the RPS is the position of workers who are shareholder and directors of the company as well as employees. In small businesses, it is very common for directors and shareholders of the company to also be employees of that company either with or without a written contract of employment. In practical terms, a business owner may decide to take some money out of the business through salary and some money out of the business by other means, for example, through dividends to themselves as shareholder. The business owner will pay tax and national insurance as any other employee and, if the company becomes insolvent, the business owner may assume that they will be entitled to redundancy pay and notice pay from the RPS like other employees.
The issue of employee status is straightforward in relation to minority shareholders particularly where there is more than one director. There is no reason at all why the director who has a minority shareholding should not also be an employee with a contract of employment and be entitled to the various benefits that arise from employee status including payments from the RPS.
The legal difficulty has arisen in relation to business owners who are the majority shareholder and who may also be the only director of the company. In these circumstances, the RPS have often held that the person is not genuinely an employee largely because their ownership of the company means that they are not subject to a sufficient degree of control by the company to demonstrate that an employment relationship exists.
The test cases in this area have not always been entirely consistent but it has now been established that a controlling shareholder and sole director can, in principle, also be an employee if other relevant factors tend to show employee status. The RPS are required to consider a range of factors in addition to the degree of control through shareholding or directorship – for example, whether there is a written or oral contract of employment and whether there are fixed duties and hours of work. In practical terms, if the business owner has a written contract of employment and works regular hours carrying out fixed duties, there is a reasonable prospect of persuading the RPS that there is genuine employee status.
For further information about employee status and the Redundancy Payments Service, contact Paul Archer or Helen Climance at Lemon & Co Solicitors on 01793 527 141
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<p><strong><a href="http://www.lemon-co.co.uk/article_directors-shareholders.php">Directors/Shareholders & Employee Status</a></strong><br />
The right to claim statutory redundancy pay and statutory notice pay only applies to workers who are deemed to be employees. Workers who are categorised as self-employed will not have any entitlements to redundancy pay or statutory notice...</p>