Are you a director and shareholder of a company?  As part of holding office were you advised to take a minimum salary with the remainder of your remuneration package by way of dividends?

The above is a common practice and represents sound advice on your pay structure.  However, that is fine where a company is profitable and under no threat of the need to enter into any insolvency process.

When a company ceases to trade following administration or liquidation employees are entitled to claim against the Redundancy Payments Services (“RPS”) for their unpaid entitlements, including wage/holiday arrears and redundancy.  However, the RPS take an active role in rejecting claims submitted by directors, where they can.  Their argument being the director is not an employee within the meaning of the Employment Rights Act 1996.

In a recent case we have seen at PBC, the director appealed against the RPS rejection by way of an employment tribunal claim.  In response, the RPS sought to justify their rejection on grounds including:

1. The contract of employment provided for a salary under the national minimum wage and accordingly, was unenforceable.

• The director was engaged in a contract for service, not a contract of service.  In other words, the director was a form of contractor rather than an employee.

• The director was able to control their own destiny and were not subject to or subordinate to anybody else. 

Starting with the last point, we believe the RPS is incorrect as all directors owe statutory duties to their company and its stakeholders.  These duties (as confirmed by the Supreme Court) shall prevail at all times over any personal views or difficulties.

In principle, all directors must ensure they can be satisfied they are an employee of the company.  With that in mind, all directors should ensure they have a written contract of employment.  You may need independent advice, but you must ensure that contract is enforceable by law, meaning it does not act in contravention of statute such as being below the national minimum wage.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.