Following Insolvency, is a director an employee?

An employee of a business in liquidation will have various entitlements that can be claimed against the Redundancy Payments Service (“RPS”).  Those entitlements fall under the Employment Rights Act.

In the past the RPS have sought to reject claims made by the directors.  At first, RPS claimed directors were making themselves voluntarily redundant.  This approach was quashed by the Court of Appeal who said meeting their statutory duties prevailed and redundancy was a direct result of meeting those duties.

The other argument has been a director is not an employee of the company, but an officer who is not entitled to claim employment rights.  The RPS place the burden of proof that a director is also an employee, firmly on the director.  Indeed, the RPS send directors a very challenging questionnaire that critics say is designed to draw the conclusion a director is not an employee.

However, there has been a glimmer of hope for directors following a recent Employment Tribunal case   This case arose following the RPS rejecting their claims, saying neither of the claimant directors were employees.  The case was heard on 15 April 2024 where the judge cited the factors, taken together, that demonstrated the claimant directors were employees included:

  1. They attended work for the duration of the operating hours each day.
  2. There was a clear distinction between their roles as an employee and their role as a director.
  3. They worked for set hours between 20 and 25 hours per week.
  4. They were paid a regular salary which was subject to the PAYE scheme.
  5. Pay slips and P60 tax documents were issued.
  6. They conducted themselves in the same way as other employees when absent and when booking leave.
  7. There is no evidence that they could substitute another for the role of an employee.
  8. There is no evidence that they used company money as personal money.
  9. They were accountable to each other and the accountant.
  10. They did not work anywhere else.

Both directors were awarded statutory redundancy and pay in lieu of notice.

Nobody plans for their company to fail.  However, directors should ensure they have a binding contract of employment in place that is up to date and commensurate to the employment role they carry out.  Together with the above points, this will help to reduce the chances of the RPS being able to reject a claim for payment of your employment entitlements.

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 488653 (Milton Keynes) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.