Are Directors Entitled to Redundancy Pay?

Are Directors Entitled to Redundancy Pay?

Nick Robinson

Nick Robinson

Mar 21, 2013 | Payroll

Redundancy pay is, on its face, designed for workers who are deemed to be employees of a company, rather than those who are known to be self-employed. Self-employed workers typically are not entitled to any redundancy pay or statutory notices that are afforded to regular employees of companies.

This issue looms large should businesses become insolvent, as it happens when a business is unable to pay redundancy or notice pay, and the government steps in so that they may pay employees in this manner.

One trick issue, though, is the question of workers who are both shareholders and directors of the company in question – as well as employees. In small businesses, it is quite common for directors of the company to also be employees, whether formally or not stated.

A business owner, for example, may decide to pay out some money through salary to himself, and other money to dividends by virtue of being a shareholder. The business owner then pays taxes just like any other employee, and if the company becomes insolvent, is entitled to redundancy pay like any other employee.

This issue is pretty straightforward when there is more than one director; after all, it makes perfect legal sense that minority directors in a company ought to be treated as employees and entitled to redundancy pay. They will also be entitled to various benefits from their employee status and the fact that they are not the majority director.

The question, then, remains for majority shareholders and directors regarding redundancy pay. Typically, the Redundancy Payments Service has held that majority directors are not entitled to redundancy pay, as they are in charge and hold too large a stake of ownership to be defined as being controlled by the company.

Test cases have not been entirely consistent with this definition by RPS, however, and a director and controlling shareholder can be seen as an employee eligible for redundancy pay based on certain factors including the degree of control through their directorship.

These factors can include, for example, whether there is a written or oral contract of employment, and whether there are fixed hours of work or requirements for their job. Contracts of employment are often the difference between claiming employment status and redundancy pay, and not qualifying according to RPS rules.

Practically speaking, if the business owner has a written contract of employment with the company that they own, and works regular hours that carry out specific and defined duties, he has a fairly good chance of claiming and earning redundancy pay from RPS by proving employee status.

MAKE AN ENQUIRY TODAY

Talk to a member of our team today!

Enquire Now

Copyright © Yorkshire Accountancy Limited 2020 | Privacy Policy | Developed by Fisher INC ltd

To Top