This article is divided into Eight Parts for easier reading:
- Part 01: Background.
- Part 02: Redundancy Pay and Taxes.
- Part 03: Redundancy and Consultation.
- Part 04: Suitable Alternative Work and Finding Other Work.
- Part 05: Redundancy and Other Factors.
- Part 06: Redundancy and Insolvency.
- Part 07: Directors.
- Part 08: Miscellaneous.
Part 07: Directors
If your business is struggling financially, despite your best efforts to turn things around, voluntary liquidation may be your best option – but few company directors know that they may also be entitled to claim SRPs.
Company directors who can prove their status as an employee of the company may also qualify for a number of statutory payments, and this can provide a much needed financial buffer following the closure of the business.
7.1 How Do I Prove My Status as an Employee?
- To receive statutory redundancy payments following the liquidation of a company, directors must be able to prove that they had more than just an advisory or non-executive role in the running of the business (i.e. a practical role).
- To do this, they must complete a form provided by the Insolvency Service that asks for details about:
- Whether they worked under a contract of employment (for at least two years, whether written, oral, or implied);
- Whether they are regarded as “an employee of the limited company” in addition to their role as director (this is a must);
- If the director worked at least 16 hours a week;
- If the director is owed money by business, whether PAYE arrears or an initial seed capital investment.
- Whether the company has been incorporated for more than two years; and
- The details of the directors’ day-to-day responsibilities in the running of the company.
- If the company director can prove to the liquidator that they had a practical and ongoing role in the running of the company, took a salary using the PAYE scheme and had a similar relationship to the company as other employees, they may be eligible for statutory payments.
Things to Consider:
- Implied contracts are a fairly common legal situation and, where it can be demonstrated that the director has maintained either a full or part-time role within the company, then they are demonstrably a worker and would hence qualify.
- The relevant laws here are Section 230 of the Employment Rights Act 1996 and Article 2 of The Working Time Regulations 1998.
- This is something of a legal grey area, however, and there have been numerous contentious legal cases around this subject.
- Where directors have opted not to receive a wage and only receive dividends as a shareholder, this will automatically exclude them from SRP.
7.2 Does the Type of Employment Contract Have Relevance?
- In short, yes.
- The type of employment contract that existed between a director and the company can have some bearing on how their status will be viewed by the liquidator.
- One of the first questions a liquidator will ask is what type of contract of employment existed – whether it is written, oral or implied.
- It is easiest to prove a director’s status as an employee where the contract was written, but a contract does not have to be written down to be legal.
- If, following discussions with the board, a director works similar hours to an employee, is paid through PAYE and has a similar relationship to the business, this oral or implied contract can still be sufficient for statutory entitlements to be paid.
- However, it will be more difficult to prove, and the liquidator will look at every aspect of the relationship before making a decision.
- The easiest method to prove your employment is by having a contract of employment in force.
7.3 How Do I Make a Claim for Redundancy Pay?
There are a number of statutory payments available to company directors if their status as a company employee has been proven, and these are outlined in Part Six (i.e. the same process as other employees).
Unlike employees who are eligible for up to £30,000 as a tax-free statutory redundancy payment, directors have to pay tax on any redundancy.