Are Directors Employees or Contractors of a Company?

Ryan Patrick

May 16, 2024 • 6 min read

A director is an individual who is appointed or elected to manage a company's affairs. It's noteworthy that directors may be either employees or contractors. However, these roles come with distinct rights and responsibilities in a company.

When a company director plays the employee status, the business is mandated by law to provide them with certain minimum entitlements. A director neglecting these requirements could expose the company to considerable legal liabilities.

This blog explores the differences between directors employees and contractors employees of a company.

What is a Director?

A director refers to an individual or an entity designated to oversee the operations and affairs of a company. It's a legal requirement for every registered limited company to have at least one director. The company's director's identity and essential details are available in the Companies Register for public viewing.

An employee director is someone hired to work within another entity's business, dedicating their services solely to that employer. The employer holds authority over the employee director, dictating their work's manner, location, and timing within reasonable bounds.

On the other hand, the contractor director is an individual who operates independently, offering services to multiple clients. They run their own business and have autonomy as their own "boss." Unlike employee directors, director contractors do not receive employee benefits. Typically, the terms of their engagement are outlined in a contract between themselves and the company.

What Are the Director's Legal Duties

Directors have duties that they must fulfil in the company

Let's explore the main responsibilities of a director.

1. Act within powers

A director has to act per the business constitutions and within the powers of the company articles. Directors must exercise these powers without exceeding their powers. Exceeding their powers can result in reversing the decision or facing a financial penalty for any monetary losses.

2. Promote the success of the business.

You should act in good faith as a director to promote the business's success. In doing so, they must consider various factors, including but not limited to the effects on employees, shareholders, suppliers, clients, and the environment.

3. Exercise independent judgment

A director must exercise independent judgment and make decisions autonomously. Following instructions from or prioritising the interests of a third party without considering the company's interests may constitute a violation of this duty.

4. Exercising reasonable care, skill, and diligence

As a director, you must carry out your tasks carefully, sufficiently, and competently. You will breach this duty if you are incompetent or negligent and fall below the mandated standard of behaviour.

5. Avoid conflict of interest.

Every director, whether employee or contractor, must avoid situations where they have direct or indirect interests that may or can conflict with the business interest. This responsibility also covers using information, opportunities, or assets for personal gain, even if the company could benefit from them. It remains applicable even after a director departs from the company.

6. Not to accept benefits from third parties.

A director mustn't accept benefits of any kind from a third party in exchange for acting or refraining from acting in their capacity as a director.

7. Disclose any personal interest in a proposed transaction or arrangement with the business.

As a director, if you have a personal interest directly or indirectly in an ongoing or proposed transaction, you must disclose the nature and scope of this interest to the other directors.

The tasks of a director are as follows:

Filing legal documents
Keeping records
Calling meetings
Following company-relevant laws
Setting business policies and making decisions
Setting and monitoring business strategy, employee well-being, and risk management

Types of Directors

There are chances where the type of director is determined by whether you're a director employee or a contractor. For instance, executive directors have dual roles as directors and company employees.

As company directors, they:

Directors have obligations but should maintain a level of independence from their managerial responsibilities
They should remain vigilant for any conflicts that may arise between their managerial duties and their obligations as a director.

You will receive a salary as an executive director or business employee.

On the other hand, the director or contractor doesn't receive a salary from the company like the employees do. Instead, they invoice the business for their services and receive payment based on the terms outlined in their contract or agreement.

However, some director contractors may negotiate specific arrangements where they receive compensation that resembles a salary, but this would be less common and would depend on the particular circumstances and agreements between the individual and the company.

Director Employees vs. Director Contractors: What's their difference?

Let's compare the difference between an employee and a contractor director.

	Director employees	Director contractor
Employment status	These directors hold directorial positions in a company, and the company also employs them. They have formal employment relationships and are subject to employment laws and regulations like entitlement to benefits, salary, and protection under labour laws.	These individuals serve as directors but are engaged by the company as independent contractors rather than employees. They run their own companies and provide directorial services under contractual agreements. Unlike director employees, these directors don't have the same employment rights and benefits as employee directors.
Legal Requirements	Director employees are subject to the legal obligations and responsibilities of being an employee, including adherence to employment laws, company policies, and fiduciary duties as a director.	Director contractors don't have the same legal obligations as employees. Instead, their contractual agreement outlines their duties, responsibilities, and the terms of engagement with the company.
Payments and benefit	Apart from receiving salaries, these directors enjoy other benefits and entitlements, including the director's employment status, including retirement plans, health insurance, and paid time off.	Director contractors receive payment on a contractual basis. They pay their own taxes, insurance, and business expenses. They don't receive employee benefits from the business,
Control and independence	They work under the company's direction and control as part of their employment relationship. They may have reporting structures, working hours, and performance expectations set per company goals.	They have higher independence and control of their work. They also have more flexibility in carrying out their duties and more independence in decision-making regarding their responsibilities.

Director Employees vs. Director Contractors: What are their Benefits?

After exploring the difference between director employees and contractors, we would like to explore the benefits of each.

Benefits of using director employee

Business familiarity: the director employee better understands the business operations objective and culture.
Long-term commitment: The employee director offers stability and long-term engagement to the company, allowing continuity in leadership roles since they are part of the company.
Employee benefits: As a director employee, you are entitled to employee benefits that enhance your job loyalty and satisfaction.
Integrated leadership: They are integrated into the company's workforce, fostering collaboration and alignment with organisational goals.
Direct oversight: these directors work directly under company direction and control, ensuring alignment with business policies and strategies.

Benefits of using director contractors

Specialised skills: Director contractors bring specialised skills and expertise to the company, filling the skill gaps available.
Flexibility: these directors offer staffing flexibility, allowing the company to access the skills it lacks based on the project without entering long-term commitments.
Cost-effectiveness: Director contractors do not receive employee benefits, resulting in cost savings for the company compared to hiring full-time employees.
Scalability: Director contractors allow the business to scale its workforce up or down based on companies needs or project management.
Innovation: Director contractors often bring fresh perspectives and innovative ideas from their experiences working with multiple clients, enhancing creativity and problem-solving within the organisation.

Frequently Asked Questions

Can an employee of a company be a director?

An employee can be a company director. Although directors have different rights and obligations from employees, they are under officeholder criteria for tax purposes. They can get an employment contract if they perform other duties unrelated to directorial obligations.

Are directors members of a company?

The directors are members of the company. When registering a limited company in the UK, you must have at least one director and shareholder. You can be a shareholder or a member and a company director.

Who can be a director of a company?

To be a director of a limited company in the UK, you must have 16 years or more. You must also not be disqualified from becoming a director.

Can a director start another company?

According to section 175 of the Companies Act 2006, a director cannot start another company because doing so would breach the duty to avoid conflicts of interest. Avoid starting another company when you are a director to prevent the risk of hefty fines, litigation, and a bad reputation.

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Final Thought

Director employees and director contractors serve as directors of the company. Their employment status, rights, obligations, and relationship with the company differ significantly based on whether they are considered employees or independent contractors.

You should seek legal counsel or an expert's advice to determine whether a director is an employee or a contractor. An incorrect definition of directorial status could make the company vulnerable to counterfeit contracting. And if you have any questions, kindly contact one of our experts here.