Not automatically. Being a company director is holding an office, and an office holder is neither an employee nor a worker for employment rights purposes. A director becomes an employee only if they also work under a contract of employment with the company, and only then do rights such as unfair dismissal protection and statutory redundancy pay follow. For tax and National Insurance, though, a director is treated as employed whether or not there is a contract.
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What is the difference between holding office and being employed?
GOV.UK’s employment status guidance says company directors run limited companies on behalf of shareholders, have different rights and responsibilities from employees, and are classed as office holders for tax and National Insurance purposes. Its guidance on office holders lists registered company directors and secretaries as statutory appointments and states that office holders are neither employees nor workers, but that someone can be an office holder and an employee if they have an employment contract with the same organisation that meets the criteria for employees.
HMRC’s Employment Status Manual (ESM2503) explains why a director holds an office: the Companies Act requires a company to have directors, so the position exists independently of whoever fills it. It adds that the term includes executive, non executive and nominee directors.
Employment, by contrast, is contractual. Section 230 of the Employment Rights Act 1996 defines an employee as an individual who has entered into or works under a contract of employment, meaning a contract of service or apprenticeship, express or implied, oral or written.
How do you tell whether a director is also an employee?
The question is whether, alongside the office, there is a contract of employment. GOV.UK’s director guidance says that if a person does other work that is not related to being a director, they may have an employment contract and get employment rights. Its guidance on employees lists indicators such as being required to work regularly and a minimum number of hours, being paid for time worked, getting paid holiday and sick pay, being subject to disciplinary and grievance procedures, and having a contract that uses the terms employer and employee.
A typical managing director of a trading company, with a written service agreement, a salary, fixed hours and holiday entitlement, is likely to be both an office holder and an employee. A director who attends a few board meetings a year for a fee, with no other duties, is likely to be an office holder only. The harder cases are owner directors of small companies who run the business but have never put any terms in writing.
Under the Companies Act, a director’s “service contract” is wider than an employment contract. Section 227 defines it as a contract under which a director undertakes personally to perform services, as director or otherwise, and says it includes the terms of a person’s appointment as a director. So having a service contract for Companies Act purposes does not by itself prove employment. Our guide to directors’ service contracts covers the inspection and approval rules.
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Which employment rights can a director have?
| Right | Director who is an office holder only | Director who is also an employee |
|---|---|---|
| National Minimum Wage | No. GOV.UK lists company directors among those not entitled | Depends on the facts of the employment; take advice |
| Paid holiday (5.6 weeks for almost all workers) | No, as an office holder is not a worker | Yes |
| Protection from unfair dismissal | No. Section 94 of the Employment Rights Act 1996 gives the right to employees | Yes, subject to the usual qualifying conditions |
| Statutory redundancy pay and minimum notice | No | Yes, as employee rights |
| Payments from the government if the company becomes insolvent | No | Possibly. GOV.UK says a director must have been an employee as well as a director to be eligible |
The general framework of employee, worker and self employed rights is explained in our guide to employment law status and rights.
How do tax and National Insurance treat directors?
Very differently. Government guidance on employment status for HR and legal professionals notes that the tax framework is separate from the employment rights framework, and that tax and National Insurance law treats some engagements as employment where there is no contract of employment, including office holders such as company directors.
HMRC’s Employment Status Manual (ESM2502) says an office holder is chargeable to tax on earnings from the office as employment income, without needing to show a contract of service. ESM2501 explains that Class 1 National Insurance is payable where an earner is employed in an office with earnings chargeable as employment income. So a director paid a salary goes through PAYE even if they have no employment rights at all. The special rules for directors, including the annual earnings period, are covered in our guide to directors’ National Insurance, and our guide to whether a sole director needs a payroll covers the practical setup.
What happens when a director is removed or resigns?
Ending the office and ending any employment are separate steps. Under section 168 of the Companies Act 2006, members can remove a director by ordinary resolution, notwithstanding anything in any agreement between the company and the director. Section 168(5) adds that this does not deprive the director of compensation or damages payable for the termination of their appointment as director or any appointment terminating with it.
So a director who is also an employee may have contractual claims and, as an employee, statutory employment claims, even though the members were entitled to remove them from the board. A director who is an office holder only has no unfair dismissal claim. Contracts often provide that resignation as a director ends the employment, or the reverse, so the documents need checking. See our guide to removing a director.
What about non executive directors and owner directors?
Non executive directors are usually office holders only, paid a fee for the office, though those fees are still taxed as employment income. Owner directors of small companies often have no written terms; whether they are employees then depends on what is actually agreed and done, and the answer can differ between the employment law and tax systems. Employment status also affects the Employment Allowance, as explained in our guide to the Employment Allowance for sole director companies.
How does this work in practice?
Illustration only. Claire and Dev each own half of a company and are its only directors. Claire signed a written service agreement as managing director with a salary, 35 hours a week, 25 days’ holiday and a notice period. Dev, who has a full time job elsewhere, attends quarterly board meetings and takes dividends only.
Claire is both an office holder and an employee, so she has employee rights such as unfair dismissal protection, subject to the usual conditions, and her salary goes through PAYE. Dev is an office holder only. He has no employment rights against the company, and if the members removed him under section 168 he would have no unfair dismissal claim. If Dev were later paid a director’s fee, it would be taxed as employment income under PAYE, even though he still would not be an employee for employment law.
What mistakes do people make?
- Assuming that being on payroll makes a director an employee for employment rights. PAYE follows the office, not the contract.
- Assuming a director can never be an employee. Many executive directors are both.
- Leaving owner directors’ terms unwritten, so that status is uncertain when a dispute or insolvency arises.
- Treating removal from the board as automatically ending an employment contract, or the reverse.
- Relying on the GOV.UK statement that directors are not entitled to the minimum wage for a director who also works under an employment contract, without checking the facts.
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Related Accountapedia entries
- Written statement of employment particulars
- Non executive director fees: PAYE and NI
- Redundancy pay when an employer is insolvent
- Payments for loss of office to directors
- Employees in administration: wages and TUPE
- Employed or self employed: the status tests
- HMRC’s CEST tool: how it works and its limits
- US employee stock purchase plans for UK staff
- Tax free bonuses from an employee owned company
- Tax relief for training you pay for as an employee
- A company car for an employee’s family member
Related cover: Directors and officers liability insurance and Management liability insurance.
Sources
- GOV.UK: Director
- GOV.UK: Office holder
- GOV.UK: Employee
- GOV.UK: Manual page ESM2503
- GOV.UK: Manual page ESM2502
- GOV.UK: Manual page ESM2501
- legislation.gov.uk: Act 1996 c. 18, section 230
- legislation.gov.uk: Act 1996 c. 18, section 94
- legislation.gov.uk: Act 2006 c. 46, section 227
- GOV.UK: Who gets the minimum wage
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.