When a company enters an insolvency procedure it can be devastating for directors and shareholders. Apart from losing their business and way of life, they can be left with substantial liabilities if they have given personal guarantees.
Often the only positive outcome is if they can receive compensation for unpaid wages, holiday pay, pay in lieu of notice and redundancy from the Redundancy Payments Service.
While employees who are made redundant are entitled to these payments, a director, who is an office holder, will need to provide evidence that they were an employee to support their application.
The Redundancy Payments Service appears to have recently changed its stance on the payment of directors’ claims and is rejecting their status as an employee where they have historically paid themselves below the National Minimum Wage (NMW).
When considering a redundancy claim, the service looks at a number of indicators to determine a director’s employee status, including pay structure, holiday arrangements, sick pay entitlement and copies of contracts of employment.
The Redundancy Payments Service said a key factor it considers is whether a director renumerates themselves as an employee or an office holder. Under the National Minimum Wage Act 1998, a director must pay themselves the NMW if they are an employee.
It is normal for directors to pay themselves a small amount by way of a salary. In addition, they will take regular drawings that will be posted to their directors’ loan account. At the end of the accounting period, a dividend, based on the company’s performance, will be declared. When a dividend is declared but not taken, it is credited to the director’s loan account, thereby reducing an overdrawn director’s loan account balance or creating a balance owed to them.
Due to the change, it is therefore important that company directors pay themselves at least the National Minimum Wage so that if the worst happens they will be entitled to receive the compensation they are due. The Redundancy Payments Service will reject claims if it cannot confirm a director was an employee.