Should a director have a contract of employment?

There are several excellent reasons why directors should consider having a formal contract of employment. 

A contract of employment is one of the basic components to having a job that unless you’ve got reason to specifically refer to it, you might forget that it’s there at all.


In fact, some company owners and directors forego having one at all – it’s their company, they started it, they’re first in and last out everyday – so why do they need a piece of paper that says all that?


Well, there are several excellent reasons why directors should consider having a formal contract of employment.


One of the main advantages in having an official employment contract is that it can help evidence eligibility for directors redundancy pay in the event of a company liquidation.


Of course it’s possible to prove to the Insolvency Service that you actually were employed in the company.


They use a questionnaire to ascertain eligibility by asking whether a contract exists, the number of hours regularly worked each week, the length of time the business has been incorporated for, etc.


While a genuine relationship with the company doesn’t require a written contract – it is acceptable to have been working under an oral or implied contract – a written contract is likely to specify certain employment entitlements such as PILON payments (the right to receive pay in lieu of notice), or the right to carry over holiday days from one holiday year to the next, certain sick pay entitlements and protections etc.


PAYE Salary 

All of this matters if the company is struggling financially.


The contract of employment will normally also define salary entitlement. For the directors of many limited companies, ‘salary’ or earnings may in practice be split between PAYE income and dividends issued by the company. When times are good, this may be a practical and efficient way of managing your income.


However, should things take a turn for the worse, not having received all or more of your salary through the company PAYE may in fact leave you at a disadvantage should the company ultimately go into liquidation.


Firstly, unlike dividend payments, director’s salary entitlements, paid through the company’s PAYE scheme, will not be subject to review as part of the liquidation process; a director is as entitled to receive salary payments, regardless of the company’s financial position as any other employee.


Secondly, the level of salary paid through PAYE will indicate your basic salary entitlement that will be used in any calculations for redundancy payments that the Redundancy Payments Service makes.


Directors Eligibility

Like any other employee, a director can claim redundancy entitlements from the Redundancy Payments Service should the company enter insolvency, but only under certain circumstances and eligibility criteria.


There are four main factors used to determine whether a director will be eligible for redundancy pay and any additional benefits:

  • Were they working under a contract of employment with the company – written, oral or implied?
  • Was salary received through a PAYE scheme?
  • Has the company been incorporated, active and trading for at least two years? (A requirement for redundancy pay only)
  • Is there role either purely advisory or a non-executive capacity or do they perform additional duties?



It can be a confusing task working out what you may be entitled to in the event of a company’s insolvency. It is not something that your accountant will always know the answer to, either.


If you have any questions about your eligibility for redundancy pay as a director or any other queries about the process or your entitlements then get in touch with us today.


One of our team of experienced, expert advisors will arrange a free initial consultation with you to discuss your situation and what you could potentially be entitled to.


Redundancy Assist was formed for the sole purpose of helping directors make claims for their redundancy entitlements in the event of an insolvency.


We are the first company in the UK to receive full authorisation from the Financial Conduct Authority (FCA) to provide professional redundancy claims management services.


Let us use our expertise to help you today.