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Company directors with Service contracts & NMW

Is it possible to alter the service contract to comply with NMW and still move salary to dividends

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I have a company client which has 2 directors both of which are drawing the majority of the remuneration as salary with minimal dividends.  IR35 not applicable.

I am looking at the possibility of switching the remuneration so that more is taken as dividends with a notional salary.  Normally I would put the salary at the LEL level for the obvious reasons.  However, both directors have written contracts of employment so they fall into the scope of National Minimum Wage (NMW).  

Director A has had their contract in place for many years and was transferred under TUPE to the current company.  Lots of employee rights and benefits accruing under the contract so therefore unikely to be willing to give this up and terminate the contract.  Director B has only recently been put in place so could easily be terminated and therefore NMW would not apply.

One option is for the service contracts to be terminated - they are unlikely to agree to this.

Another option is to just pay their contracted hours at the minimum wage and the rest as dividends or is there another option which is a halfway house....

In real terms both directors undertake duties as both employees but also as officers so I was wondering if it would be possible to amend their service contracts from the current 35 hours a week to something like 16/20/25 hours and apply the NMW to these hours and make this their salary, the rest of the remuneration to be taken as dividends.  A sort of compromise.  Although this would not be as tax efficient as terminating the employment contracts it means they continue to have the protection of the contracts of employment AND also some of the tax efficiency of receiving a greater proprortion of their income as dividends.

Help gratefully received....

Replies (4)

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By stepurhan
20th Sep 2018 15:49

If they would be unhappy for their contracts to be terminated, why would they be happy for them to be amended.

Reducing the hours would have an effect on their rights under their contracts. For example, in the event of the company going under, redundancy pay would potentially be reduced, as their weekly pay would be less.

But I cannot help think reducing the hours is not going to work anyway. For a start, do the contracts distinguish between work done as an "officer" from work done as an "employee"? Even if it does, can you really justify the split of hours to those you are proposing?

Either they want tax-efficiency, or they want the protection of employment rights. It is up to them to decide which they value more.

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By johngroganjga
20th Sep 2018 15:55

What purpose do the contracts serve? Wouldn't a shareholders' agreement be a better tool to achieve whatever that purpose is? If so, tear up the employment contracts. Job done.

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By lionofludesch
20th Sep 2018 18:21

If they wouldn't be happy for their contracts to be terminated you need to ask "why are you in business together when you clearly don't trust each other?"

Agree with previous answers, though. A shareholders' agreement - as formal as they wish - is a better solution.

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Replying to lionofludesch:
By atleastisoundknowledgable...
21st Sep 2018 07:37

Excuse the question, but what would the SA say? How would this help the matter - surely the salary is the salary as dictated by the employment contract?

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