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Directors and NMW (again!)

Directors and NMW (again!)

We have a client who is a significant albeit minority (40%) shareholder in a close UK trading company of which he is also a director.

He seeks to derive his income from the company by way of a mix of directors' fees at the earnings threshold and the balance in dividends (for as long as the law remains as it is).  Take it as read that IR35 and the MSC legislation does not apply to this case.

The shareholders, who are all directors, wish to put in place an agreement between them binding them to work exclusively for the company.  The company itself is not party to this agreement.

The question has arisen whether this arrangement would be such as to give rise to a contract of employment between the company and the director and thereby bar the director from exemption from the application of the National Minimum Wage legislation.

The solicitors have quoted Trusted Steel Concrete Co v Green [1946] CH115 at us.  I do not have access to this in detail, but I do observe that it predates the NMW legislation and seems to relate to the definition of employment as required for the interpretation of the Essential Work (General Provisions) No. 2) Order, 1942.  But even if this case is irrelevant we may not be entirely out of the woods.

The other question in my mind is whether HMRC have put out anything in the public domain concerning whether they would pursue the matter even if a contractual employment was held to be in force and thereby bringing it within the NMW.

Is there some general legal principle that allows you to challenge an abusive use of legislation that is applied or pursued other than for the reason of enactment? The NMW was introduced to protect vulnerable employees.  By no stretch of the imagination is this a vulnerable individual, employee or otherwise.  If it were pursued in this case it could only be for the generation of NI charges and non-compliance penalties, which are reasons outwith the purpose of the legislation.  If there is not some common law (or even perhaps EU law) that provides a defence against such abuse then there ought to be.

Could it be a defence that had the full NMW been paid then there would have been insufficient reserves out of which to pay the dividends which the "employee" has enjoyed, so that the employee would have been no better off by the application of NMW?  Indeed the imposition of NI charges would leave the director worse off, being a perverse conclusion to the application of NMW law.

I am having a lot of difficulty finding anything in the public domain published officially by a government body stating their policy in this area.  There is a passing comment here

that "directors" are not subject to NMW.  But this is rather terse and brief and indeed contrary to my hitherto understanding that they are indeed so subject if they have a contract of employment.

If anything, the comments on the HSE website would seem to support the conclusion that they are "employed" in most cases where in practice they work full time for the company, which has worrying connotations for the NMW implications, as reported here:

I searched archived posts in AWeb but nowadays they all point to broken links, or links to documents hidden behind member areas at ICAEW website requiring a login.

Any help out there?

With kind regards

Clint Westwood


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By jlsTax
30th Nov 2012 13:17

NMW case law


You may find it helpful to look at the recent decision of the Court of Appeal in Marlow Inns v HMRC [2012] EWCA Civ 1498.

Whilst this does not deal with the situation of a director, it does show that the courts may well enforce the NMW in a situation where there seems to be no need to protect a 'vulnerable employee'. 

In your situation you could certainly end up with a potential problem if there was a dispute between Directors.  If your documentation amounted to an employment contract, it would seem that a Director could use the NMW regs even though had apparently consented to the arrangement.


Thanks (1)
30th Nov 2012 13:40

It's a question of Hats!

There does seem to be a divergence between the HMRC interpretation of the NMW and the real world which I suppose is really nothing new.

HMRC seem to exclude directors per se from the application of the legislation because they are directors end of story.

In face for many years and in many cases the law considers that a person can wear a number of different "hats" - a shareholder director has a contractual relationship with the company as shareholder, an office held as a director, and a contractual relationship as an employee where executive duties are carried out.  Each is a separate hat, in a separate capacity with different rights, obligations etc.  There was a case many moons ago concerning compensation for loss of office (?) where the House of Lords

On this analysis a director could fall within the NMW by virtue of the third relationship but this seems to be completely ignored by HMRC, if you are a director you are not within NMW is their opinion.  Perhaps whilst they hold this opinion we should let sleeping dogs lie.

However it may still be open, as suggested, for a disgruntled ex-director to vent their spleen by invoking this possibility and then the solids could hit the air-conditioning...

Thanks (2)
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