Directors and employment rights
What does being a director mean?
Directors are responsible for managing companies. There are different types of director but they are all subject to wide ranging legal duties to the company and its shareholders with the exception of some ‘non-board’ directors (see below).
Broadly, being a director means you have a legal duty to promote the success of the company, act in good faith and with ‘reasonable care, skill and diligence’. You must exercise your own independent judgement when you make decisions about the company, and you have specific duties to avoid conflicts of interest and accepting any benefits because of your role as a director. You also have a specific duty to declare any interest you have in any proposed transactions with the company.
These duties should be taken seriously, as there can be financial and even criminal penalties for directors who are found to have breached their duties.
An important part of a director’s role is to attend board meetings to vote on decisions about the company, although some decisions can be delegated to individual directors.
What different types of director are there?
Broadly, there are two types of director: executive and non-executive directors. However, there are situations where those who have not officially been appointed as directors are legally treated as if they have been, meaning they are subject to the same legal duties as official directors. There are broadly two situations where this can happen, and these directors are known as ‘de facto directors’ or ‘shadow directors’ (see below).
All executive, non-executive and de facto and shadow directors are all subject to the same legal duties and responsibilities. The law does not distinguish between them.
What is the difference between an executive & non-executive director?
Executive directors are the most common type of director. They are also employees of the company and they are responsible for running the company. Non-executive directors are not employees and tend to have a more advisory role, e.g. by attending board meetings and advising on strategic decisions, rather than taking on responsibility for day to day decision making.
What is the difference between a board and a non-board director?
Directors who sit on the board are ‘official’ directors – they have been officially appointed and are subject to the legal duties described above. However, in some industries there has been a movement towards giving people the title ‘director’ even if they do not actually sit on the board.
These ‘non-board’ directors are generally just employees with a specific job-title. They will not be subject to the same legal duties and responsibilities as official directors, unless they are actually ‘de facto’ directors (see below).
What are de facto and shadow directors?
A de facto director is someone who ‘performs the functions of a director’ but has not been formally appointed. This can happen, for example, where an employee is given responsibility for making strategic decisions about their particular area of the business, or attends and contributes to decisions at board meetings, even if they have not been officially appointed at companies house.
There are also ‘shadow directors’ – these are people whose advice and instructions the board are accustomed to following, even though they are not appointed as directors. For example, if the board are accustomed to taking instructions from a major shareholder even though she is not officially appointed as a director, she could be a shadow director.
You should, therefore, be careful if you have not been officially appointed as a director but you are carrying out functions that a director would – you may be subject to the same legal responsibilities, but you will not benefit from legal protections that the officially appointed directors might have.
Do I have full employment law rights as a director?
Executive directors are also employees and so they still have full rights as an employee, which are separate to their role as a director. In this case, the director wears two different ‘hats’, so to speak – ending the employment relationship will not necessarily end the directorship and vice versa.
Non-executive directors and shadow directors (unless they are also employees of the company) do not have any employment law rights.
Is there a difference between a service contract and a contract of employment?
Many directors, particularly non-executive directors, work under a ‘contract for services’ and are therefore paid a fee, rather than a wage. Directors who work under this type of contract are self-employed.
Directors who are also employees tend to have a ‘service contract’ (or ‘contract of service’). In terms of employment rights, this is equivalent to an employment contract. The only difference is that directors service contracts tend to be longer and more complex than standard employment contracts, as they can include provisions dealing with shares, long notice periods, post-termination restrictions and what will happen to the directorship if the director’s employment ceases and vice versa.
Can I be a director without being a shareholder?
Yes, it is possible to be a director without being a shareholder, although it is very common for directors to own shares in the company. If you are a shareholder and a director, you have two different roles and you should try to keep them separate in your mind. Try to think about yourself as wearing two different ‘hats’ – your director’s hat when you are at board meetings and working for the company, and your shareholder’s hat when you are attending general meetings.
Can I be personally responsible for any actions of the company?
Directors are not generally liable for the actions of the company, for example, a director cannot usually be liable for a company’s debts. However, directors can be personally liable to the company itself and (in some cases) potentially third parties where he has breached his duties, for example if the company suffers losses because the director has acted negligently or fraudulently.
How easy is it to be removed as a director?
An officially appointed director can be removed by an ordinary resolution of the company’s shareholders (i.e. by a majority vote at a general meeting) no matter what it says in the director’s service contract. It is not possible to remove this right from shareholders, if they are unhappy with the director’s performance.
Being removed as a director, however, does not necessarily end the director’s employment. An executive director who has been removed as a director still has employment rights, including the right not to be unfairly dismissed (if the director has worked at the company for at least two years).
If the company wants to terminate the employment of someone who has been removed as a director, there needs to be a fair reason for dismissal and a fair procedure needs to be followed, just as with any other employee.
Similarly, if a director’s employment is terminated this will not necessarily end the directorship. If you are in process of ending your employment relationship with the company, you should ensure that you also resign as director, to avoid remaining subject to onerous directors duties when you no longer work there.
Can I claim unfair dismissal if I am a director?
Executive directors (and non-board employee directors) are also employees and can therefore also claim unfair dismissal if they are dismissed from their role. Non-executive directors are not employees so they cannot claim unfair dismissal.
Can I claim discrimination?
Yes you are entitled to make a claim for discrimination if you are treated unfavourably by someone else because of a protected characteristic (e.g. age, race, sex). The Equality Act 2010 protects a variety of people, including employees, job applicants and ‘office holders’.
As office holders, directors are protected from unlawful discrimination by the company (or any of its employees). Executive directors are also protected from unlawful discrimination because they are employees.
Would a failure by a director to disclose conflict of interest amount to Gross misconduct?
Potentially yes, due to the provisions of s.175 of the Companies Act
You should check your contract to see whether this was listed as a potential reason for dismissal, but it could also fall under your implied term of fidelity or fiduciary duties.
The reason for this is that a director has a higher level of duty compared to a regular employee, so your employer should consider how serious your failure is, whether you should have realised it should have been disclosed, and whether there are any mitigating circumstances. Any dismissal should not be a knee-jerk reaction, however.
Should I obtain some form of indemnity or cover from the company after I have left?
As directors are subject to such stringent legal duties, it is possible to obtain ‘Directors & Officers Insurance’ to protect against potential claims. The rules around this type of insurance are very complex (including what you can and can’t insure against). If this is something you are considering, you should speak to the company or take specialist insurance advice.