Understanding Redundancy Payments to Directors

Much has been written about employee rights during insolvency but less on the fact that directors themselves are entitled to redundancy payments. Statutory redundancy pay is available to directors (with a cap of £14,370) and can be a lifeline during the difficult circumstances of a liquidation. There are strict criteria for this which this article will attempt to qualify.

What Criteria Should Directors Meet to Receive Redundancy Payments?

(1)  The principal criterion is that any director seeking redundancy pay must be regarded as ‘an employee of the company’ in addition to his/her role as director (i.e. his/her role was more than non-executive).

(2)  The director must have worked under an employment contract for at least the last two years (this may be written, oral or implied.)

(3)  The director’s work week must be a minimum of 16 hours

(4)  The director must be owed money by the company (whether it be PAYE arrears, for example, or an initial seed capital investment.)

What Criteria Surrounding the Contract of Employment Should a Director Fulfil to Qualify for Redundancy Pay?

Especially in instances where the director has founded the company, there may be no written employment contracts specifying the nature of his/her job role. During a company liquidation, it will be up to the liquidator to assess whether a director without a written contract of employment has a legitimate claim on redundancy pay.

Implied contracts are a fairly common legal situation and, where it can be demonstrated that the director has maintained either a full or part-time role within the company, then they are demonstrably a worker and would hence qualify. The relevant laws here are Section 230 of the Employment Rights Act 1996 and Article 2 of The Working Time Regulations 1998. This is something of a legal grey area, however, and there have been numerous contentious legal cases around this subject.

Where directors have opted not to receive a wage and only receive dividends as a shareholder, this will automatically exclude them from statutory redundancy pay.

What Redundancy Payments may Directors be Eligible for?

HMRC offer a handy redundancy payment calculator which you can find here. You redundancy application will be based on:

  •         your current age
  •         your length of service to the company (with a 20-year maximum)
  •         your gross weekly pay (up to a maximum of £479 per week)

Holiday pay

Also, you may claim a maximum of six weeks accrued holiday pay, and up to 8 weeks of unpaid wages.

Notice pay

For each full year of employment, a director has served, the RPS calculates one week’s notice being applicable. In cases of redundancy, pay instead of notice applies which means that a director may be eligible for up to 12 weeks additional redundancy pay

Is Director’s Redundancy Pay Taxable?

Unlike employees who are eligible for up to £30,000 as a tax-free statutory redundancy payment, directors have to pay tax on any redundancy.

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