National minimum wage and directors

The National Minimum Wage (NMW) rates increased for pay periods beginning on and after 1 April 2018. The rate for those aged 25 and over (also called the living wage) rose from £7.50 to £7.83 per hour, an increase of 4.4%.

The three other NMW rates vary from £4.20 to £7.38 per hour, according to the employee’s age. Individuals who are enrolled on an approved apprenticeship may be paid a reduced rate of £3.70 per hour for the first year of their apprenticeship, or while they are under the age of 19. Interns generally must be paid the NMW, but what about directors?

If the director does not have a contract of employment with the company and is effectively only paid for his role as an office-holder, the NMW does not apply. However, where the director does have an employment contract with the company, he will be treated as an employee for NMW purposes, and the NMW should be paid for all the hours he works.

Where the company has a number of employees, good employment practice is to require all employees and directors to sign a declaration to say they understand their rights and responsibilities as set out in the company’s employment handbook. Such a declaration will amount to an employment contract where the handbook sets out all the employment conditions. Thus, directors who sign the declaration will have signed an employment contract with the company.

If the company comes under scrutiny for NMW issues, HMRC will want to examine the pay calculations for everyone on the payroll, including the directors.

The penalty for failing to pay the correct amount of NMW can be up to £20,000 per employee. If the company is fined for NMW violations, and the total underpayment is £100 for the whole payroll, it will also be included on the ‘named and shamed’ list of employers.