Key Take Home Points
- The distinction between a director and an employee within a company is important for small businesses.
- Small businesses may be exempt from certain obligations under the Fair Work Act in relation to employees’ rights.
- A director is usually an officer of the company with different duties than an employee, including management and big-picture strategy.
- Directors may also be considered employees, but there are key differences in their contracts and responsibilities.
- The distinction between a director and an employee is determined by various factors, including the nature of their work and their level of control and responsibility within the company. Seek legal advice if unsure.
Whether someone is a director or employee within a company is a crucial question but also one without a definitive answer.
It’s a distinction that most often arises for small businesses – those enterprises with 15 or less employees.
For businesses of that size, certain important exemptions exist under the Fair Work Act in relation to employees’ rights.
Specifically, small businesses may be exempt from paying redundancy to eligible employees, in addition to notice of termination.
An employee must also complete 12 months’ continuous service before they are eligible to bring an unfair dismissal claim against the employer.
For this reason the employee headcount is important in classifying the enterprise as a small business.
While there are situations where the distinction between director and employee is unclear, a number of court cases provide some guidance on how the roles are defined.
What are the Essential Differences between Director and Employee?
A director is considered an officer of a company, usually with different duties to those of an employee, including management and big-picture strategy. Many directors have no role in the day-to-day running of the company.
But this does not mean a director cannot also be considered an employee.
One key distinction is that an employee is generally employed on a contact of service, whereas a director is more likely working under a contract for services (see Lincoln Mills (Aust) Ltd v Gough [1964] VR 193, 198).
The first type of contract will set out details such as annual leave, personal leave, job duties, hours of work and remuneration – all hallmarks of an employee’s role.
By contrast, a company director’s duties, which are fiduciary in nature, are governed by statute – the Corporations Act – and the company’s corporate constitution.
Where there is no contract, the Fair Work Commission or a court employs a common law ‘multi-factor’ test to try to distinguish one role from the other (see Hollis v Vabu Pty Ltd (2001) 207 CLR 21).
Other than a contract, the test takes account of a number of factors:
- Whether the person has the right to delegate – employees are generally unable to delegate their duties to others.
- Personal liability. Under the Corporations Act, directors can be held liable for certain occurrences, such as trading while insolvent, and be subject to civil and criminal penalties. In general, employees do not face such risks.
- Employees generally have set days and hours of work.
- Employees’ conditions include annual leave, long service leave, personal leave and other entitlements which directors do not receive.
- Employees receive a wage or salary, directors are generally remunerated through dividends, equity in the company, etc.
Case law example
In Jeremy Taylor v ALG, it was decided that the respondent company’s directors were not employees on the basis that the directors were involved in the recruitment and termination of employees, and took high-level strategic, marketing and technology decisions.
In addition, the directors were not involved in the company’s day to day operation; were not employed under an employment agreement; did not have any specific roles or duties; were remunerated through dividends, with no entitlement to wages or superannuation; and were not covered by the company’s workers’ compensation policy.
The distinction often turns on whether the directors draw ‘wages’ as consideration for personal services, or for work better characterised as management and control of the company.
In Wilson v B.A.R.B Trading [2016] FWC 3841, two managing directors who drew wages from the company did not do so as consideration for personal services, nor did they receive long service leave, superannuation, annual leave and personal leave.
The inquiry by the Commission will generally look behind a person’s title to understand their role in the company as either director or employee.
Seek legal advice if unsure
The key conclusion is that each case will be adjudged on its factual circumstances as to the nature of the employment relationship.
If you are unsure of the differences between a director and an employee, particularly in a small business of 15 employees or less, seek expert legal advice so that the business’ count of employees is accurate.
Employers should be cautious to delineate directors from employees by ensuring the latter are engaged on employment agreements setting out the conditions of employment.
