Is a Director an Employee?

Often in employment law the question arises as to whether a director falls within the definition of ’employee’ for purposes of the Fair Work Act 2009 (Cth).

Common circumstances where this question may arise are:

• When a director’s engagement is terminated by a company and its unclear whether they are eligible for a unfair dismissal/general protections claim;
• Where a business seeks to rely on the Small Business Dismissal Code when terminating an employee.

To summarise, the Small Business Dismissal Code has less strenuous obligations on the employer in relation to the procedural requirements of dismissing employees and may allow for a corporate to avoid redundancy pay where the employee is given the appropriate notice of the redundancy.

To rely on the Small Business Dismissal Code, a company must have less than 15 employees and often we are requested to advise on whether directors are included in this headcount.

The determination of whether a director qualifies as an ’employee’ for purposes of the FW Act is not always clear and will depend on the circumstances of each case.

In general, a director is an officer of the company and may have different duties to an employee such as managing business operations and conducting strategic planning of the business.

In Lincoln Mills (Aust) Ltd v Gough [1964] VR 193 198 a key distinction was identified as an employee being employed on a contract of service where a director is more commonly working under a contract for services.

Where the directors are employed under a employment contract with a company which clearly identifies an employee relationship by setting out terms such as job duties, hours of work, annual leave, remuneration, ect, it may suggest an employment relationship.

Where there is no employment contract, the director will be governed by the directors duties contained in the Corporations Act and the Company’s Constitution.

In circumstances where there is no employment contract, to determine if a director is an employee, the Fair Work Commission or the Court will apply the multi-factorial test discussed in the High Court case of Hollis v Vabu Pty Ltd (2001) 207 CLR 21.

The multi factorial test in Hollis considers:

1. The ability to delegate – employees are not usually able to delegate duties where directors commonly can.
2. Employees usually have set days and hours of work where directors may not.
3. Employees have statutory entitlements such as annual leave and personal leave where directors may not receive these entitlements.
4. Employees are compensated for their service by wages or salary where directors may be remunerated via dividends, and equity in the company.
5. Employees have less liability under the Corporations Act where Directors can be held liable for certain breaches such as trading insolvent.

The recent case of Jeremy Taylor v Auto Loans Group Pty Ltd  [2018] FWC 1950 puts this test into perspective where the FWC considered if the directors were to be included in the 15 employee head count for purposes of the Small Business Dismissal Code.

It was found in these circumstances that the 2 directors were not to be included in the employee headcount for the following reasons:

1. No contract of employment existed between the directors and the company;
2. The directors were involved in high level strategic, marketing and technology matters and were responsible for hiring and firing employees but not involved in the company’s day to day dealings;
3. The directors had no specific roles or duties designated by the company;
4. The directors derived income from the company via dividends and had no entitlement to wages or superannuation; and
5. The directors were not covered by the company’s workers compensation policy.

In conclusion, it is not always clear whether a director will qualify as an employee for purposes of the FW Work Act and will be determined by the individual circumstances of each case.

For further guidance on this topic, please don’t hesitate to get in contact with one of our lawyers.