How the minimum wage crackdown could impact on unsalaried or low-paid directors

Many of those firms using the services of a business consultancy in London will have taken note of the recent national minimum wage (NMW) crackdown that has seen a quadrupling in non-compliance fines. This also raises the question, however, of the potential effect on unpaid directors or those taking a low salary.

Recent reports have signalled the government's intention to take a harder line with companies failing to pay young workers the NMW. It has now been indicated by Vince Cable that a general NMW crackdown is imminent. Legislation has already been pushed through meaning that from 1 February 2015, the maximum penalty for failing to pay the NMW will be £20,000, compared to the current £5,000.

The news has already prompted many companies to check that their dealings with employees are in compliance with the NMW legislation - but the position of directors also needs to be considered. The NMW regime may apply to a director, depending on the nature of their contract with their company. Problems can arise where directors take a modest salary, for example, with dividends being responsible for the rest of their wages.

A business consultancy in London may generally advise that directors aren't affected by the NMW rules when there is no contract between them and their company. While this is the case if a contract relates solely to the person's role as a director, a contract requiring that person to do a job can be a greater issue.

A building firm, for instance, may have four directors that each require the others to work on site, this potentially representing an employment contract even if it isn't in writing. This would then make the NMW rules applicable.

The government has not suggested that its NMW crackdown will specifically cover directors' contracts. Nonetheless, it makes sense for potentially affected companies to minimise the risk of challenge. Where directors might be impacted by NMW legislation, they are advised to drop any contracts or arrangements requiring them to work in the company's business.

The bottom line is that if a person's contract only covers work as a director, they won't be hit by any NMW crackdown. If they do have an oral or written contract of employment, however, and are not paid the NMW, fines may apply.

Editor’s Note: London Registrars (http://www.london-registrars.co.uk) are represented by the search engine advertising and digital marketing specialists Jumping Spider Media. Email: info@jumpingspidermedia.co.uk or call: +44 (0)20 3070 1959 / +34 952 783 637.