Director-only companies and auto enrolment clarification from The Pension Regulator

  • By Pat Nown
  • 30 November 2015 00:00

It's good to know that sometimes persistence does pay off. We have been pressing for some time for an answer to the question - what approach will The Pension Regulator (TPR) take to directors in director-only companies? Will TPR argue with the company as to whether the directors have contracts of employment and therefore there is an auto enrolment requirement?

A sole director/ shareholder company is exempt from auto enrolment regardless of whether or not that director has a contract of employment. However, where there is more than one director the position depends on a number of factors. Assuming there are no other workers other than the directors the position can be summarised as follows:

  • Where all the directors either have no contracts at all, or contracts for personal services but not contracts of employment, auto enrolment does not apply.
  • Where there is only ONE director with a contract of employment auto enrolment does not apply.
  • Where there is more than one director with a contract of employment auto enrolment applies.
  • Many directors of owner managed business companies do not have written or explicit contracts of employment but the issue of whether they could be deemed to have implied contracts causes uncertainty. The issue being that if the directors have implied contracts of employment they would be workers for auto enrolment and the company would need to comply with the auto enrolment duties and automatically enrol the directors into a workplace pension.

    My colleague, Phil Williams, posted a blog post on 30 March 2015, giving his arguments for coming to a conclusion that a typical director in an owner managed business does not have an implied contract of employment.

    Since then we have been seeking clarification on this matter in conjunction with the Chartered Institute of Payroll Professionals (CIPP) and are pleased to reveal that TPR has now responded. The full response is referenced below but critically TPR has stated in connection with director only companies that 'we will not as part of our approach seek to argue that an implied contract of employment exists'.

    In the light of the clarification from TPR, we have updated our client letters. If you have held off writing to your clients about this matter given the previous uncertainty, you may wish to write to them now. For those of you who have previously purchased the letters, we will be sending you an update. You can find more information about the letters here.

    The information can be found in the Frequently Asked Questions section - within the Automatic enrolment for directors section (final question).

    We reproduce it here:

    Question - a contract of employment does not have to be a written document. In what circumstances would the regulator consider that an implied contract of employment exists and the company should have carried out automatic enrolment duties for the director?

    Answer - the regulator has set out its approach to the enforcement of automatic enrolment duties on our website:

    http://www.thepensionsregulator.gov.uk/doc-library/strategy-and-policy.aspx

    Our overall compliance approach is focused on educating and enabling employers to comply with the law. In the event that:

    • we were investigating a director-only company for a failure to carry out any of their automatic enrolment duties, and
    • there is no written contract of employment or other evidence of an intention to create an employer/worker relationship, between the company and a director or directors,

    we will not as part of our approach seek to argue that an implied contract of employment exists.

    Link is http://www.thepensionsregulator.gov.uk/automatic-enrolment-enquiries.aspx#s18358

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