Pension auto enrolment – does a company with only directors have to bother with auto enrolment? Part 2

  • By Phil Williams
  • 30/03/2015

Last May I wrote a blog post on the above question. Ten months later, we are getting nearer to an answer but we are not quite there yet. And ten months later the blog post is still topping the charts of the most read Mercia blogs. So it's appropriate to consider now how near we are to an answer.

There has been some useful information from The Pensions Regulator (TPR) in the last month. We have had an update from Steve Rowntree, the Industry Liaison Manager which included a pro-forma email. This can be sent to TPR if the company has no workers at their staging date. The key part is the confirmation that the company is not an employer for the purposes of auto enrolment for one of the following reasons:

(a) there is only one director and there are no other staff working for the company

(b) the only people working for the company are directors and none of them has an employment contract

(c) the only people working for the company are directors and only one of them has an employment contract

(d) if there is some other reason why you believe you do not have any automatic enrolment duties (please provide a brief explanation)

The effect will be, if accepted by TPR, there are no obligations on the company to do anything else including the requirement of an employer to complete a 'declaration of compliance (registration) checklist' within five months of the staging date.

Reason (a) is straightforward - there is a specific exemption which is often referred to as the 'one man company' exemption. If an individual is the only person in a company of which they are also a director, the employer duties do not apply even if there is an employment contract.

Reason (b) is relatively straightforward - any director who does not have an employment contract is not a 'worker' even if they do a lot of work for the company. So there are no employer duties in relation to that person for the company. If all directors do not have an employment contract and they are the only people working for the company, the company has no 'workers'. And so the company has no employer duties.

Reason (c) follows on from (a) and (b). All the directors bar one are not 'workers'. The director with the employment contract is a 'worker' but the specific exemption in (a) applies. So the 'one man company' exemption should really be called the 'company with no staff and only one of the directors has an employment contract' exemption. I don't think the longer title is going to catch on.

Reason (d) includes such things as 'it is a breach of my human rights to have to organise a pension scheme when the state should be providing a decent pension based on an employee's earnings'. Expect TPR to reject this.

How do we know if directors have employment contracts?

This question is an issue if we have two directors and there are no other staff working for the company.

Typically there will be no written contract of employment but this fact is not sufficient to conclude that the two directors do not have contracts of employment. In TPR's detailed guidance for employers (book 1) it includes this:

'A note about contracts

  • A contract does not have to be in writing
  • It can be a verbal contract between the employer and the worker
  • The terms of employment can be implied, rather than explicitly stated'.

An office-holder, such as a director is not a 'worker'. An office-holder has no contract or service agreement in relation to that appointment. If the directors carry out a wide range of activities this may be regarded as evidence of a contract of service.

This is the point on which we would like some help from TPR. Its official position is that it is for the company to understand the contractual relationships that exist and apply the pension regulations accordingly.

Hhmm. So it is up to the client to decide but he will expect you to make the decision on his behalf.

If this was my client, I would accept the challenge given to me. For an employment contract to exist there has to be a legal arrangement between the director and the company beyond the arrangement which exists because the individual is an office holder. The extra arrangement must involve obligations on both sides - the obligation for the director to work for the company and be under its control and the obligation for the company to provide and pay for that work. It is up to the director and the company concerned to decide whether or not they wish to create a relationship of employer and employee. They do not have to do so.

In the absence of any explicit contract drawn up between the director and the company, then, in the context of two director-shareholders running the business, it is reasonable to conclude there are no employment contracts.

If I wanted some 'authority' for my conclusion, I would go to the same source as I commented on in my previous blog - the correspondence between the ICAEW and the Department of Trade and Industry in 2000 on the applicability of the National Minimum Wage to directors. You can read my previous blog here.

Is there another option?

Yes there is. What if contracts could be drawn up between the directors and the company for the work undertaken but these contracts do not have many of the features one would expect in an employment contract? If so, the directors will not be workers due to reason (b) above - any director who does not have an employment contract is not a 'worker' even if they do a lot of work for the company. The contract could, for example, state:

  • there is no intention to create an employment relationship
  • there is no entitlement to holiday pay and other benefits expected in an employment relationship
  • there is no obligation on the company to provide work
  • there is no obligation on the director to undertake the work

It can be argued that the advantage of this approach is to make clear the terms under which the work is provided.

We are considering, in Mercia, writing a standard letter(s) that you can send to your micro clients advising them whether they have auto enrolment duties. For those who regularly buy our client letters details will be sent to you when available. If you would like to be told when the letter is available, please email marketing.support@mercia-group.co.uk with the title in the email: AE and directors.

If you want to know what other help we can give you on auto enrolment, please click here.

If you want to find out further details on what a client letter is, please click here.

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