I’m a limited company IT contractor, can I receive holiday pay?

The role of a company director is pivotal in the running of a business, and so holiday pay – or the director’s eligibility to holiday pay – seems like a fair question.

But in the case of a contractor’s limited company, or Personal Service Company (PSC), the contractor is often the only person involved with the company, being both the director and shareholder.

And for a sole director shareholder company, holiday pay is not something that is normally considered, writes Helen Christopher, founder of accountancy advisory Beansprout Consultancy.

Generally, a director will pay themselves an annual salary at a tax-efficient level and top up with dividends as a shareholder, so holiday pay just doesn’t really feature as an option.

But should directors of PSCs automatically assume holiday pay doesn’t apply to them? Well, it all depends on their employment status in terms of employment law.

Let’s break it down in clear, simple terms.

Who is a company director?

A company director is a person appointed to manage a company’s affairs.

They are legally responsible for the company’s operations and must act in the company’s best interests.

Directors can be executive i.e. involved in daily operations, or non-executive i.e. providing oversight and strategic guidance without daily involvement.

Employment status of directors

Employment status matters as it determines how employment law (and tax law) is applied to the individual’s situation.

Remember, it is possible to have a different employment status for employment and tax law, but that is a large subject not for this article!

Once appointed as a company director, a person automatically becomes an “office-holder,” irrespective of whether they have an employment contract or get paid by the company.

Office-holders may or may not be an employee.

Employees are legally entitled to holiday pay, but office-holders are not.

Determining employment status

Where a director is hired and paid for their services, they will likely have a director’s ‘service agreement,’ also known as a ‘service contract,’ in place.

This is very similar to an employment contract and generally sets out terms that would otherwise be contained in a standard employment contract, along with additional duties relating to their role as office-holder.

Company directors with a written service agreement will normally be considered employees as well as an office-holder.

We have already acknowledged that many small companies are founded and owned by one individual, so there is often little reason to create an employment relationship or put in place an employment contract between the director and the company. In this case the director will generally not be considered an employee, just an office-holder.

However, the lack of service agreement doesn’t automatically preclude the director from being an employee and in a dispute, the courts will look at various factors to determine employment status including whether:

  • they are required to work regularly.
  • they work a minimum number of hours.
  • they get paid for time worked.
  • they can or cannot send a substitute to carry out their work.
  • they can join the company pension scheme.
  • the company’s HR policies apply to them, for example, disciplinary procedures.
  • they work at the company’s business premises.

Holiday pay entitlement as a…

Employee director

If a director is classified as an employee, they are entitled to the same statutory benefits as other employees, including holiday pay.

This means they are entitled to a minimum of 28 days of paid holiday per year, which includes public holidays.

The exact amount can be higher if stipulated in the employment contract.

Non-employee director

For directors who are not employees but rather office-holders, the holiday pay situation is different.

They do not automatically qualify for statutory holiday pay.

However, they might receive some form of remuneration or fee for their services, but this does not equate to ‘holiday pay’

Holiday pay as a limited company worker, in a nutshell

So, in summary, if a director is classified as an employee, they enjoy the same rights and benefits as other employees, including holiday pay.

If they are merely office-holders, they do not have these statutory entitlements. For most limited company / PSC directors, including those we advise, this means no legal entitlement to holiday pay, meaning any time out is funded by retained profits or personal savings.

Wednesday 22nd May 2024
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Written by Helen Christopher

Chartered accountant Helen Christopher is a former head of finance & accounting and a former chief operating officer, who has worked for 28 years in corporate roles. Helen qualified as an accountant in 1995 with Price Waterhouse (now PwC) – the year she became a member of the ICAEW, and seven years prior to her becoming an FCA. Also a local magistrate for the Department of Justice, Helen specialises in tax, accounting and HMRC advice for small companies and their owners. 
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