Non-Exec Directors – key considerations

What is a Non-Executive Director?

A Non-Executive Director (NED) is a member of a company’s board of directors who is not intended to be an employee of the company. Typically, such a director will allocate only a portion of their time to the company and their role is more advisory/strategic in nature.

They tend not to be involved in the day-to-day operations of the business. They don’t fill a role in the company’s management structure. They may have an oversight role in relation to the executive directors, advise in relation to directors’ pay and benefits, and have responsibilities for governance. They will be subject to the usual directors’ duties imposed by law. They won’t have a written service contract or employment contract but may have a “letter of appointment”.

It is crucial for organisations to understand the legal status of all individuals within the business (including NEDs) –  whether employee, worker, or self-employed. This allows an assessment of what employment rights the individual has. Determining status involves considering the full factual matrix and understanding the parties’ relationship.

As an office holder, fees to a NED should be paid under deduction of PAYE, whatever their status is otherwise.

Is a non-executive director likely to be an employee?

If the parties refer to the individual as a “non-executive director” that does not conclusively establish that they are not an employee. If, in reality, the individual is working in the business, under the control of the Board, perhaps with fixed working hours, the relationship will inevitably bear some of the hallmarks of employment.

The key tests for employment status are:

1. Are there mutual obligations? Must the company provide and pay for work and the individual carry it out?
2. Does the company exercise control over the individual – how, when and where they do the work?
3. Is there an obligation on the individual to do the work personally and not send a substitute?
4. Do the other circumstances suggest employment?  For example is the individual integrated in the organisation?  Must the individual work for one company exclusively?

Companies entering into a relationship with NEDs will want to ensure that these factors don’t apply.

Is a non-executive director likely to be a worker?

A worker is an individual engaged under a contract to personally provide services to another, other than a customer or client of their own business.

A NED could potentially be a worker, and it is not uncommon for NEDs to bring claims relying on worker status. In the case of Catt v English Table Tennis Association Ltd, in 2022, a NED dedicated 10-15 days annually to his duties, attending board meetings and other specified events in exchange for an honorarium and expenses. He sought to pursue a tribunal claim alleging whistleblowing detriments, which required him to show that he had the status of a worker.

The employment tribunal ruled he was not a worker as he was not subordinate to the organisation, or vulnerable. The Employment Appeal Tribunal overturned this decision as the ET had failed to engage with the detail of the case and had placed too much emphasis on a few factors  The EAT noted that NEDs in different organisations may have widely different responsibilities and relationships, and each case needs to be considered on its own facts.

Each case requires individual scrutiny but if organisations wish to avoid their NEDs being classed as workers, they should act with care and take advice.

Why is this important?

A correct understanding of a NED’s status will highlight what rights the individual has.

An employee has a number of key rights such as unfair dismissal and redundancy pay.

Non-employee workers don’t have these rights but have other important rights such as:

• Minimum wage
• Paid leave and rest breaks
• Protection from discrimination
• Protection from detriment for whistleblowing etc

If a company fails to appreciate an individual NED’s status, and does not give effect to these rights, there is the potential for legal liability and ET claims to arise.

When appointing NEDs organisations should:

Ensure NEDs have clear roles and responsibilities focused on oversight and strategic guidance rather than day-to-day running of the business.

• Avoid exercising control over what the NED does (save for a requirement to attend board meetings at a particular time and place
• Ensure that the NED is not involved in day-to-day operations or takes on a management role.  However, a NED might reasonably be asked to become involved at the appeal stage of a disciplinary or grievance matter.
• Ensure that NED appointment letters are clearly drafted, emphasising their non-executive, advisory nature and the lack of control.
• Provide NEDs with appropriate fees for their services, distinct from employee wage structures.   Don’t provide employee benefits.
• Make clear that the NED is allowed (and expected) to act in a similar role for other (non-competing) businesses
• Regularly review and adjust NED arrangements as required.

Seek legal advice to ensure that both the written NED documents, and the relationship in practice, do not reflect the usual features of worker or employee status. If you have any questions regarding this topic do not hesitate to contact a member of BTO’s Employment Team.

This update contains general information only and does not constitute legal or other professional advice.