With the start of 2015 we will see a huge increase in the number of companies who need to start the process of Automatic Enrolment (AE) for pensions. As we move through 2015 and into 2016 many small, micro and “nano” employers will become affected by the legislation. Many people ask me whether one or more directors need to be considered as “workers” and as such are they subject to AE legislation.
In the Pensions Act 2008 it states that directors are not treated as workers if they’re not employed under a contact of employment AND there is no-one else in the company employed under a contact of employment.
In other words, if there is only 1 director in a company and no other employees then the company will be exempt from auto enrolment. This makes things much more straightforward as there is no need to set up a workplace pension scheme or submit a declaration of compliance.
It may be that The Pensions Regulator (TPR) still issues a staging date letter, but in this situation you would simply need to contact TPR and tell them you’re a 1 person company and they will go away!!
It should also be noted that if the company employs someone else in the future, there’s a good chance this employee will be classed as a worker, which means the director will be as well.
What is a Contract?
Under law a contact can be written, verbal or sometimes even implied. It may be that there is no formal contract of employment, for example where a married couple are both directors, but it doesn’t mean they aren’t then treated as workers (and possibly subject to AE legislation). They would then need to test themselves against the criteria like any other director.
What if a Director is classed as a Worker?
If it turns out that a Director is to be treated as a worker then all of the AE requirements will apply.
In practice, many directors may only pay themselves a small PAYE salary (at or just above the National Insurance threshold), with the bulk of earnings taken as dividends. In this situation the Director would have to be assessed, but they may not have to be enrolled as their salary would be below the AE threshold.
There would still be some statutory duties to be performed, like designating a pension scheme and giving workers information, but where it’s only a couple of Directors the rules shouldn’t prove too onerous.
What about Equity Partner’s in LLP?
In a recent ruling by the Supreme Court, partners of an LLP may have to be treated as workers for AE purposes. In Clyde & Co LLP v Bates Van Winkelhof, an equity partner in a firm was expelled from the partnership after she reported some suspicious activity as a whistleblower. Under the Employment Rights Act (ERA) 1996, workers who whistleblow are afforded protection against unfair dismissal and Ms Bates van Winkelhof argued that these rights should be extended to her. Ultimately, the Supreme Court agreed with her so that a partner is treated as a worker and receives whistleblower protection.
What has this got to do with pensions you might ask?
Well, following the ruling TPR have now said that an LLP partner is a worker for the purposes of AE and that the ruling is to be applied retrospectively!
This may mean that if there are partners of an LLP that has already staged then they will now need to be assessed as workers. If they are classed as an “eligible jobholder” then they must be enrolled into a pension – and the employer must pay all the contributions due from the staging date.
For a broader look at Automatic Enrolment legislation, we have a guide available on our website - http://farsightfinancial.co.uk/planningguides/financial-planning-guides. If you have any questions about Automatic Enrolemt and Workplace Pensions then please feel free to get in touch. We can have a no-obligation chat about your situation and provide an audit of your company to let you know what your requirements are and how you’ll be affected.