Director Vs Employee: Understanding Dual Roles In New Zealand Businesses

If you run a small business in New Zealand, it’s pretty common to wear more than one hat. You might be a company director who also does the day-to-day work (sales, ops, admin, even the “unclog the printer” jobs).

That’s where the question of a director employee dual role comes in: are you acting as a director, an employee, or both? And if it’s both, what does that mean for pay, tax, decision-making, liability, and your legal documents?

Getting this right from day one can save you a lot of headaches later-especially if there’s a dispute between co-founders, a shareholder exit, a restructure, or the business hits financial pressure.

What Does “Director Employee Dual Role” Actually Mean?

In a company, a director is appointed to help govern and oversee the company. An employee is engaged to perform work under an employment agreement, usually under direction and control, in exchange for wages or salary.

A director employee dual role is where the same person is both:

• A director (with governance responsibilities and directors’ duties); and
• An employee (with employment rights and obligations under an employment relationship).

This happens a lot in:

• Founder-led startups and small companies
• Family businesses where a parent is a director but also “on the tools”
• Companies where a director takes on a salaried “general manager” or “operations manager” role
• Businesses with working directors but outside investors/shareholders

One of the biggest misunderstandings we see is assuming that being a director automatically means you’re “not an employee”. In reality, you can be both-but you need to set it up clearly.

Why The Distinction Matters

When you’re wearing two hats, the rules you’re subject to can change depending on what you’re doing:

• When you vote at a board level, you’re acting as a director.
• When you perform operational work (and get paid for it), you may be acting as an employee.

If it’s unclear, you can end up with disputes like:

• “Was that payment wages, drawings, or a director fee?”
• “Can the board remove them from employment but keep them as a director?”
• “Do they get notice, holiday pay, or redundancy?”
• “Are they personally liable for decisions they made while the company was struggling?”

Director Vs Employee In NZ: What’s The Legal Difference?

At a high level, the director role is about governance, and the employee role is about working in the business. But the consequences are very different.

Directors: Governance And Duties Under The Companies Act

Directors are governed primarily by the Companies Act 1993. While the Act is detailed, the big takeaway is that directors owe duties to the company, including duties that relate to acting in the company’s best interests and managing risk appropriately.

That “best interests of the company” concept becomes especially important when:

• There are multiple shareholders (not just you)
• The company is considering taking on debt
• The business is under financial stress
• There’s a potential sale or restructure

Directors can also face personal risk if they fail to meet their duties-this is one reason dual roles need to be structured carefully. (If you want a practical overview of what that can look like, this personal liability explanation is a helpful starting point.)

Employees: Employment Rights And Minimum Entitlements

Employees are governed by New Zealand employment law, including (most commonly):

• Employment Relations Act 2000 (good faith obligations, processes, disputes)
• Holidays Act 2003 (annual holidays, sick leave, public holidays, etc.)
• Wages Protection Act 1983 (rules around deductions)

If you are genuinely an employee (even if you’re also a director), you may be entitled to minimum employment rights like leave and notice. That’s why it’s crucial to have a clear Employment Contract in place that matches what’s actually happening in the business.

“But I Own The Company-Can I Really Be An Employee?”

In practice, yes-many working directors are also employees. But ownership and employment status are not the same thing, and the label you use doesn’t always decide the outcome.

You can be:

• a director but not an employee (e.g. you attend board meetings and may receive director fees);
• an employee but not a director (e.g. a hired general manager); or
• both (e.g. founder/director who also works full-time as CEO on salary).

The key is making sure your documents, pay arrangements, and governance structure all line up, so there’s less room for conflict later.

How Do You Set Up A Director Employee Dual Role Properly?

If you’re setting up (or cleaning up) a director employee dual role, think of it as building two clear lanes: one for governance decisions and one for the employment relationship.

1. Separate The “Director” Engagement From The “Employee” Engagement

A director’s appointment is usually recorded through company processes (board/shareholder resolutions, Companies Office records, and your internal governance documents).

For the employment side, you’ll typically want a tailored employment agreement and supporting policies/processes that reflect your business reality.

In some cases, directors also have a separate service arrangement dealing with duties and remuneration for their director role-particularly where responsibilities go beyond a standard director appointment. Depending on your structure, a Directors Service Agreement can help clarify the boundaries.

2. Make Sure Your Shareholder/Founder Documents Match The Setup

Dual roles often become a problem when the “people documents” are missing or inconsistent-especially when there are two or more founders.

For example:

• If one founder is paid a salary and the other isn’t, how is that justified?
• If one founder is removed as an employee, do they keep their shares?
• If a founder leaves, is there a requirement to transfer shares back?

These issues are usually addressed in a Shareholders Agreement, which sets expectations early and gives everyone a roadmap if things change.

It’s also common for companies to adopt a Company Constitution so the rules around governance, voting, and share rights are clear (and not just whatever the default Companies Act rules are).

3. Document Decision-Making Properly (Especially For Pay Changes)

If you’re both a director and an employee, it’s important to keep good records showing “who decided what” and in what capacity.

For example, if you’re increasing your salary, a good process might include:

• a board meeting or director resolution approving the remuneration change (director hat);
• an employment variation letter confirming the new terms (employee hat); and
• payroll updates and correct tax treatment (compliance hat).

This doesn’t have to be complicated, but it does need to be consistent. Clean paperwork can be the difference between a smooth business sale and a messy due diligence process.

Common Risk Areas For Small Businesses With Dual Roles (And How To Avoid Them)

Dual roles aren’t “bad”-they’re normal. The risk comes from uncertainty, informal arrangements, and misunderstandings between people who started out on good terms.

Conflicts Of Interest

A director has duties to act in the best interests of the company. But an employee naturally looks after their own employment interests too (pay, security, performance management outcomes).

This can create friction when, for example:

• the board is considering cost-cutting and the director-employee’s role is affected;
• there’s a dispute between founders and one wants to remove the other from employment;
• a director-employee has access to sensitive information and is starting a side business.

A practical starting point is having clear rules and disclosure expectations through a Conflict of Interest Policy (and ensuring it’s actually followed).

Pay, Tax, And “What Is This Payment?” Problems

Working directors can be paid in different ways, including salary/wages (as an employee), director fees, shareholder drawings, or dividends.

The right method depends on your company structure and the specific tax and accounting advice you receive, but legally you want to avoid confusion where payments are made without clear labels or approvals.

From a business owner’s perspective, this matters because unclear remuneration can lead to:

• tax compliance issues (for example, whether PAYE applies)
• shareholder disputes (especially if other shareholders think payments are excessive)
• problems when selling the business (buyers want clean records)

Performance Management And “Can We Manage Them Like Any Other Employee?”

If your director is also employed in an operational role, you still need fair and lawful processes if there are performance issues.

That’s where businesses can get stuck: it feels awkward to performance-manage a founder, or a fellow director, or a family member.

But informality is often what creates the biggest legal risk. Under New Zealand employment law, employers are expected to act fairly and in good faith, including following a reasonable process.

Good documentation helps here, including clear role descriptions, KPIs where appropriate, and well-drafted employment terms.

Termination, Resignation, And “Which Hat Are They Taking Off?”

A key thing to understand is that:

• Ending someone’s employment doesn’t automatically remove them as a director; and
• Removing someone as a director doesn’t automatically end their employment.

In other words, you may need two separate processes.

Where things get especially tricky is when the relationship breaks down and the business wants a quick exit. It can be tempting to rush this-but that’s often when disputes and personal grievances arise.

It’s also worth thinking ahead about notice periods and exit obligations. Even in ordinary employment relationships, notice is a common pain point-this article on payment in lieu of notice is a useful reminder that you can’t just “swap” notice for money unless it’s handled properly and the contract allows it.

Insolvency Pressure: Directors’ Duties Don’t Pause

If the company is under financial stress, the dual role can feel personal-because you’re trying to keep the business alive while also keeping yourself employed.

This is exactly when governance discipline matters most. Directors need to be careful about decisions that could expose the company (and potentially the directors) to greater risk, including taking on obligations the company can’t meet.

In practical terms, if cashflow is tight, it’s often better to:

• document decisions clearly;
• take early advice (legal and accounting); and
• avoid “silent” arrangements, like stopping pay without a written variation.

What Legal Documents And Policies Should You Have In Place?

If you want your director employee dual role to be stable (and scalable), aim to have a clean set of documents that cover ownership, governance, and employment.

Depending on your business, that might include:

• Employment agreement for the working director role (salary, duties, confidentiality, termination): Employment Contract
• Director engagement document if needed for director duties and remuneration: Directors Service Agreement
• Governance and ownership rules (especially with multiple founders/investors): Shareholders Agreement
• Company rules around director/shareholder powers and procedures: Company Constitution
• Workplace policies dealing with conduct and disclosure (particularly important when someone has influence and access): Conflict of Interest Policy

Not every business needs every document on day one-but if you have (or plan to have) multiple owners, staff, or investors, putting the right foundations in place early is usually a smart move.

A Quick Reality Check: “Do We Really Need This If Everyone Trusts Each Other?”

Trust is great. But good documents aren’t about expecting the worst-they’re about avoiding misunderstandings and keeping your business running smoothly if someone gets sick, wants to step back, or you need to make fast decisions under pressure.

Think of it like insurance for your working relationships and decision-making process. You hope you never need it, but you’ll be glad it’s there if you do.

Key Takeaways

• A director employee dual role is common in NZ small businesses, but it needs clear boundaries so you know when you’re acting as a director versus an employee.
• Directors are governed by the Companies Act 1993 and owe duties to the company, while employees have rights and protections under New Zealand employment laws (including minimum leave and fair process expectations).
• Dual roles can create practical risk around conflicts of interest, pay and tax treatment, performance management, and exit/termination, especially when there are multiple founders or shareholders.
• Clean documentation makes decision-making easier and can prevent disputes-particularly an Employment Contract, and often a Shareholders Agreement and Company Constitution as the business grows.
• Ending someone’s employment and removing someone as a director are usually separate processes, and you’ll want advice before taking steps that could trigger an employment dispute.
• If the business is under financial pressure, directors’ duties don’t stop-good governance and early advice are key to protecting the company (and the people running it).

Important: This article is general information only and isn’t legal or tax advice. Because director/employee arrangements and remuneration can have different legal and tax outcomes depending on your structure and circumstances, it’s a good idea to get legal advice and talk to your accountant before making changes.

If you’d like help setting up (or untangling) a director employee dual role in your business, we’re here to help. Reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.