Can a Co-Director in a 50/50 Partnership Claim 3.5 Years of Annual Leave with No Employment Contract?

Ozgrabber on 23/07/2025 - 12:46
Last edited 23/07/2025 - 13:26 by 1 other user

Hi everyone, I'm currently in the process of finalising the sale of a business that I co-own with another director.

We have a 50/50 partnership in a Pty Ltd company, and both of us have worked full-time in the business since day one. However, there has never been any written or verbal employment agreement, and we’ve always shared responsibilities and profits equally as co-directors.

We’ve paid ourselves a Director fee regularly and a causal wage ( No Employment contract), all income has come through profit distributions and director fee. Now that the business is being sold, the other director is attempting to claim 3.5 years’ worth of annual leave pay as part of their entitlement.

Is a director entitled to claim annual leave if there is no employment contract?

From what I understand, directors are not automatically entitled to annual leave under the Fair Work Act unless they are also employees under a separate contract — which we’ve never had.

Would appreciate any legal or accounting insights into how this should be treated — especially in the context of finalising a business sale and partnership exit.

Thanks in advance!

Financial

Comments

  • DashCam AKA Rolts on 23/07/2025 - 12:53
    +48

    You claim the same then as it's 50/50 Partnership.

    • Duckie2hh on 23/07/2025 - 12:54
      +2

      This

    • rambutann on 23/07/2025 - 12:58
      +3

      Yeah exactly.. play the same game if that's how they want to play it..

      Ultimately the answer is no they cant claim it, but given the 50/50 ownership, I would do the same thing.

      • Ozgrabber on 23/07/2025 - 13:04

        I am in the process of selling the business for a certain value and the other director have agreed to that value and wants to takeover the business, now suddenly he wants to claim 3.5 years of annual leave, with out having and verbal or written contact and want to deduct that amount from sale value as showing that as expense from business

        • rambutann on 23/07/2025 - 13:12
          +39

          You claim the same thing - which will offset his claim.

        • mbck on 23/07/2025 - 16:30
          +22

          Actually simce he wants to buy the buseinees from you (ie, take over your half), youre the one who should be claiming the 3.5 years annual leave. He's still in the business so he can continue accruing. Another 4 years and he'll have long service!

        • CodeXD on 23/07/2025 - 17:15
          +8

          How can he claim annual leave when he isn't using it or leaving the company?

          • MrFrugalSpend on 23/07/2025 - 22:56
            +3

            @CodeXD: general practice when a business is sold is accrued entitlements are adjusted for as the new owner has to honour them for continuing employees.
            I.e. they accrued 6 weeks leave working for you, then someone buys it and the employee stays on, as that person is still entitled to paid leave it is adjusted for in the selling price so the seller pays.

    • MrFrugalSpend on 23/07/2025 - 22:57
      +13

      I think we should start with getting the facts right - It is technically NOT a "Partnership" if it is a "Pty Ltd" company. In a partnership structure, each partner is personally liable for the business' debts, it is not a separate legal entity.

      I'm guessing from what OP has said they are both shareholders and both directors of a proprietary limited corporation (limited by shares) which is a separate legal entity.
      Also, presuming it is, what is not known if it is a share sale, or asset sale.

      In a share sale, the buyer acquires ownership of a company by purchasing its shares, effectively taking over the entire entity, including all its assets and liabilities.
      In an asset sale, the buyer purchases specific assets and liabilities of the business, rather than the company itself and a transition process for transferring them is undertaken.
      Most arms-length / third-parties buying small businesses do an asset sale so they can be released of inheriting the companies liabilities… in such case as well as transferring all its IP, contracts, name, various assets etc… they effectively re-hire the staff that are staying with the business, but usually agree to honour previously accrued leave entitlements,… that's where it is a common concept to value and adjust for inheriting those leave entitlements accrued under the previous owner so the leave can still be taken with the new corporation that has purchased and will be operating the sold business going forward… But…

      where one person is already in the business it is far more likely to be a share sale where one shareholder is buying more portion of shares off another shareholder (or in this case, all of them). Hopefully there is a shareholders agreement that dictates how this works! In such case, the shares have a value, and that value may have already taken into account the liabilities of any leave owed (as it should be reflected on the books). The employees stay working for the same company so nothing changes other than shareholders transact based on share value and control/voting rights may change as well as Directors resign.,, However these guys sound a bit of an informal setup that haven't been documenting things properly so it is hard to say and probably just needs to be agreed. However it would be fair to say both are entitled to leave and if the seller is retiring from the business may be entitled to be paid out as well to be fair.

  • star-ggg on 23/07/2025 - 12:57
    +24

    Have both you and your business partner signed an agreement to abide by the judgments handed down by the court of OzB?

    • jv on 23/07/2025 - 13:31
      +6

      Adjourned…

  • djsweet on 23/07/2025 - 13:03

    If you had a "casual" wage, then what would 3.5 years annual leave actually mean? If you are selling the business why bother taking money out as an entitlement, surely you will get the money as a proceed of the sale. Ie you will get the money one way or another… So why does it even matter? Just make sure you both get the same (ie 50/50)

    • Ozgrabber on 23/07/2025 - 13:05

      I am in the process of selling the business for a certain value and the other director have agreed to that value and wants to takeover the business, now suddenly he wants to claim 3.5 years of annual leave, with out having and verbal or written contact and want to deduct that amount from sale value as showing that as expense from business

      • djsweet on 23/07/2025 - 13:07
        +6

        So he wants to take an additional 3.5y of leave paid to him in addition to the sale value. Okay. Well then take the same. Whats the difference. He takes (say 40k extra out of the sale money - which would go to you). You take out 40k from the same bucket and give it to yourself. Works out even does it not?

        • Ozgrabber on 23/07/2025 - 13:11
          -2

          We have liabilities to be paid which will cover the business sale value. There is no money left to share.

          • mskeggs on 23/07/2025 - 14:06
            +15

            @Ozgrabber: That is equally his problem if you both claim the holidays.
            When you make the identical claim it will become apparent to him the issue.

  • fantombloo on 23/07/2025 - 13:04
    +9

    Can a Co-Director in a 50/50 Partnership Claim

    They can claim whatever they want. You can counterclaim whatever you want. Sorting it out is a different matter.

    I've seen friendships and even family destroyed by this kind of thing. I hope you're both fair. Good luck.

  • Trying2SaveABuck on 23/07/2025 - 13:26
    +1

    Makes no difference you would be entilted to it too

  • Dollar General on 23/07/2025 - 13:29
    +15

    Spend money on decent legal advice. Getting poor advice from bargain hunters can cost you more

    • Jackson on 24/07/2025 - 10:40
      +2

      People need to include a disclaimer with these "get legal advice" statements, some legal practioners are terrible and cost a tonne of money. maybe speak to your accountant first if you have one

  • Protractor on 23/07/2025 - 13:50
    +4

    Why would you even ask here?

    (BTW, that may actually explain why the other guy is the better business person.And likely to get the 3.5 years worth of AL cash)

  • AustriaBargain on 23/07/2025 - 13:51
    +1

    Does it affect the sale price? If not, you should just claim the same. You both probably should speak to a lawyer though so cover your asses.

    • cauilfield on 23/07/2025 - 15:03

      yeah as it would effectively become a liability.

  • Muppet Detector on 23/07/2025 - 14:04
    +1

    What is a causal wage?

    Do you mean a casual wage?

    To determine leave entitlements, Fair Work will look to determine if the director was also an employee of the company.

    Director duties and associated payments (admin duties in operation of the company) are different to duties of an employee and their payment.

    You have said "we worked full time"

    You say he has drawn a casual? wage in addition to director fees

    An employment agreement does not need to be in writing and can exist without express reference based on the nature of the relationship.

    Is a director entitled to claim annual leave if there is no employment contract?

    Yes, but I don't know if all directors are entitled to claim annual leave.

    The information that you have provided here indicates that Fair Work could recognise an employment relationship, but I don't know enough to be able to say if that employee relationship is casual or full time.

    Usually, a casual employee is not entitled to paid leave

    However a part time employee is entitled to pro rata entitlements and a full time employee is entitled to paid leave, including annual leave.

    It is well accepted that a full time employee would be entitled to four years paid leave each year.

    How much this is will depend on what income they received as a full time employee (ie if those profits or payments equaled $100 a week, then that is the rate at which annual leave would be paid.

    Note that annual leave may also attract leave loading as well.

    In short, your partner definitely has an argument to present to Fair Work and seem to have grounds to be established as an employee.

    However, from the info you've provided, I can't work out what type of employee that may be (casual or full time), or what amount any leave entitlement may be.

    There is a bunch of precedent about this where FairWork have determined whether or not a company director was also an employee entitled to the usual employee benefits.

  • Muppet Detector on 23/07/2025 - 14:18
    +1

    From what I understand, directors are not automatically entitled to annual leave under the Fair Work Act unless they are also employees under a separate contract — which we’ve never had.

    You may have that additional contract. The nature of the work and payment method/procedure may give rise to an implied contract that an employee relationship does exist.

    A quick google turned up 14 Fair Work cases where they were asked to determine exactly that.

    Would appreciate any legal or accounting insights into how this should be treated — especially in the context of finalising a business sale and partnership exit.

    I am neither a lawyer or accountant. I'm a random stranger on the internet offering you my free opinion.

    Opinions are free, but you need to pay for this type of advice ;)

    My last thoughts are, what are the terms and conditions in the contract of sale for the business?

    If I were in your position, I'd be asking my lawyer

    1. If partner was owed payment for annual leave, wouldn't he become an unsecured creditor of the business?

    2. As it is the business who owes him this money, you would both be liable for the payment, so at a maximum, only half of that leave payment should be payed by you. As an equal partner, he should be liable for half the payment.

    3. Once the business is sold, any outstanding debts are the responsibility of the new owner, aren't they?

    4. If the initial agreement did not include this payment, you need a different contract which would likely change the sale price of the contract.

    • Some Guy on 28/07/2025 - 18:28

      If I were in your position, I'd be asking my lawyer

      How's OP know who your lawyer is?

      • Muppet Detector on 29/07/2025 - 03:16
        +1

        OP doesn't need to know who my lawyer is.

        I am not in his situation, I merely said that if I were in his situation that I would use my lawyer.

        This thread is all about OP. This is his situation. He may not like my legals, he needs to use ones with whom he is comfortable and he believes will have his best interests at heart.

        • Some Guy on 29/07/2025 - 12:33

          OP doesn't need to know who my lawyer is.

          Then why you say OP should ask your lawyer?

          • Muppet Detector on 29/07/2025 - 13:48

            @Some Guy: I didn't.

            I said that if i was in the OP's position, then I'd be asking my lawyer.

            The corollary of that is that IMO, as OP is in the position he describes then OP should ask OP's lawyer for advice.

            If my lawyer and OP's lawyer happen to be the same lawyer, then sure, OP can ask my lawyer because my lawyer is also his lawyer.

            But in the unlikelihood that this is true, OP would be crazy to ask my lawyer about OP's situation because my lawyer won't have any idea about what OP's situation is. For that reason, **OP should askhis lawyer about his predicament because OP's lawyer will know what OP is talking about.

            Do note that if OP doesn't know how to contact our lawyer, then i'm not going to tell him how to contact our lawyer, because by default, our lawyer will become my lawyer and i will no longer be required to share my lawyer with the OP.

            Additionally, if both of us using the same lawyer somehow becomes a conflict of interest,i call dibs on my lawyer, because i found him first, i know how to contact him, I really doubt that OP knows who he is anyway, and playing "scissors, paper, rock, lizard, Spock seems to be quite an immature way to sort out ownership of my lawyer, and I always win anyway.

            I realise that I sound greedy by preferring not to share my lawyer with the OP, some may even see that as a lack of compassion, but lawyer's aren't a scarce commodity and finding one these days is like shooting fish in a barrel.

            However, despite my many shortcomings, i am still a big enough person to help another OzB member out and suggest that OP should definitely ask his lawyer about his predicament but stay away from my lawyer, because OP's predicament is not my predicament and because i'd like to keep it that way.

            Additionally, my lawyer is too damn busy doing my stuff to make sure that i don't end up in the same predicament that OP has found himself in, so OP really does need to find his own lawyer and forget about entertaining the idea that he has any hope of using my lawyer.

            As you can see, we have now come full circle and it is clear that the OP doesn't need to know who my lawyer is.

  • JuanLove on 23/07/2025 - 14:39

    Mate you're selling for agreed value. If you don't agree with that the company owed him money, then price your buyout accordingly. If he says no, then it's no sale. He can embezzle as much as he wants when you're gone.

    If he wants to be a dick, remember the company is a distinct legal entity. You are not the company. Further, directors have legal obligations that he can't decide to ignore. He needs to act in the best interest of the company and he needs to keep appropriate records.

    https://www.asic.gov.au/for-business-and-companies/companies…

    If he wants to claim the money and you think it's not due, tell him he'll need to sue the company. But then you'll direct the company to sue whoever the director was at the time who directed the company to be negligent in paying their entitlements and negligent in reporting on their debts in the annual report (which was him) and report him to ASIC.

    • Protractor on 23/07/2025 - 14:53
      +3

      To be fair we really don't know if OP, or other guy, is the dick. The other guy isn't here seeking advice (yet!) , so there's that.

  • try2bhelpful on 23/07/2025 - 15:28
    +2

    Make sure everything associated with the sale goes through a contract lawyer and tell your partner the cost of that will go through the company books before the sale. You need to make sure that you aren’t hit with costs you don’t currently know about. This is already sounding shaky.

  • AustriaBargain on 23/07/2025 - 15:42

    How much are yous selling the company for anyway?

  • JohnSy on 23/07/2025 - 16:36
    +1

    I am guessing you have a company with two directors, both you and the other person are shareholders of the company, and you both own equal numbers of ordinary shares. Its not really a partnership agreement. It's just a company owned by 2 people that distributes money evenly to themselves.

    If thats is the case, I'm not sure why you used directors fees / casual wage for remuneration - why not just pay franked dividends each year out of the profits to yourselves evenly?

    For the sake of clarity, is the 3.5 years of annual leave pay 20 x 3.5 = 70 days of pay, or is it 3.5 years of pay?

    I am wondering why the other director wants to claim annual leave payments. For instance, do they believe they have worked more hours on the business than you, and they are trying to rectify this now? Perhaps for the past 3.5 years, you went on holidays for one month every year, and they did not? It seems like a strange request to claim the leave without there being an underlying reason. Perhaps they have a Xero account which shows they have 3.5 years of annual leave entitlements that they never claimed, and they think now is the time? It's all very strange.

    • Ozgrabber on 23/07/2025 - 16:43
      +1

      For the sake of clarity, is the 3.5 years of annual leave pay 20 x 3.5 = 70 days of pay, or is it 3.5 years of pay?

      It is 70 days of pay.

      • JohnSy on 23/07/2025 - 20:02
        +5

        Ok. So, putting yourself in their shoes, why do you think they believe they are justified in claiming 70 days of pay more than you?

    • Crow K on 23/07/2025 - 17:31
      +1

      I'm not sure why you used directors fees / casual wage for remuneration - why not just pay franked dividends each year out of the profits to yourselves evenly?

      I'd presume it's easier to keep track of their recurring monthly drawings as wages to reflect the ongoing business expenses, plus more importantly there may not have been profits or franking credits available to the company anyway

      • JohnSy on 23/07/2025 - 19:58

        Good point - I guess it depends on the frequency of payments required.

        With all things being equal, if those amounts were not paid out as director fees or casual wages they would have ultimately generated retained company earnings of equal value, which, after company tax was paid, could have been distributed as franked dividends.

        • Crow K on 23/07/2025 - 22:12

          Supposing a small start-up business were to have profits and company tax payable (usually not the case, especially at the beginning)

  • ihbh on 23/07/2025 - 16:44
    +2

    An alternative, is you buy the business for the agreed amount and claim the AL. Ask the other director what he thinks of this situation?

    • Protractor on 23/07/2025 - 17:07
      +2

      Maybe the other partner did all the hard yards and the OP had holidays during their partnership? As usual, half a story demanding all the free advice.

  • bluesky on 23/07/2025 - 17:06
    +1

    am in the process of selling the business for a certain value and the other director have agreed to that value and wants to takeover the business

    If a contract is already executed between you both, for you to sell to the other director at the agreed value, I can see why this is worth you pursuing. Because even if you claim the same annual leave as the other director, your take home amount would have decreased. But if it is not contractual yet, you can always renegotiate a value to adjust this back - if you feel you are short-changed.

    In addition, this is probably not a legitimate business expense, and this director may have no intention to put it down as an expense in the company income statement later (when it is prepared), but this could be a tactic to reduce your take away amount now. Why not ask the accountant who prepares your company financials, whether this is a legitimate business expense? If the reply is no, you can provide this info to the other director.

  • mskeggs on 23/07/2025 - 18:43
    +7

    I‘m not sure why you are not happy with the suggestions above, but:
    - Directors are not full time employees and do not attract paid leave. Their remuneration is for the role they play, and does not vary if they need to spend more or less time on their duties.
    - Casual employees do no accrue leave, the casual rate includes and uplift to cover annual leave, sick leave and other entitlements.
    - If you have agreed to sell the business to your partner in exchange for extinguishing your liabilities, this includes any past leave obligations.
    - If your partner is intransigent, you can respond that you will claim identical entitlements, and that you propose you each cover your own.

    I also suggest you pay a lawyer to draw up a deed of release for you both to sign so any future issues like this are definitely settled. Otherwise, you run the risk of a creditor or someone pursuing you in years to come if your ex-partner says you were still responsible.

  • joka on 23/07/2025 - 19:58

    Do you think the business partner is reading this thread?

  • 82norm on 24/07/2025 - 08:28
    -1

    Better get a lawyer son, a real good one. This aint gonna end well.

  • adomental on 24/07/2025 - 09:33
    +1

    So many questions that need answering first.

    Most importantly, were you a partnership or a company? You've used both terms interchangeably, but they are very different legal entities.
    Sounds like you were a company, were you both shareholders? Both directors?
    What does "paid through profit distributions": mean? Do you mean partnership distributions, or company dividends?
    Were these wages/directors fees declared anywhere, IE through Single Touch Payroll?
    Did you pay the other employee entitlements such as superannuation, annual leave, sick leave etc?

    Honestly, you need to speak to a real professional, not a internet forum.

  • mungas on 25/07/2025 - 09:58
    +2

    Hey interesting one. A few people have pointed it out above, you need to clarify exactly what your ownership structure is. A company cannot be a partnership (under common/tax law). It sounds like you both hold equal shares in a private company.

    Secondly, directors (as far as I've seen in industry) are not entitled to any employee benefits. If they are hired in a director capacity, they are not entitled to benefits.

    The issue will lie as to whether this person considers themself an employee under law. I.e. did they perform employee duties, however were never called an 'employee'. This is the same issue the gig economy has faced all these years, where 'contractors' were challenging their employment status, to access benefits.

    I would recommend you consider engaging legal advice who specialise in employment. Here they are likely to provide you a forum to discuss what your roles and responsibilities were. Even if a director contract exists, and this director has a clause which broadly acknowledges that they were not engaged in an employment capacity, this could still be contested (and I've seen it successfully contested).

    • Some Guy on 28/07/2025 - 18:35
      +1

      By extension, if this person did consider themself an employee, they could then claim unpaid super and whatever else employees get or should get these days.

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