Are Company Directors Counted as Annual Work Units (AWUs)? The SME Definition Doesn't Actually Answer the Question.
At first glance, the question seems simple.
Are company directors included in the Annual Work Unit (AWU) calculation when determining enterprise size under the European Commission's SME Definition and, consequently, under EU REACH?
Many people answer immediately:
"Yes. Directors count."
Others are equally confident:
"No. Only employees count."
Interestingly, neither statement appears anywhere in the legislation.
The more I have worked with enterprise size determinations, the more I have realised that one of the most misunderstood aspects of the SME Definition is not ownership, linked enterprises or financial thresholds.
It is the treatment of directors.
The legislation never mentions directors.
Article 5 of Commission Recommendation 2003/361/EC defines staff headcount as the number of Annual Work Units (AWUs) and states that staff consists of:
employees;
persons treated as employees under national law;
owner-managers; and
partners engaging in a regular activity in the enterprise and benefiting financially from it.
Notice something missing?
The word "director" never appears.
Neither does the ECHA guidance replace "owner-manager" with "director". Instead, it simply repeats the wording of Article 5.
That immediately raises an important question.
If the legislation does not refer to directors, why do so many people assume every director automatically counts?
A director is a legal position.
An owner-manager is an economic reality.
Those are not necessarily the same thing.
A company may have:
executive directors,
managing directors,
shareholder-directors,
nominee directors,
investor-appointed directors,
family directors,
independent non-executive directors,
dormant directors,
statutory directors who rarely participate in the business.
Legally, every one of them is a director.
But are they all owner-managers?
The Recommendation does not say.
The phrase that matters may not be "director" at all.
The legislation repeatedly refers to people working within the enterprise.
It refers to owner-managers.
It refers to partners engaging in a regular activity.
It measures Annual Work Units.
All of these expressions describe what someone does, not merely what title they hold.
Perhaps that is deliberate.
If so, the real question becomes:
What level of involvement transforms a statutory director into an owner-manager for the purposes of Article 5?
Consider three different directors.
Director A
Works full-time.
Runs the company every day.
Negotiates contracts.
Supervises employees.
Makes operational decisions.
Most people would have little hesitation counting this individual.
Now consider Director B.
Owns shares.
Attends quarterly board meetings.
Reviews annual budgets.
Signs statutory resolutions.
Provides strategic advice.
Still straightforward?
Finally, Director C.
Remains on the Companies Register.
No salary.
No management duties.
No operational involvement.
Merely retains the title of director.
Does that person generate one AWU?
Half an AWU?
No AWU at all?
The legislation gives us no direct answer.
What does "regular activity" actually mean?
This may be the most important phrase in the entire discussion.
Article 5 expressly includes partners engaging in a regular activity in the enterprise.
But nowhere does the Recommendation define:
regular;
activity;
engagement; or
management.
The Commission's User Guide explains who falls within the staff headcount but deliberately avoids prescribing objective tests for determining whether somebody's activities are sufficiently "regular". It provides examples of who may be included but does not establish thresholds based on hours worked, board meetings attended or remuneration received.
That leaves practitioners asking difficult questions.
How many hours constitute regular activity?
One day a week?
One day a month?
Attendance at every board meeting?
Strategic decision-making?
Signing regulatory submissions?
Occasional consultation?
There is no checklist.
Now imagine the practical consequences.
Suppose a registrant has calculated:
249 AWUs
€41 million balance sheet
€48 million turnover.
Everything points towards medium-sized status.
Now assume one shareholder-director is included in the AWU calculation.
The headcount becomes 250 AWUs.
Nothing else changes.
Yet the enterprise may cease to qualify as an SME because of the addition of a single individual.
The financial consequences can be substantial.
Under REACH, losing SME status may result in:
higher registration fees;
top-up invoices;
administrative charges;
interest;
years of correspondence with ECHA.
All because of one person's classification.
But how would either conclusion be proven?
This is where the legislation becomes particularly interesting.
Suppose ECHA asks:
Why wasn't this director included?
What evidence demonstrates that they were not engaging in regular activity?
Conversely, if the director was included:
How do you demonstrate that they genuinely were an owner-manager?
Would you rely upon:
employment contracts?
service agreements?
payroll records?
dividend history?
board minutes?
management meeting attendance?
organisational charts?
email correspondence?
travel records?
calendars?
witness statements?
powers of attorney?
signatures on commercial contracts?
Or would regulators expect something entirely different?
The Recommendation provides the legal categories.
It does not prescribe the evidential standard.
Form versus substance.
One theme appears consistently throughout the SME framework.
The assessment concerns the economic reality of the enterprise rather than simply the legal form. The Commission repeatedly emphasises that enterprises must be assessed according to their actual circumstances rather than labels alone.
That principle arguably applies here as well.
Calling someone a director cannot, by itself, answer whether they are an owner-manager.
Equally, someone may exercise all the functions of management without holding an employment contract.
Titles are easy.
Reality is harder.
Perhaps the real question is not whether directors count.
Perhaps the better question is:
When does a director become an owner-manager for the purposes of Article 5?
And if that distinction can determine whether a company remains below or exceeds the 250 AWU threshold, shouldn't every enterprise size assessment explain why each director has—or has not—been included?
I'd be interested to hear how others approach this issue.
If a director receives no salary, owns shares, attends board meetings, signs statutory documents, contributes to strategic decisions several times each year, but has no day-to-day operational role, should that individual be included in the AWU calculation?
More importantly, if ECHA asked you to justify your answer tomorrow, what evidence would you rely on?
Unsure whether your directors should be included in your AWU calculation? Don't leave your enterprise classification to chance. At MSME Compliance Ltd, we specialise in complex enterprise size assessments under EU and UK REACH, helping businesses determine their correct SME status with confidence. If you'd like a technically robust, fully documented and defensible assessment, get in touch—we're always happy to help.
#EUREACH #ChemicalCompliance #RegulatoryCompliance #ECHA #AnnualWorkUnits #EnterpriseSize #SMEDefinition #OnlyRepresentative #RegulatoryRisk #ChemicalIndustry