When is a shareholder also an employee and entitled to pay?
A shareholder of a company may also have employment rights, including the right to be paid, when services are carried out for the company. This was confirmed by the Court of Appeal in its judgment of 5th February 2015 in the case of Stack v Ajar-Tec Ltd. This is an noteworthy case for anyone interested in the problematic question of employment status.
Ajar-Tec, incorporated in 2005, was in the business of supplying audio-visual equipment. The three shareholders, who included Mr Stack, each held roughly equal shares and all were directors of the company. Mr Stack had been approached by the other two as a potential investor because he had been looking for a project in which to invest. Mr Stack’s skills lay in project management but he had some knowledge of audio-visual equipment and installations. He was also experienced in procurement. Mr Stack had another business and also some property interests.
Mr Martin, one of the other shareholders, received a “statement of particulars of employment” under which his salary was stated to be £60,000 per annum. Mr Stack did not have a written contract and received no pay. In late 2006, an internal document described Mr Stack as “Operations Director” defining his role as “overseeing operational aspects of the company”. It recorded him in this role as “full-time” and this was the same for Mr Martin, but not the third shareholder, Mr Kean who was described as “part-time”. When the company needed more space, Mr Stack located premises. Modifications were done through Mr Stack, either direct by him or managed by him.
All three directors were members of the staff private healthcare scheme, had company credit cards and used employee expense forms.
He was removed from his appointment as a director of the company by an EGM in August 2009 and it was not until this point that he sought payment for his work carried out for the company. Mr Stack brought claims for constructive unfair dismissal and authorised deductions from wages. The company maintained that there was never any agreement that he would be remunerated for his work. They relied heavily on the fact that Mr Stack was the major investor and had other substantial business interests.
Mr Keane, the third shareholder, has never asserted that he is an employee of the company. This may be because he was supporting the company in its position, and to claim he was an employee would have undermined this.
The Employment Judge confirmed that a shareholder does not of necessity have operational involvement with a limited company but acknowledged that it is common, particularly in smaller businesses, for the shareholders to also do the work. This means that they can also be employees.
Directors are not always employees, but may become so if there is a contract of employment which may be express or implied. The essential elements of a contract of employment, established over the years by case law, are:
- A degree of control by the employee over the worker which is consistent with an employment relationship.
- An obligation on the worker to carry out the work personally.
- A mutual obligation on the employer to provide work and for the employee to perform the work offered.
Further, the case of Ready-Mixed Concrete v Minister of Pensions of 1968 provided the test that “there must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration, no contract of any kind”.
The Judge was of the view that it made no sense for Mr Stack to deploy his skills but not be paid while Mr Martin was using his sales skills and being paid. It made no sense to find that Mr Stack’s rewards were limited to those deriving from his dividends. The Judge did not accept that the lack of a signed contractual document should affect that determination. The employment tribunal found that there was an “express agreement” that Mr Stack would carry out work for the company and an implied agreement that he would be paid, as Mr Martin was working and being paid.
The Court of Appeal confirmed the assessment of the Employment Tribunal to the extent that Mr Stack was both and employee and a worker of the company. The fact that there was no express agreement between the parties about remuneration did not mean that there was no contract. The court followed the case of Tilson v Alstom Transport of 2011 which held that a contract could be implied if it was necessary to give effect to the reality of the relationship. It could be implied that he would be paid a reasonable rate from a reasonable date to give business reality to the arrangements. In contrast, in Tilson, the agency worker was not an employee despite his integration into the client’s business.
Another interesting point about this case is the opening line of the Court of Appeal’s judgment: “This case is not a good advertisement for our system of resolving employment disputes”. This is the second time that the matter had been before the Court of Appeal and the sticking point for the courts at each stage in relation to Mr Stack’s claims was the vexed question of employment status. It is now well established that directors and shareholders may be employees too and that the issue of employment status must be assessed according to the facts of each case. This case demonstrates that even if directors haven’t received any remuneration, this fact does not mean that they are not employees if, in fact, there is a legal obligation for them to be paid.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.