Employment status must be clear from the outset

Posted 18/03/2015

For many incorporating a limited company, tax and limited liability considerations are at the forefront of their mind, not the employment status of that company’s directors. However, the recent case of Stack v Ajar-Tec makes clear that overlooking this aspect can be an expensive oversight.

In the case of Stack, a director and shareholder who had not received payment for his work, was held to be an employee and a worker. This means it is possible for a director to bring employment claims against a company even if they were not paid for their work. Director Stack had founded a company with three others and he agreed to work for the company on the understanding that he would be remunerated eventually. There was no written employment contract.

Three years later, he resigned from his directorship. He had other business interests but had given around 80% of his time to the company. The company’s accounts showed no liability to pay him. Up to his resignation he had never been paid and had not asked to be paid.

He issued claims for constructive unfair dismissal and unauthorised deduction from wages. The company said he was not eligible to bring these claims as he was not an employee or a worker.

The Employment Tribunal decided he was both and so he was entitled to bring his claims.  It found the director had expressly agreed, before the company was incorporated, that he would work for the company. There was also an implied term that he would be paid a reasonable amount once he started to do a substantial amount of work.  The Court of Appeal has now agreed with this decision on appeal.

The Court said it did not matter that the directors had failed to agree payment terms at the outset and although some contracts are implied and some are express, it is also the case that some contracts are formed by a mixture of implied and express terms.   There were terms that needed to be implied here to give business reality to the arrangement and it could be implied that the director would be paid.

The Court rejected that the parties express agreement was only that the director would work to protect his investment.  The Court found each director had promised to dedicate something (e.g. money or skills) and that these promises that the directors had made to each other created a binding express agreement.

This case shows how difficult it can be to decide the status of an individual in the absence of any written arrangement and that a director and shareholder can still have employment rights even if they are not paid. It is important to be clear from the outset when forming a company what the expectations of directors will be and to set out clearly any arrangements for remuneration. This enables the company to evaluate its exposure to any employment law obligations from its creation, thereby avoiding such disputes later on.