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Employment Law

Legal guidance - compliance - software

16 FEB 2015

Unpaid shareholder and director is an employee

Unpaid shareholder and director is an employee
Charlotte Williams
Solicitor, Veale Wasbrough Vizards

A recent Court of Appeal (CA) decision highlights the importance of ensuring that relationships are formalised at the outset, in order to mitigate against disputes arising and to ensure that, in the event relationships do turn sour, disputes are more likely to be resolved quickly and in a cost effective way. 

The CA held that the Employment Tribunal (ET) in Stack v Ajar-Tec Limited (2015) was right to find that a director and shareholder was an employee. This was the second time that the case had come before the CA. Mr Stack, together with two others, started Ajar-Tec Limited, an audio-visual business, in April 2005.

Mr Stack was the major investor to the business and also worked for it. Despite various discussions with his fellow directors about his roles and responsibilities at the company, including the circulation of draft contracts, Mr Stack's employment arrangement was not formalised. In 2009, a dispute arose and the two other directors terminated Mr Stack's directorship.

Mr Stack brought a claim for constructive unfair dismissal and unauthorised deductions from wages. The ET held that not only had there been an "express agreement" that Mr Stack would work for the company, but there was an implied term that he would be paid a reasonable amount for his work. He was an employee, and therefore a worker, from the outset. The company appealed.

The Employment Appeal Tribunal (EAT) upheld the appeal and asked a freshly constituted tribunal to consider whether a contract had existed at all. Mr Stack appealed to the CA.

The CA held that there was an agreement between the three founders. Each provided something different to the venture, which created an express agreement under which Mr Stack accepted an obligation to work for the company.

Further, having undertaken his obligation to work for the company, it made no sense to the CA that he would only be rewarded by dividend, when his co-founder (who worked for the company on a full-time basis) would be remunerated by way of salary, as well by dividend. A contract could also be created by implication, and governed by implied terms. The fact that the co-founders had failed to agree a term concerning remuneration was not fatal to the existence of the contract itself.

Best practice

Given the level of costs that both parties will have incurred in respect of this litigation, this case serves as a prime example of the benefits of giving proper consideration to the relationships between individuals and ensuring that appropriate documentation records the agreed terms. Depending on the circumstances, it may be appropriate to engage individuals as employees, workers or consultants.

Whilst this may not be a priority for businesses, particularly start-ups, ensuring that robust agreements are in place is likely to be an investment which will pay off in the long run. Relationships can, and do, turn sour and a formal agreement is the most effective way to demonstrate the specific terms agreed.
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