Owners of family businesses may understandably feel it is unnecessary to enter into formal employment agreements with their fellow shareholders and directors, particularly if they are family or trusted non-family members.
However, the Court of Appeal decision of Stack v Ajar-Tec Limited highlights the importance of ensuring relationships are formalised at the outset in order to manage the risk of disputes arising and ensure that any disputes which do arise are resolved quickly and cost effectively.
In that case, the court confirmed that a director and shareholder of the company was also an employee.
Mr Stack and two others started Ajar-Tec Limited in April 2005. He was the major investor in the business and also worked for it. Despite discussions with his fellow directors about his role and responsibilities at the company, his 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 in the Employment Tribunal for constructive unfair dismissal and unauthorised deductions from wages. The tribunal held that there was an 'express agreement' that Mr Stack would work for the company, which included an implied term that he would be paid a reasonable amount for his work. It concluded tat he had been an employee from the outset and this decision was upheld on appeal.
The Court of Appeal was asked to consider whether a contract between the parties had existed at all. It held that there was an agreement between the three founders. Each had provided something different to the venture and, in Mr Stack's case, this involved the creation (and acceptance) of an obligation to work for the company.
As Mr Stack had fulfilled this obligation, he was entitled to receive a salary as well as a dividend and so his claim against the company was successful.
Family members in business may feel that formal employment agreements are unnecessary because that level of formality is not required between family members that love and trust each other. They may feel that the culture of the family business would be somewhat damaged if they were to ask employees and directors to enter into formal agreements.
This case demonstrates the need for such agreements which should help family business owners to clarify roles and relationships within the family and the business so that all involved can move forward with a clear and focused vision.