22 July 2014
Unpaid shareholder/director neither an employee nor ‘worker’
A shareholder/director with no contractual entitlement to be paid for his work was neither an employee nor a 'worker'.
A shareholder and director of a company had many business interests. He did not work for the company full-time, had no employment contract and was not paid for the work he did do. He had several opportunities to formalise arrangements, but never took advantage of them.
There was a falling-out and the other shareholders terminated his appointment as company director. He claimed constructive unfair dismissal and unauthorised deductions from wages. The others argued he could not claim these as he was neither an employee nor a 'worker'.
The Employment Tribunal ruled that (in Ajar-Tec Ltd v Stack) he had promised to do work for the company which created an express contract between them. It then implied a term into the contract that he was to be paid for that work and he was, therefore, an employee.
The Employment Appeal Tribunal (EAT) ruled that this was the wrong approach. It found that a binding contract required both a promise to do work and consideration for that promise – for example, that the shareholder/director be paid for his work. In this case, there had only been a promise by the shareholder/director, but no consideration from the company - so there was no contract.
As there was no contract, it was not possible in law to imply a term into it. The EAT therefore remitted the case to be tried again before a fresh tribunal.
Kathryn Fielder, senior associate in the employment law team, comments: "Companies should ensure it is clear whether or not shareholders and/or directors undertaking work for the company are employees or workers, and whether or not they are actually paid for their work."