Monday 9 February 2015

Court of Appeal rules that unpaid director was an employee

An interesting decision has emerged from the Court of Appeal this week which sounds a warning to companies that permit unpaid work to be undertaken by shareholders or directors.


In Stack v Ajar-Tec Ltd [2015] EWCA Civ 46 the Court of Appeal held that a director and shareholder who worked part-time for free did in fact have 'worker' and 'employee' status.


The case relates to an audio-visual business that had three directors who were also shareholders. One of the directors had a contract of employment and was remunerated accordingly. In contrast, although contracts of employment were considered and circulated in regard to the other two directors, such discussions and drafts were never formalised. The remaining two directors did input their time into the business but on a part-time, ad-hoc basis. This continued for three years but they were not paid.


When relations broke down, one of the directors who helped out part-time brought an unfair dismissal claim. Importantly, the Court of Appeal held that even though there was no formal agreement or remuneration in place, the director had undertaken a positive, enforceable obligation to work for the company. This was confirmed by his offer to bring his skill-set to the table at the beginning of the venture and then confirmed by his subsequent working input.


The appeal judges felt that such commitment and obligation implied that he should have received remuneration and it would not be just that one director received a salary and dividends whereas the others should only receive dividends, despite their evident input.


Small business should be aware that shareholders or directors who invest time and effort into the business but are not officially paid, may have employee status under the Employment Rights Act 1996. This would allow them to bring proceedings for unfair dismissal if they have provided such services for more than two years.


I know a number of SME businesses that have directors who operate in this manner and my advice would be to discuss such arrangements immediately with the concerned parties so as not to avoid confusion or problems further down the line. Directors who work for the business should ideally be placed on director's service contracts or employment contracts so as to provide protection for both the director and the company.