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Employment status: receipt of pay is not essential

The Court of Appeal has overturned the EAT’s decision that a director and shareholder, who performed part-time work for a company without pay for at least three years, was an “employee” and a “worker” for the purposes of the Employment Rights Act 1996 (ERA 1996).

Generic contractStack was one of three shareholders and directors of Ajar-Tec Ltd. Draft employment contracts were circulated between the three directors, but none were completed or signed by Stack. Relations between the directors deteriorated and in 2009, Stack’s appointment was terminated. Stack was not paid for his work and the company’s accounts reflected no liability to pay him. He brought claims of unfair dismissal and unauthorised deduction of wages.

An employment judge found that the directors had expressly agreed before the company was formed that Stack would work for it with an implied term that he would be paid a reasonable amount for his work when the company was in a financial position to do so. Considering the tests in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance, the judge concluded that Stack was both an employee and a worker within the meaning of S.230 of the ERA 1996. Ajar-Tec Ltd appealed against this decision.

The EAT allowed the appeal, holding that as Ajar-Tec Ltd had not expressly agreed to remunerate Stack, there was no agreed consideration and therefore no binding contract. Furthermore, the employment judge ought to have considered whether, following the decision in Tilson v Alstom Transport, it was necessary to imply or infer a contract of employment. The EAT considered that in the absence of either an express or an implied contract of employment, the judge had erred in finding an implied term as to remuneration.

Stack appealed the decision to the Court of Appeal who found that the contract to work for Ajar-Tec Ltd was supported by consideration, in that the directors agreed to contribute to the venture. Given that this express agreement was formed prior to the incorporation of the company, it was impossible for Ajar-Tec Ltd to undertake to pay Stack for his work at that time. Moreover, the judge found that it was an implied term that he be paid for his services when the company could afford to do so. He also found that it was unfair to reward Stack through dividend income alone when another of the directors, who would receive equal dividend income, was to be paid for his work.

The Court observed that a contract may be formed partly expressly and partly by implication. The fact that the parties had not expressly agreed a term about remuneration did not mean that there was no contract created. The employment tribunal implied a term that the director would be paid a reasonable rate from a reasonable starting date in order to give business reality to the arrangements. The Court of Appeal restored the employment judge’s decision that Stack was both an employee and a worker.

Comment

This case highlights the difficulties in establishing employment status where there is no written agreement. It is a clear reminder of the importance of formalising employment relationships to save time and money disputing employment status if the relationship deteriorates. It also demonstrates that; if there is a legal obligation on the employer to pay directors or shareholders, they do not need to have received pay in order to be employees.

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further