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Director/Shareholder and/or employee?

How the court determines if a director/shareholder is also an employee.

In this case two brothers were co-directors and shareholders of a limited company. R holding 40% of the shares and B 60%. R was not under the control of B or the company. He decided on his own hours, worked in different roles with his primary focus as a site manager, but also took on the responsibility of marketing the company and its social media. There was no employment contract. Later, at the ET, the judge called it a typical family-run business with “…a lack of contractual documentation and paperwork, over-dependence on personal relationships and … attendant risks of disagreements.” The brothers were paid an equal salary which was agreed between them and paid regardless of how many hours had been worked. Deductions to PAYE and NI were made, but the judge found that this was done on the advice of the company accountants for tax reasons rather than any other reason.

After a dispute R brought employment tribunal claims for unfair dismissal, notice pay, unlawful deductions and holiday pay. His employment status was a preliminary issue.

The employment status can be determined by looking at S.230 ERA, under which an employee is

an individual who has entered into or works under … a contract of employment

and an employment contract in this context means a

contract of service … whether express or implied and (if it is express) whether oral or in writing”.

A worker is an

individual who has entered into or works under …

  1. a contract of employment, or
  2. any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or service for another party to the contract whose status is not by virtue of the contract that of client or customer of any profession or business undertaking carried on by the individual…

The ET found that R was neither an employee nor a worker of the company under S.230 ERA. The clear difference in status of the brothers compared to other employees as well as an understanding between the brothers that they were free to do other work outside the company, which R sometimes did, demonstrated this.

R appealed. This was dismissed by the EAT. R argued that as the judge had found that he provides services in return for a salary, and the arrangement was not a sham, he should be considered either an employee or a worker. However, the EAT confirmed the decision of the ET, as the work and payments could not necessarily be referred to any of the three types of contract mentioned above.

It is also important to note that in this case there was no evidence of any employment contract, written or oral. If there was to be a contract of employment, it would be one that would be implied based on conduct and other relevant circumstances.

Of course, it is possible to be a director/shareholder of a company as well as an employee of the same company. However, the tribunal can take into account the specific status as director /shareholder as well as any family relationships, as this case highlights, when determining status.