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Case law: Unpaid shareholder/director neither an employee nor 'worker'

Companies need to ensure they are clear whether its shareholder and directors are actually employers or workers.

Legal Alert

This update was published in Legal Alert – July 2014

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A shareholder/director with no contractual entitlement to be paid for his work was neither an employee nor a 'worker'. In a recent case, a company shareholder/director 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 didn't take 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 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) said this was the wrong approach. 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.

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