UK: When Is A Shareholder Also An Employee And Entitled To Pay?

Last Updated: 10 March 2015
Article by Clare Gilroy-Scott

A shareholder of a company may also have employment rights, including the right to be paid, when services are carried out for the company.  This was confirmed by the Court of Appeal in its judgment of 5th February 2015 in the case of Stack v Ajar-Tec Ltd.  This is an noteworthy case for anyone interested in the problematic question of employment status.

Ajar-Tec, incorporated in 2005, was in the business of supplying audio-visual equipment.  The three shareholders, who included Mr Stack, each held roughly equal shares and all were directors of the company.  Mr Stack had been approached by the other two as a potential investor because he had been looking for a project in which to invest.  Mr Stack's skills lay in project management but he had some knowledge of audio-visual equipment and installations.  He was also experienced in procurement.  Mr Stack had another business and also some property interests.

Mr Martin, one of the other shareholders, received a "statement of particulars of employment" under which his salary was stated to be Ł60,000 per annum.  Mr Stack did not have a written contract and received no pay.  In late 2006, an internal document described Mr Stack as "Operations Director" defining his role as "overseeing operational aspects of the company".  It recorded him in this role as "full-time" and this was the same for Mr Martin, but not the third shareholder, Mr Kean who was described as "part-time".  When the company needed more space, Mr Stack located premises.  Modifications were done through Mr Stack, either direct by him or managed by him.

All three directors were members of the staff private healthcare scheme, had company credit cards and used employee expense forms.

He was removed from his appointment as a director of the company by an EGM in August 2009 and it was not until this point that he sought payment for his work carried out for the company.  Mr Stack brought claims for constructive unfair dismissal and authorised deductions from wages.  The company maintained that there was never any agreement that he would be remunerated for his work.  They relied heavily on the fact that Mr Stack was the major investor and had other substantial business interests.

Mr Keane, the third shareholder, has never asserted that he is an employee of the company.  This may be because he was supporting the company in its position, and to claim he was an employee would have undermined this.

The Employment Judge confirmed that a shareholder does not of necessity have operational involvement with a limited company but acknowledged that it is common, particularly in smaller businesses, for the shareholders to also do the work.  This means that they can also be employees.

Directors are not always employees, but may become so if there is a contract of employment which may be express or implied.  The essential elements of a contract of employment, established over the years by case law, are:

  • A degree of control by the employee over the worker which is consistent with an employment relationship.
  • An obligation on the worker to carry out the work personally.
  • A mutual obligation on the employer to provide work and for the employee to perform the work offered.

Further, the case of Ready-Mixed Concrete v Minister of Pensions of 1968 provided the test that "there must be a wage or other remuneration.  Otherwise there will be no consideration, and without consideration, no contract of any kind".

The Judge was of the view that it made no sense for Mr Stack to deploy his skills but not be paid while Mr Martin was using his sales skills and being paid.  It made no sense to find that Mr Stack's rewards were limited to those deriving from his dividends.  The Judge did not accept that the lack of a signed contractual document should affect that determination.  The employment tribunal found that there was an "express agreement" that Mr Stack would carry out work for the company and an implied agreement that he would be paid, as Mr Martin was working and being paid.

The Court of Appeal confirmed the assessment of the Employment Tribunal to the extent that Mr Stack was both and employee and a worker of the company.  The fact that there was no express agreement between the parties about remuneration did not mean that there was no contract.  The court followed the case of Tilson v Alstom Transport of 2011 which held that a contract could be implied if it was necessary to give effect to the reality of the relationship. It could be implied that he would be paid a reasonable rate from a reasonable date to give business reality to the arrangements.  In contrast, in Tilson, the agency worker was not an employee despite his integration into the client's business.

Another interesting point about this case is the opening line of the Court of Appeal's judgment:  "This case is not a good advertisement for our system of resolving employment disputes".  This is the second time that the matter had been before the Court of Appeal and the sticking point for the courts at each stage in relation to Mr Stack's claims was the vexed question of employment status.  It is now well established that directors and shareholders may be employees too and that the issue of employment status must be assessed according to the facts of each case.  This case demonstrates that even if directors haven't received any remuneration, this fact does not mean that they are not employees if, in fact, there is a legal obligation for them to be paid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.