In the recent case of Stack v Ajar-Tech the Court of Appeal upheld the decision of an employment tribunal on the facts of this particular case that a shareholder and director who had neither asked for, nor received, any remuneration for the work that he had done for the company over the previous three years was nevertheless entitled to be treated as an employee. As a result he was therefore entitled to pursue a claim for constructive unfair dismissal and was also entitled to pursue a claim for unlawful deductions from wages in respect of the work that he had carried out.
The claimant, Mr Stack, was one of the three directors of the company all of whom were also shareholders. He had no written contract of employment and was not exclusively engaged in relation to this particular company as he had other business interests. Nevertheless the tribunal found that he had devoted approximately 80% of his time to the company’s business. He had never been paid and had never asked to be paid.
On the other hand, Mr Martin, one of the other shareholders had received a “statement of particulars of employment” under which his salary was stated to be £60,000 per annum. Some of the company documents described Mr Stack as “Operations Director” and defined his role as “overseeing operational aspects of the company”. Internal documents recorded both Mr Stack and Mr Martin as working full time though the other director, Mr Keen was described as “part-time”.
On the facts, the employment judge held that there was an express agreement that Mr Stack would do work for the company and that it was an implied term that he would (eventually) be paid for what he did. The fact that the parties had not expressly agreed a term about pay did not mean there was no contract between them. The Court of Appeal found that it was open to the tribunal to imply 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 between them.
The crucial part of this decision, on the facts, was that the tribunal found that there was an implied agreement that Mr Stack would be paid, as Mr Martin was working and being paid. It seems that if this had not been the case then the arrangements would not have satisfied the tests set out in the leading case of Ready-Mixed Concrete v Minister of Pensions (1968) which provided the test that “there must be a wage or other remuneration. Otherwise there will no consideration, and without consideration, no contract of any kind”.
The issue arose as a result of a dispute between the directors and shareholders as a result of which Mr Stack was removed from his appointment as director of the company by an EGM in August 2009. It was only at that point that he sought payment for the work that he had carried out and brought a claim for constructive unfair dismissal and unauthorised deductions from wages. It is not clear whether this came as a surprise to the other shareholders but up to that point no provisions had been made in the accounts in respect of his, apparently unpaid, salary.
The case is an interesting example of the way that joint business owners can continue to work together without fully understanding the way that their relationship operates. In this case there was no shareholders agreement and a lack of understanding about the basis upon which the parties were doing business together. Whilst such arrangements appear to work perfectly well when the parties are getting on, they can, as this case testifies, give rise to uncertainty and sometimes unexpected and unwelcome results.
It is often advisable to get legal advice in these situations at the outset and set the company up in such a way as to ensure that everyone understands precisely the basis upon which they are going to be investing their time and effort.