Whether or not a company director is also an employee of the company is not always a straightforward question to answer, yet the outcome may result in major repercussions for both the individual and the company if this is not clearly determined from the outset.
Michael Shroot, chief executive officer at WHN and a solicitor specialising in employment law, refers to a recent Employment Appeals Tribunal (EAT) case involving a dispute between co-directors of a company which highlights how simply receiving a salary for payroll and tax purposes may not necessarily prove you are an employee of the company.
The case of Rainford v Dorset Aquatics Ltd
The recent Rainford v Dorset Aquatics case followed Bradley Rainford (the claimant) and his brother Ben, who were co-directors and 40/60 shareholders of Dorset Aquatics Ltd, a small family company (and the respondent in the case).
As a co-director of the company, Bradley also worked as site manager at a company site.
The brothers were both paid an equal salary agreed between them and the necessary PAYE and NI deductions were made accordingly. It was concluded that this arrangement was set up on the advice of an accountant for tax purposes without any input from the brothers.
The brothers also each received dividends, but aside from that there was no written employment contract or documented record relating to Bradley’s position as an employee in the company.
A dispute arose between the brothers in 2018, and Bradley then brought about employment tribunal claims for unfair dismissal, notice pay, unlawful deductions and holiday pay. The judge first ruled Bradley was not an employee of the company and therefore could not bring a claim. Bradley then appealed.
Why was the appeal regarding being an employee rejected?
Bradley’s appeal that “he provided services to the company and received a salary so therefore he must be an employee or worker of the company” was rejected by the EAT, which ruled that providing services to a company and being a company director does not automatically entitle you to rights as an ‘employee’.
The appeal judges also took into consideration Bradley’s right to substitute someone else to provide his services if he wished, and also considered the fact that there was no written employment contract for Bradley.
Why written contracts of employment are important
The appeal judges did emphasise that it is possible to be both a director/shareholder and an employee of a company. In practice there is no reason why someone who is a shareholder and director of a company cannot also be an employee, even if the person has total control over the company. However, for there to be an employment relationship there needs to be an employment contract in place, whether in writing or verbal to back the arrangement.
It is a question of fact for the tribunal if the matter is brought in dispute. When matters have been dealt with informally as in the case of Rainford v Dorset Aquatics, it is a difficult question as to whether the correct inference is that the shareholder/director was truly an employee.
When making a judgment, the court will take into consideration how the parties conduct themselves, what they actually did and how they got paid. As in this case, a lack of written documentation like an employment contract or service contract will be an important consideration.
Every company should ensure they have in place at the very minimum employment contracts or service agreements for each director. It is also vital to seek legal advice to ensure that the contracts and agreements are prepared in the correct manner. If you do decide to dismiss a director, take legal advice from a specialist employment solicitor first, prevention is better than the cure!
Michael Shroot is chief executive officer and a solicitor based at WHN’s Bury office. Michael has specific expertise in employment law and contract disputes. He is a member of the Employment Lawyers Association.
If you need help on such a matter, please contact Michael on 0161 761 8087 or by email michael.shroot@whnsolicitors.co.uk
