In the case of Stack v Ajar-Tec Ltd [2015] EWCA Civ 46, the Court of Appeal upheld a tribunal’s decision that a director and shareholder, who worked part-time for a company for at least three years without pay, was an employee (and therefore a worker).  The fact that the parties had not expressly agreed a term about pay did not mean that there was no contract between them.  It was open to the employment tribunal to imply a term that the director would be paid a reasonable rate from the point when the company could afford to pay him, in order to give business reality to the arrangements.

Facts

Ajar-Tec Ltd (the Company), an audio-visual business incorporated in April 2005, had three shareholders and directors.  Mr Stack was one of the three shareholders, the other two being Mr Martin and Mr Keane.  Mr Stack worked for the Company but received no remuneration.  He was the major investor and the business operated out of premises owned by him.  Mr Martin worked on a full-time salaried basis under a written contract of employment.  Mr Keane was a part-time finance director and played a small part in the Company’s operation.  Over the years several discussions took place between the three directors regarding their respective roles and responsibilities and, despite various draft employment contracts being circulated in 2005 and 2007, employment arrangements were never formalised for Mr Keane or Mr Stack.

The relationship between the directors deteriorated in 2009 amidst arguments about money.  Mr Martin and Mr Keane terminated Mr Stack’s appointment as a director of the Company.  Mr Stack lodged an employment tribunal claim for constructive unfair dismissal and unauthorised deductions from wages.  There followed a protracted dispute over his employment status.

Employment tribunal decision

Mr Stack’s evidence to the employment tribunal was that pre-incorporation discussions had taken place on the basis that the three directors would eventually share equally in what Mr Stack described as “remuneration”.  His understanding of the agreement was that he would be paid salary from incorporation but only once the business began to generate funds sufficient to support the payment.  He expected to be remunerated at the same rate as Mr Martin.

The tribunal took the view that it made no sense that Mr Stack would be required to deploy his skills in the trading operations of the Company without being entitled to pay, while Mr Martin was deploying his sales skills and being paid.  In the tribunal’s view there had been an “express agreement” that Mr Stack would work for the Company.  Further there was an implied term that he would be paid a reasonable amount for what he did.  The judge concluded that Mr Stack was an employee under the Employment Rights Act 1996 and it was not necessary for the tribunal to decide separately whether he was also a worker.  The Company appealed against the tribunal’s decision.

EAT decision

The EAT upheld the appeal and remitted the case to a fresh tribunal to determine whether it was possible to imply a contract on the facts.  It held that the tribunal had erred in law by separating the question of whether there was a contract between the Company and Mr Stack from the issue of whether there was consideration.  It was clear to the EAT that there was an agreement between the parties before the Company was formed and there had been an express agreement that Mr Stack would work for the Company.  However, the EAT found that the existence of an implied contract could not be satisfied in the absence of any consideration (meaning remuneration).  This conclusion was different from that reached in the case of Secretary of State for Business, Innovation and Skills v Knight, where the EAT accepted that notional, rather than received, pay was sufficient consideration.  Mr Stack appealed this decision to the Court of Appeal.

Court of Appeal decision

The Court of Appeal upheld the appeal.  It set aside the EAT’s order to remit the case and restored the employment tribunal’s decision that Mr Stack was an employee (and therefore a worker).

The Court of Appeal concluded that the EAT had erred in its approach.  It held:

  • On the tribunal’s findings, there was an express agreement between Mr Stack, Mr Keane and Mr Martin prior to the incorporation of the Company.  The first question was whether this agreement was supported by consideration.  On the facts, there was ample consideration in the mutuality of the promises between the three promoters.  Each of the promoters agreed to contribute something different to the venture (skills and/or money).  Therefore, there was an express agreement under which Mr Stack accepted an obligation to work for the Company.  It was unsurprising that there was no express promise by the Company to pay Mr Stack at this stage, as the Company did not then exist.
  • When deciding whether there was an implied term that Mr Stack was to be paid, the employment judge correctly observed that payment might be deferred remuneration and that this amount might be ascertained by reference to a factor such as what was paid to somebody else.  Mr Stack had undertaken a positive, enforceable obligation to work for the Company and, in the judge’s view, it made no sense to regard Mr Stack as agreeing to be rewarded through dividend income alone when another of the directors, who would receive equal dividend income, was to be paid for his work.
  • The EAT overlooked the fact that, while a contract may be created expressly or by implication, it can also be formed partly by express and partly by implied terms.  It was not fatal to the existence of a contract that the three promoters failed to expressly agree a term concerning remuneration.  It would have been open to the judge to conclude that a contract had been formed by “a combination of that which was said expressly and that which was necessarily to be implied, in the light of the manner in which the three directors dealt with each other, in order to give business reality to… the transaction”.  

Comment

Doubts as to Mr Stack’s employment status have resulted in lengthy proceedings and this is the second time that the matter has been heard by the Court of Appeal, prompting Lord Justice Tomlinson to comment that “this case is not a good advertisement for our system of resolving employment disputes”.

The case underlines the difficulties in establishing the most fundamental concept of employment law, employment status, in the absence of a formal agreement.  It is well established by case law that neither a director nor a majority or sole shareholder of a limited company is precluded from being an employee of that company and that the issue of employee status has to be considered in each case on its own facts.  This case and BIS v Knight (referred to above) now suggest that directors or shareholders will not necessarily need to receive pay in order to be employees, provided that there is a legal obligation on the employer to pay them.

In general terms, this case will not affect the employment status of voluntary workers and interns as they do not usually have a contractual entitlement to pay or an obligation to work, meaning that there is no mutuality of obligation.  However, employers should remember that if they take on an intern with a promise of paid employment at the end of the internship, this may mean that the intern is an employee or worker and will almost certainly mean that the intern should be paid the national minimum wage for the entirety of the internship since the promise of paid work is a form of reward for work undertaken.