In the case of Ajar-Tec Ltd v Stack UKEAT/0293/13 the EAT found that the employment tribunal had erred in finding an employment contract in the absence of remuneration and we consider why the EAT came to a different conclusion from that which it reached in the case of Secretary of State for Business Innovation and Skills v Knight UKEAT/0073/13, which we reported in our 23 May briefing.
Ajar-Tec Ltd (the Company) is a supplier of audio/visual equipment, which was incorporated on 19 April 2005. Mr Stack was one of three shareholders, the other two being Mr Martin and Mr Keane. Mr Stack provided work to the Company under no formal employment arrangement and received no remuneration. He was the major investor in the Company and it operated out of premises belonging to him. 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. Mr Martin on the other hand had a contract and received a salary of £60,000. Mr Martin's salary was detailed in the Company's accounts for the year 2006 to 2007 but there was no reference to a specific liability to Mr Stack in the sums due to creditors.
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 a employment tribunal claim for constructive unfair dismissal and unauthorised deductions from wages.
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". That agreement was ratified post-incorporation. He said there was an agreement that he would be paid salary from incorporation but only once there were sufficient resources in the business. His understanding was that he would be remunerated at the same rate as Mr Martin. Mr Stack gave evidence that he had made a full-time commitment to the business from the start and that he was an integral part of the Company.
Employment tribunal decision
There was a protracted dispute over Mr Stack's employment status at Watford Employment Tribunal in August and December 2012. The judge found that there was an express agreement that Mr Stack would work for the Company and that it was an implied term that he would be paid for that work. The written judgment and reasons sent to the parties in January 2013 concluded that Mr Stack was an employee under the Employment Rights Act 1996 and that it was not necessary for the tribunal to decide separately whether he was also a worker. The Company appealed against the tribunal's decision.
The EAT heard the appeal in December 2013 and reserved judgment. Issues arose that required further written or oral submissions from leading counsel and the EAT reconvened on 19 March 2014. The EAT found there was an error of law in that the employment judge had failed to separate out the issues in the way that he should have done. The first issue that should have been considered was whether there was an express contract and the second issue was if not, then whether there was an implied or inferred contract. The third question the tribunal should have considered was whether there was an express term as to remuneration and if there was not, then whether there was an implied term as to remuneration. During the time that Mr Stack worked for the Company he received no payment for his work and, despite opportunities to have done, so the position regarding remuneration and status was never formalised with him.
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). The EAT was unable to say if it was possible to imply a contract of employment between the parties and remitted the case to be tried again before a fresh tribunal.
Secretary of State for Business, Innovation and Skills v Knight
We covered this case in our 23 May briefing. In this case the EAT came to a different conclusion when it decided that Mrs Knight, a sole shareholder who had received no remuneration for the last two years of her employment, was entitled to remuneration. The main difference between these two cases was that Mrs Knight had a written employment contract, which specified her salary entitlement albeit she had decided not to exercise her right to be paid in order to assist her struggling business. Mr Stack on the other hand had no written employment contract and had never sought or received remuneration for his work.
The Ajar-Tec Ltd v Stack case highlights the importance for all parties of formalising their employment arrangements. An employment contract might not seem important in the first flushes of a working relationship but can save months, if not years, of protracted arguments if the relationship sours.