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Can an unpaid shareholder and director of a Company be an employee?

What is the employment status of an unpaid Director & Shareholder?

In order to qualify for most employment rights, including the right not to be unfairly dismissed, a person must first establish that they are an employee. Whilst this may be fairly obvious in most cases there are several previous cases where the Tribunal and Courts have had to analyse whether a person is an employee for the purposes of the law. This case involves circumstances where the person in question was a shareholder and Director of the Employer.

The Facts

Mr Stack pursued claims against Ajar-Tec Ltd in the Employment Tribunal for constructive unfair dismissal and unauthorised deductions from wages.

Mr Stack had founded Ajar-Tec Limited with two other Directors and Shareholders, Mr Martin and Mr Keane. Mr Martin worked full-time for the business and received a salary. He had a written contract of employment and no other interests or source of income. Mr Keane was part-time finance director and played a small part in the company’s operation.

Mr Stack worked for the business from the start but did not receive any pay. Mr Stack had numerous business interests away from Ajar-Tec Ltd.

Although various discussions taking place over the years, and draft employment contracts being circulated in 2005 and 2007, Mr Keane and Mr Stack did not formalise any employment arrangements.

Despite being the major investor in the business, when relationships deteriorated Mr Stack’s directorship was terminated.

In order to pursue his claims for unfair dismissal and wages payments Mr Stack had to first show that he was an employee. At the Employment Tribunal they agreed with Mr Stack that he was an employee of Ajar-Tec Ltd as there had been an express agreement that he would work for the business and they considered it was common-sense that he would be paid for what he did it. As a result a term regarding payment was implied into his contract.

Ajar-Tec Ltd appealed against the Tribunal’s decision.

The Employment Appeal Tribunal upheld the appeal and sent the case back to a new Tribunal to decide if it was possible to imply a contract of employment on the facts.

Mr Stack appealed against the decision to the Court of Appeal.

The Law

In order for a person to establish that they were an employee or worker there must be an express or implied contract in place.

Basic contract law states that in order to be a valid contract there must be consideration between the parties. For employment contracts this means that the employee must provide work and in return the employer pays them or provides some other benefit.

In this case Mr Stack had not received any payment (consideration) for the services he provided.

The principle has developed from previous cases that in the absence of an express contract, a contract will be implied if it is necessary to give effect to the reality of the relationship between the parties.

If it is established that a contract exists, a further test should be applied to establish whether the contract is one of employment. For it to be so, “there must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind”.

This means that in Mr Stack’s case it was necessary to imply a term that a wage or some remuneration would be provided.

In simple terms the test for deciding if a term can and should be implied in a contract is whether such a provision would spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean.

The Decision

The Court of Appeal decided that Mr Stack was an employee and agreed with the decision of the original Employment Tribunal that there had been an express agreement between Mr Stack, Mr Keane and Mr Martin prior to starting the Company.

The fact that the parties had not expressly agreed a term about remuneration did not mean that there was no contract between them and the Tribunal had been able to imply a term that a Director would be paid a reasonable rate into the contract between Mr Stack and Ajar-Tec Ltd.

Points to Note

This case stresses the importance of ensuring that relationships between parties at the outset of a Company or business venture are formalised in writing. I have seen examples in several cases I have advised upon where those involved are friendly and eager to get the Company going and forget the formalities, relying on the fact that they are friends and “nothing will go wrong, I trust that they will look after me”, and then when money or difference of opinion is involved this changes very quickly.

Whatever your intention about the future of your business or status within the business you should ensure that you have something set out in writing and obtain advice about the pros and cons of each situation.

This case also serves as a reminder that a director and/or a majority or sole shareholder of a limited company can and will likely be found to be an employee and it does not matter if they have actually received pay in, provided that there is a legal obligation on the employer to pay them.


Stack v Ajar-Tec Ltd [2015]

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The information contained in this blog post is provided for guidance and is a snapshot of the law at the time it is written. It is provided for your information only and should not be used as a substitute for obtaining legal advice that it specific to your particular circumstances.

The guidance should not be relied upon in any decision making process. It is strongly recommended that you seek advice before taking action.

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