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EAT considers the employment status of a director/shareholder

By December 17, 2021December 20th, 2021Employment, Employment for Business

The Employment Appeal Tribunal (EAT) has recently considered the issue of employment status in the case of Rainford –v- Dorset Aquatics Ltd, after an Employment Tribunal had concluded that a director and shareholder of a company was not an ‘employee’ or a ‘worker’, despite the fact that he worked at the company as a site manager and received payments described as ‘salary’.

This case concerned two brothers who were co-directors and shareholders of the company, one of them holding 40% of the shares (R) and the other holding the remaining 60% (B). R worked for the company in various capacities, however, he did not have set hours and was not under the control of B or the company.

The brothers decided, on the advice of the company accountants that for tax reasons, they would each be paid an equal salary, subject to PAYE and NI deductions. They also agreed the amount of dividends to be paid at the end of the year.

In June 2018, a dispute arose and R issued an Employment Tribunal claim for unfair dismissal, notice pay, unlawful deductions and holiday pay. However, the issue of R’s employment status was raised and addressed as a preliminary issue.

The employment judge found that R was neither an employee nor a worker, distinguishing between the company’s employees and the brothers. It was also held that based on B’s evidence, R was able to provide a substitute to carry out his work should he wish to, and that both brothers were free to carry out work outside of the business. R appealed to the EAT.

In the EAT, R argued that once the judge had found that R was providing services to the company in exchange for a salary, and that arrangement was not a sham, the judge was required to find that R was an employee, a worker, or a self-employed contractor. On the basis that the company was not R’s client or customer, R argued that it followed that R must be an employee or a worker.

However, the EAT rejected R’s argument that his director/shareholder status was mutually exclusive with employee status. The EAT held that it is open to an employment tribunal to take into account the views of the parties regarding what was agreed between them as well as the nature of their relationship.

It concluded that whilst there is nothing to say that directors/shareholders cannot also be employees, it is not automatically the case and therefore it follows that each matter should be determined on its own facts taking into account the individual circumstances.

Ultimately, the EAT dismissed R’s appeal and found that the original Employment Tribunal’s decision was neither erroneous nor perverse.

This decision demonstrates that the Employment Tribunal will often look at the reality of the situation, rather than simply the label attached to it. It reiterates the need to ensure that arrangements are clearly set out and documented in a situation where a director/shareholder also intends to be an employee of the company.

One way to do this might be to ensure that a director’s service agreement and/or contract of employment is prepared, signed by the parties and adhered to.

If you need assistance with drafting these types of documents, or need advice regarding employment status, please do not hesitate to contact a member of the employment team at Glaisyers ETL.

Gemma Wilson

Author Gemma Wilson

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