EAT considers employment status of director and shareholder

14 Jan, 2022

CFS Redundancy Payments Ltd report that, in Rainford v Dorset Aquatics Ltd, the EAT has upheld an employment judge’s conclusion that a director and shareholder of a company was neither an ‘employee’ nor a ‘worker’ of the company under S.230 of the Employment Rights Act 1996. Although he worked for the company as a site manager and in various other capacities, and received payments described as ‘salary’, it did not follow that the work and payments were necessarily referable to one of the three types of contract referred to in S.230(3).

CFS Redundancy Payments Ltd have been told that R and his brother, B, were co-directors and shareholders of DA Ltd, with R holding 40% of the shares and B the remaining 60%. R worked for the company in various capacities, including as site manager at a longstanding landscaping project, and by taking responsibility for marketing and social media. He decided on his own hours of work and was not under the control of B or the company. There was little contractual documentation covering R’s working arrangements and no written contract governing his employment status. The brothers were each paid an equal ‘salary’, agreed between them, which was subject to PAYE and NI deductions, but this was done on the advice of company accountants for tax reasons without any positive input by either brother. They also agreed between them on the amount of dividends to be paid at the end of the year in accordance with their shareholdings. In June 2018, a dispute arose and R brought employment tribunal claims for unfair dismissal, notice pay, unlawful deductions and holiday pay. His employment status fell to be decided as a preliminary issue.

CFS Redundancy Payments Ltd understand that the employment judge found that R was neither an employee nor a worker of DA Ltd under S.230 ERA. The judge took into account, among other things, that there was a clear difference in status between the brothers on the one hand and DA Ltd’s employees on the other; that there was an expectation between the brothers that they would both generate and execute enough work to sustain the company and its profits so as to pay their employees and each of their incomes; that they were both free to do other work outside the company and R sometimes worked with his partner in her hair salon; and that, based on B’s evidence at the hearing, he would have had no difficulty with R substituting someone else to do the site manager work, although in practice this never arose. R appealed to the EAT.

The EAT dismissed the appeal. R argued that, once the judge had found that he provided services to the company in return for a salary, and that the arrangement was not a sham, it was incumbent on the judge to find that his relationship with the company was either that of an employee, a worker or a self-employed contractor working for a client or customer; and given that DA Ltd was not his client or customer, it must follow that he was an employee or worker. The EAT rejected that argument. Although R worked for the company and received money – including some described as ‘salary’ –  it did not follow that the work and payments were necessarily referable to one of the three types of contract referred to in S.230(3). As the EAT’s decision in Dudgale v DDE Law Ltd EAT 0169/16 shows, it is possible for working shareholder/directors receiving payments from a company to organize their relationship through the company’s corporate structures without individual contracts of employment. R referred to Lady Hale’s statement in the Supreme Court in Clyde and Co LLP v Bates van Winkelhof (Brief 1000) to the effect that employment law distinguishes between three types of people, namely employees, workers and the self-employed. The EAT accepted this classification but did not consider that Lady Hale was suggesting that every individual who does any work for another person and receives money must necessarily come within one of the three categories.

In relation to B’s evidence that R had a right of substitution, the EAT held that it was open to the employment judge to take this into account: in deciding what was and was not agreed between the parties in this kind of case, it is open to an employment tribunal to take into account views expressed by the parties themselves which are relevant to the nature of their relationship and any agreement between them. The EAT also rejected R’s argument that the judge had erroneously treated R’s status as a director and/or shareholder as being mutually exclusive with employee status. While it would certainly be an error of law to suggest that a person cannot be both an employee and a director/shareholder, there was no reason to think that the judge approached matters in that way. The judge had referred to the level of R’s control over the company and the fact that he shared the risks with B. These factors were referable to his status as a director/shareholder and so were not directly relevant to the question whether he was an employee or worker. However, they formed part of the backdrop and the EAT was satisfied that they had not had any significant influence on the judge’s decision.


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