What is the employment status of a company director and shareholder paid a salary and performing work for it?

That was the issue the EAT had to decide in Bradley Rainford v Dorset Aquatics Limited. 

Facts

Bradley and his brother Ben, owned and ran a small family company. Both were directors and held its shares between them.

Bradley performed a number of roles for the company including being the site manager on one of its large projects and taking responsibility for its marketing, website and social media content. He decided on his own hours of work and he wasn't subject to any controls by his brother. Both directors agreed that they would generate and perform enough work to meet company overheads and sustain its profits. 

So far as money was concerned, the brothers were paid equal monthly salaries which were subject to PAYE and NI deductions and were paid regardless of the number of hours they actually worked. The pay structure was put in place on the advice of company accountants for tax reasons and didn't reflect any agreement about the directors employment status. 

There was little contractual documentation which set out the brothers working arrangements and neither had a contract which set out their employment status. 

A dispute arose and Bradley left the company. He alleged that he was an employee and/or worker and brought proceedings for unfair dismissal, notice pay, unlawful deductions and holiday pay. The company denied that he was an employee or worker and argued that he had no legal right to bring these claims. 

The tribunal agreed with the company's submissions and Bradley appealed.

EAT decision

The EAT rejected Bradley's appeal. It found that:

1. Although directors and shareholders can also be employees or workers, it doesn't automatically follow that just because someone works for a company and receives money for that work they fall into one of these categories. It's possible for working shareholder/directors receiving payments from a company to organise their relationship through the company’s corporate structures without having individual contracts of employment. And, it isn't unusual to see this sort of structure in small family run businesses.
2. It accepted that it would certainly be an error of law to suggest that a person cannot be both an employee of a company and a director/shareholder. But the judge hadn't done this. Bradley’s status as a director and shareholder, and his family relationship with Ben were, potentially relevant and matters that the judge could take into account.  
3. The judge was entitled to take into account views expressed by the parties to help determine what was agreed (or could be implied by conduct). In this case Ben had given evidence that his brother could have substituted someone else to manage the site. Although Bradley hadn't actually substituted anyone to do this work, the judge accepted that he could have done and that this wouldn't have caused a problem with the company.  

Implications

The outcome of this particular case doesn't mean that other directors and shareholders will fail with similar claims and we recommend that you periodically conduct an audit of your staff to properly determine their status. Employment law recognises three categories of workers: employees, workers and those who are self-employed. Complications often arise because HMRC only recognise employees and those who are self-employed. It's therefore possible for someone who is treated as self-employed for tax purposes to be a worker (and possibly and employee) in employment law.

It is helpful to put in place written agreements which set out whether your directors are also employees of the company. But, these must reflect the reality of the situation and, if they don't, tribunals can ignore them. 

We can help

Please let us know if you'd like us to conduct a review of the employment status of your self-employed contractors and directors. Where appropriate, we can draft contracts which set out the nature and scope of your relationship.  

We also have a suite of precedent contracts of employment and director service agreements which are free to our IMhr clients. If you are interested in finding out about how we can support you with our fixed-fee annual retainer, or flexible discounted bank of hours service, please contact Glenn Hayes.