What is the status of salaried employee of a business manager and salaried shareholder working for it?

Facts

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

Bradley has served in a number of roles for the company, including being site manager on one of its major projects and taking responsibility for its marketing, website and social media content. He decided his working hours himself and he was not subject to any control from his brother. The two directors agreed that they would generate and perform enough work to cover the company’s overhead costs and maintain its profits.

As far as money was concerned, the brothers received equal monthly salaries subject to PAYE and NI deductions and were paid regardless of the number of hours actually worked. The compensation structure was put in place on the advice of the company’s accountants for tax reasons and did not reflect any agreement on the employment status of the directors.

There were few contract documents defining the brothers’ working conditions, and neither had a contract defining their employment status.

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

The court accepted the company’s submissions and Bradley appealed.

EAT decision

The EAT denied Bradley’s appeal. He found that:

  1. Although directors and shareholders can also be employees or workers, it does not automatically follow that just because someone works for a company and receives money for that work, they fall into one of these categories. It is possible for active shareholders/directors receiving payments from a corporation to arrange their relationship through the corporate structures of the corporation without having individual employment contracts. And, it’s not uncommon to see this kind of structure in small family businesses.
  2. She admitted that it would certainly be an error of law to suggest that a person cannot be both an employee of a corporation and a director/shareholder. But the judge had not done that. Bradley’s status as a director and shareholder, and his family relationship with Ben were potentially relevant and matters for the judge to consider.
  3. The judge had the right to consider the opinions expressed by the parties to help determine what had been agreed (or might be implied by the conduct). In this case, Ben had testified that his brother could have replaced someone else to manage the site. Although Bradley didn’t actually replace anyone to do the job, Judge admitted he could have done it and it wouldn’t have caused the company a problem.

Consequences

The outcome of this particular case does not mean that other directors and shareholders will fail with similar claims and we recommend that you periodically audit your staff to properly determine their status. Labor law recognizes three categories of workers: employees, workers and self-employed. Complications often arise because HMRC only recognizes employees and the self-employed. It is therefore possible that a person assimilated for tax purposes to a self-employed worker is a worker (and possibly an employee) with regard to labor law.

It is helpful to have written agreements in place indicating whether your directors are also employees of the company. But, these must reflect the reality of the situation and, if they do not, the courts can ignore them.