Employment status of an unremunerated director

12 February 2015

Was an unremunerated director both an employee and a worker?

Yes, held the Court of Appeal, on the facts in Stack v Ajar-Tec.

Daniel Barnett’s employment law bulletin summarises:

Agar-Tec had three shareholders, who were each directors, one of whom was the Claimant, Mr Stack. He had no written employment contract. He also had other business interests. But for three years he devoted approximately 80% of his time on the company's business. It was common ground that he was never paid and never pursued payment. And there was no provision in the company's accounts reflecting liability to pay him.

But the Employment Judge, applying the indicia of a contract of service to be found in Ready Mixed Concrete (South East) v Minister of Pensions and National Insurance [1968] 2 QB 497, held that there was an express agreement that Mr Stack would do work for the company and it was an implied term that he would (eventually) be paid for what he did. He therefore concluded Mr Stack was an employee. It was unnecessary to decide separately the issue of whether he was a worker, but an analysis of the relevant factors brought the Employment Judge to the conclusion that he was. The EAT reversed the decision of the employment tribunal on the basis that it was wrong to find an express contract of employment on the basis of an implied term that Mr Stack should be paid for remuneration. In its view the arrangement lacked agreed consideration.

The Court of Appeal reversed the EAT, reinstating the employment judge's decision. The company was incorporated essentially by three promoters, each agreeing to bring different things to the venture. And it was in the nature of the agreement that Mr Stack accepted some obligation to work for the company. In this particular case it was not fatal to the existence of a concluded contract that the three promoters failed expressly to agree a term concerning remuneration.

The process of contract formation may be partly express and partly by implication. Here, given the way the three directors dealt with each other, a term for remuneration could be implied in order to give business reality to the transaction and create enforceable obligations between parties dealing with each other in circumstances in which one would expect that business reality, and those enforceable obligations, to exist.