Employment status of Directors

09 December 2021

It is often the case that a company director will also work in or provide services to the company. In the event of a dispute or change in circumstances, it is important to consider the director’s status, in order to establish what rights, if any, they possess and what steps should be followed. Whether a director is just an office holder, or whether they are also an employee/worker/ self-employed, will have a significant effect on the ability to discipline and remove a director and what processes should be followed.  

This is exactly what was considered in the case of Rainford v Dorset Aquatics Ltd,

R and his brother, B, were both shareholders and directors of DA Ltd. R held a 40% share of the company with B holding the balance of 60%.  R worked within the company in various capacities, including by taking responsibility for marketing and social media and as site manager at a longstanding landscaping project. R decided on his own hours of work and was not under the control of B or anyone else at the company. There was little contractual documentation covering R’s working arrangements and no written contract governing his employment status. Both R and B were each paid an equal ‘salary’, from which PAYE and NI deductions were made. They also received dividends based on 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.

In the first instance, the employment judge found that R was neither an employee nor a worker of DA Ltd. 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 that both directors would generate and execute enough work to sustain the company and its profits so as to pay their employees and each of their incomes;
  • both directors were free to do other work outside the company and, in fact, R sometimes worked with his partner in her hair salon; and 
  • based on B’s evidence at the hearing, R was able to substitute someone else to do the site manager work, although in practice this never arose.

As he lost the case R appealed, arguing 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, then the Judge had no alternative but to find that his relationship with the company was either that of an employee, a worker or a self-employed contractor working for DA Ltd.

The Employment Appeal Tribunal (EAT) dismissed the appeal. 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).  Following Dudgale v DDE Law Ltd, it is possible for working shareholder/directors who receive payments from a company to organize their relationship without individual contracts of employment. Whilst employment law does indeed identify three types of people, namely employees, workers and the self-employed, the EAT held that not every individual who does work for another person and receives money must necessarily come within one of the three categories.

In conclusion

It is often difficult to establish the true relationship between a company and its directors. While it would certainly be an error of law to suggest that a person cannot be both an employee and a director and/or shareholder, this will be a question of fact based on the evidence. The main test remains one of control and a requirement to perform duties personally.

As always, this advice is general in nature and will need to be tailored to any one particular situation. As a MILS member you have access to the MILS Legal advice line, as well as a number of industry experts for your assistance. Should you find yourself in the situation above, contact us at any stage for advice and assistance as appropriate.