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Company directors: are they employees?

Posted on 07th January 2022 in Employment

Posted by

Stephen Jennings

Partner and Solicitor
Company directors: are they employees?

Whether or not directors are also employees is often not a simple question and can have big implications both for the individual and the company. A recent Employment Appeals Tribunal (EAT) case has highlighted that simply receiving a salary for payroll/tax purposes does not necessarily prove you are an employee. The judgment in Rainford v Dorset Aquatics Ltd [2021] UKEAT 2020-000123 was handed down last month.

Their business

Bradley (the claimant) and Ben owned and ran a landscaping business. They were both shareholders in and directors of the company (the respondent). They paid themselves monthly ‘salaries’, on the advice of their accountants for tax purposes, and paid income tax under PAYE and national insurance on them. They received wage slips. The salaries were not referrable to how many hours they each worked. Bradley and Ben did not have written employment contracts. They also paid themselves dividends as shareholders of the company. The brothers decided on the split of work between themselves. Bradley decided on his own hours of work and there was no control by Ben or the company over how he carried out his work. He took holidays when he wished subject only to co-ordinating with Ben.

The tribunal 

After a falling out, Bradley brought an employment claim against the company. The judge at first instance held Bradley was not an employee of the company and therefore could not bring a claim. Bradley appealed to the EAT.

The EAT upheld the Tribunal’s decision that Bradley was not an employee, owing to the facts above. The appeal judges rejected Bradley’s argument that, because he provided services to the company, received a salary and the arrangement was not a ‘sham’, he must be an employee or worker of the company. The tribunal judge had also found that Bradley had a right to substitute someone else to provide his services if he wished, and the appeal judges attached significance to this.

The appeal judges did emphasise that it is possible to be both a director/shareholder and an employee of a company. However, for there to be an employment relationship there still has to be an employment contract, whether in writing or oral, and whether express or implied. Fundamentally, the key features of an employment relationship are personal service, control and mutuality of obligation. All other features of the relationship must be consistent with there being a contract of employment.

How we can help

Determining employment status is often a complex task, and our specialist employment team are here to help with any questions you may have. We recommend that employment status is clearly agreed at the outset; we would be happy to assist with drafting employment contracts or other documentation to make the position clear and avoid a potentially costly dispute such as the one in this case.

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