Company Directors – You Need to Act to Secure Your Employment Rights

Company directors with imperfect knowledge of employment law all too often fail to confer upon themselves the basic legal protections to which even their most junior members of staff are entitled. In a case on point, a businessman found himself in a very weak position following his removal from the company he co-founded.

The man was a 45 per cent shareholder and director of the company, which thrived in its early days, employing about 80 staff and turning over around £1.8 million. As its fortunes waned, however, he greatly reduced the hours he worked for the company, largely performing paperwork tasks at home.

After the company’s board removed him as a director with immediate effect, he launched Employment Tribunal (ET) proceedings, alleging, amongst other things, unfair and wrongful dismissal. To succeed in those claims, however, he first had to establish that he was the company’s employee.

Ruling on that issue, the ET noted that he bore responsibility for issuing employment contracts to the company’s staff but did not provide one for himself or his co-founder. As a result, they did not have the benefit of the disciplinary, grievance and other procedures enshrined in the company’s staff handbook.

The ET acknowledged that there is no reason in principle why a person who is a shareholder and director of a company cannot also be its employee, even if they have complete control of the business. In the absence of a formal employment contract, however, the task of discerning whether the man nevertheless enjoyed employment status was a fact-sensitive exercise.

In finding that he lacked such status, the ET noted that he was paid largely by way of dividends. Nominal sums that he received via the PAYE system did not vary and bore no relationship to the number of hours he worked. He occasionally attended senior management, sales and board meetings but, by the time of his removal, he was not involved in the company’s day-to-day work.

He and his co-founder treated themselves differently from the company’s employees. He did not take statutory sick pay; he worked the hours he chose and went on holiday when he wanted. Although he was expected to work so as to promote the company’s profitability, he did not do a particular amount of work for a particular wage. Overall, the company had no control over how he went about his work.

He could have employed someone else to perform the work he was doing and the company’s articles of association entitled him to appoint an alternative director in his place. He was therefore not required to perform his services personally. The absence of that requirement also meant that he was not a ‘worker’, within the meaning of Section 230(3)(b) of the Employment Rights Act 1996.

Given his lack of either employee or worker status, the ET had no jurisdiction to entertain his unfair dismissal and wrongful dismissal claims or a further complaint in respect of holiday pay. As a director of the company, he was, however, an officeholder, within the meaning of Section 49 of the Equality Act 2010. He was thus entitled to pursue further complaints of age discrimination.