Does a director shareholder have employee status?

Directors and shareholders

In many small businesses the owners are both company directors and controlling shareholders. However, whilst these individuals may carry out various hands-on duties, many director shareholders do not have an employment contract or a written statement of employment particulars (which is sometimes referred to as a statutory statement), setting out their employeestatus .

Monthly payments

This was the situation in the case of Rainford v Dorset Aquatics Ltd 2021 (see here ). Dorset Aquatics Ltd (D) is a small, family-owned, company in which Bradley Rainford and his brother, Ben, were both directors and 40%/60% shareholders. Ben had a larger shareholding because he had lent D some money.

Bradley worked as the site manager at D’s premises. Both he and Ben were paid an equal monthly sum of £1,500 from which PAYE and NI were deducted.

Family fallout

In June 2018 the brothers had some personal differences which led to Bradley writing to Ben saying that he had “decided to take a step away” from D. Shortly thereafter, D stopped making his monthly £1,500 payment.

When this was queried by Bradley’s legal representatives, D’s solicitors indicated that he had “chosen to absent himself without permission or approval” and his absence was “unauthorised” . Therefore, in the company’s view, Bradley had “no entitlement to payment of salary” .

Unfair dismissal claim

Bradley didn’t return to work and he claimed unfair dismissal. In order for a claim to succeed, an individual must be working under a contract of employment, i.e. they have employee status .

The tribunal noted that there was no express or implied employment contract between Bradley and D, either on a written or verbal basis. Thus, it rejected his claim for unfair dismissal.

An appeal

Bradley appealed to the Employment Appeal Tribunal (EAT) which has now confirmed that a director shareholder is not automatically classed an employee (or a worker), and thus able to claim unfair dismissal under the Employment Rights Act 1996.

Tip. A director shareholder will only have employee status if they have an employment contract to this effect. Where you wish to confer employee status on a director shareholder you should ideally put this in writing with the minimum requirement being a written statement of employment particulars (see here ).

Tip. In the absence of an employment contract which, don’t forget, can be created via a verbal agreement, a director shareholder will have no right to claim unfair dismissal or any other employment rights that are attached to employeestatus .