Stack v Ajar-Tec Ltd

This case is not a good advertisement for our system of resolving employment disputes.

As Elias LJ explained when this case was first before the Court of Appeal nearly 3 years ago, the issue is whether the Appellant Mr Stack was at the material time either an employee or a worker employed by the Respondent company. Mr Stack has lodged claims before the Employment Tribunal for constructive unfair dismissal and unauthorised deduction from wages. He has to be an employee to pursue the former, and a worker to pursue the latter. At a preliminary hearing in April 2010 to determine whether Mr Stack fell into either or both of these categories, the Employment Judge held that he fell into neither and that accordingly the Tribunal had no jurisdiction to hear his claims. The Employment Appeal Tribunal (Mr Justice Underhill P sitting alone) concluded, on 8 July 2011, that the Employment Judge had erred in law in his approach and remitted the matter to a differently constituted tribunal to decide the issue afresh. By its appeal in April 2012 to this court the Respondent company, then the Appellant, sought to restore the decision of the Employment Judge.

The company’s appeal was dismissed by this court - see [2012] EWCA Civ 543. So the matter went back to a differently constituted tribunal to decide the issue afresh.

On the second time around, the matter came before Employment Judge Pettigrew, sitting alone in the Employment Tribunal at Watford. After a 4 day hearing in August and December 2012 he decided, by a decision dated and sent to the parties on 8 January 2013, that Mr Stack was both an employee within the meaning of section 230 of the Employment Rights Act 1996 and a worker within the meaning of that section and of Article 2 of The Working Time Regulations 1998.

The company appealed to the EAT. His Honour Judge Birtles, sitting alone, allowed the appeal. He concluded, giving his reasons in a judgment dated 30 May 2014, that the Employment Judge was in error in finding that there had been a contract of employment. He concluded:-

“On the facts found by the Employment Judge, I am quite unable to say that it is possible for me to imply a contract or a contract of employment between the parties. In those circumstances, the matter will have to be remitted to be tried again by a fresh Employment Judge. It must follow that Mr Stack was not a worker either.”

Now there is a further appeal to this court, brought with the permission of Underhill LJ who, as President of the EAT, had himself heard the first appeal to that tribunal. Underhill LJ considered that all four grounds of appeal disclosed a reasonable prospect of success. In granting permission he observed:-

“It goes without saying that it is highly regrettable that this preliminary issue will have to be considered in this Court for a second time; but that cannot be helped.”

Mr Timothy Pitt-Payne QC seeks to uphold the decision of Employment Judge Pettigrew in the Employment Tribunal.

The terms “employee” and “worker” are defined in section 230 of the Employment Rights Act 1996 as follows:-

"(1)

In this Act "employee" means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.

(2)

In this Act "contract of employment" means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.

(3)

In this Act "worker" (except in the phrases "shop worker" and "betting worker") means an individual who has entered into or works under (or, where the employment has ceased, worked under)—

(a)

a contract of employment, or

(b)

any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual;

and any reference to a worker's contract shall be construed accordingly."

As Elias LJ observed on the earlier occasion,

“It follows from the definition that all employees are workers, but not all workers are employees. The central feature of both concepts, however, is that the worker should be employed pursuant to a contract. If there is no contract personally to perform work or services, then neither concept applies”

Ajar-Tec is a supplier of audio-visual equipment, and was incorporated on 19 April 2005. There were three shareholders: Mr Martin, Mr Keane, and Mr Stack, with equal shares, save that Mr Martin had 334 shares whereas Mr Keane and Mr Stack had 333. Each of the shareholders was also a director of the company. The principal motivator behind the founding of the company was Mr Martin. He was leaving a job in marketing in 2004 and he approached Mr Keane, a financial advisor, with a view to setting up a business. Mr Martin had been involved in marketing 360º cameras and he was keen to try to market that technology. He was looking for financial backing. Mr Keane was able to introduce Mr Martin to some investors, or potential investors, principally Mr Stack. Mr Stack was looking for a project in which to invest, and this one was attractive to him because he had skills derived from running a business in the building and contracting industry. Principally his skills were in relation to project management but he also understood audio-visual technology having done many installations. He was also experienced in procurement. Mr Keane in turn also possessed financial expertise. Mr Stack’s building and contracting company was called London Trellis Company Limited, (“LTC”). Mr Keane was also a director of that company. In addition, Mr Stack had interests in property. See the judgment of Employment Judge Pettigrew at paragraphs 6.1 and 6.2.

The judgment of Employment Judge Pettigrew suffers from the defect that it is not always clear whether what is contained in that part of the judgment described as “findings of fact” is in truth a finding of fact or rather a recitation of the evidence of one particular witness, which may or may not have been contentious. A paradigm and important passage appears at paragraph 6.2:-

“The discussions that took place were on the basis that all the directors would eventually share equally in what Mr Stack described as ‘remuneration’. Mr Stack’s evidence was that there was an agreement that he would be paid on the same basis in relation to salary from incorporation but only once the company had the resources to make payments. He said it was understood that he would be remunerated at the same rate as Mr Martin back to the start of the company.”

It is clear from subsequent findings in the judgment that the Judge is here referring to discussions which took place prior to the incorporation of the company. The reference to being paid “on the same basis” is not entirely clear but appears to be a reference forward to the undisputed finding, at paragraph 6.4 of the judgment, that it was agreed that Mr Martin would receive a salary from the start and that he duly began to receive payment under PAYE from the date when he joined the company in June 2005. The Employment Judge did not expressly accept Mr Stack’s evidence that it was agreed in the course of these discussions that he would be paid by the company, whether at the same rate or on the same basis as Mr Martin or indeed at all. On the other hand, he did not expressly reject that evidence either, see further at paragraph 31 below.

It was the company’s pleaded case that whilst Mr Martin was at all material times an employee, neither Mr Keane nor Mr Stack were. The evidence does not disclose that Mr Martin had a formal written contract of employment, but he did receive a statement of particulars of employment which was effective from 1 May 2007. That recorded that his salary would be £60,000 per year, subject to review, and with eligibility to receive private health care. The period of continuous employment is stated to commence on 1 June 2005, and holidays were expressed to be 20 days plus statutory and public holidays. The period of notice was to be 4 weeks in the first 2 years, 8 weeks thereafter, increasing by one week each year after 8 years’ service. It does not appear that Mr Keane has ever asserted that he was an employee of the company. However I doubt if that circumstance of itself assists the enquiry. In 2009 Mr Martin and Mr Keane resolved to terminate Mr Stack’s appointment as director of the company. He was removed at an EGM on 26 August 2009. Since that time Mr Stack and the company have been in dispute. It would not have assisted the company’s case for Mr Keane to assert that he was at all material times an employee of the company.

It was common ground that Mr Stack had never in fact sought payment and had never been paid for his work carried out for the company, and moreover that there was no provision in the company’s accounts reflecting a liability to pay him.

Further relevant paragraphs in the judgment of the Employment Judge include:-

“6.3

Mr Stack said in evidence that there were discussions about employment contracts and rules and procedures at a meeting on 13 June 2005 but he was not able to say what was agreed. The notes of that meeting referred to an employment contract but it is not possible in my judgment to interpret the note any further. There is a note of another meeting on 21 October 2005 which includes a reference to lower salary and “B shares come out as dividend”…

6.6

Mr Keane’s financial advisory company occupied a property belonging to Mr Stack at Elers Road, Ealing as its place of business and it was in a room in this property from which the respondents operated until the end of 2005. Thereafter they moved to another property owned by Mr Stack, this time in Acton, and they remained there for six months before returning to Elers Road in July 2006. Mr Stack did some work to convert a room there. In addition to the office accommodation mentioned, the respondents used a flat of Mr Stack’s in Hanwell for storage and dispatch of products…

6.7

On 3 November 2006 Ms Thompson and Ms Burt produced a sheet identifying roles within the company and this shows the claimant as operations director, defining his role as “overseeing operational aspects of the company- do we have the right tools and staff for the job?” It records that Mr Stack worked full time as operations director covering organisational procurement and logistics and resources for project delivery that Mr Martin worked full time and that Mr Keane was part time, Mr Duchscherer being technical director mainly in sales and client facing work…

6.9

At the end of 2006 the company needed more space which Mr Stack located and the respondents took a lease on premises at Northfield Road, Ealing. Some modifications were necessary. The respondent did not have sufficient cash at the time so the work was done through Mr Stack, either direct by him or managed by him and he used various staff members as well as external contractors. Subsequently an invoice was raised for this work by LTC on 20 February 2008 in the sum of £35,700 plus VAT…

6.15

Mr Stack and Mr Keane and indeed some other investors introduced by Mr Keane invested various amounts of money in the business. Mr Stack’s director’s loan account as at 19 August 2009 showed £495,700 payments into the account and withdrawals of £649,100, together with £21,500 in loans. This statement of account which Mr Stack confirmed to be accurate shows, amongst other things, an entry for 31 March 2008 referred to as “Robert Provision” for an amount of income to the account of £102,000 described as “Trade Creditors” and in the comment column “Provision in 2006 Accounts for expenses paid by Mr Stack”. There is a further entry on 1 April 2009 for a payment of £102,000 shown as “Suspense” and with the comment “Reversal of 2006 Provision to Suspense Account”. Mr Kong explained that the Grant Thornton report had noted a credit to the director’s loan account of £100,450 by way of an adjustment following a re-analysis of the provision of directors’ expenses made in the financial statements for the period ending on 30 September 2008. It would appear, therefore, that the sums for income and outgoings in Mr Stack’s directors’ loan account should be reduced by £102,000 on each side of the equation, that is to say they should show payments of £393,000 in and £547,100 out…

6.18

As mentioned Mr Keane was involved in the business to a minor degree as financial director and Mr Martin was sales director mostly devoted to sales and marketing activity and he worked full time. There is a substantial conflict of evidence as to the amount of time which Mr Stack devoted to the business. It is common ground, however, that the directors are all members of the staff private healthcare scheme, had company credit cards and they used employee expenses claim forms…

6.20

By late May 2006 the number of employees and contractors working with the company peaked at 25. As mentioned, there was a conflict of evidence as to the extent to which Mr Stack participated in the work of the respondent company.”

The Employment Judge then summarised the evidence of Mr Stack, Mr Martin and Mr Keane as to their respective involvement in the work of the company. There was an acute conflict of evidence between Mr Martin and Mr Keane on the one side and Mr Stack on the other. The Judge also heard evidence from Ms Thomson, corporate manager of the company between June 2006 and February 2008, and from Mr Moore, a management consultant engaged by Mr Stack to advise the company. One factor which no doubt complicated the perception by others of how much time Mr Stack devoted to the company is the circumstance that he ran his other businesses from the premises occupied by the company.

The Judge’s further relevant findings are:-

“6.29

There was a meeting in 2007 at the offices of the company’s accountants when various matters relating to corporate governance were discussed, as was the issue of contracts for the directors. The company’s solicitor produced a draft contract entitled “Senior Executives’ Employment Agreement”. It was discussed, a copy of the draft was annotated by the solicitor with a number of amendments which apparently he thought were appropriate to the situation, for example, where there was a reference to three months’ notice the annotation shows ‘six to twelve’. The agreement in original draft provided for the employee to devote the whole of their working time to the business, but the annotation appears to suggest an amendment of ‘sufficient time’ and the use of the phrase ‘as the business of the company dictates’. In the provisions on salary the figure of £85,000 is annotated. One outcome of the meeting was the circulation of the draft contract. However, that was not taken any further and no agreement was ever signed…

6.35

At a meeting on 7 April 2009 at the offices of the company’s solicitors it was agreed that Mr Keane would work towards full time employment with the company, taking responsibility for the accounts department. Mr Stack would take charge of the technical division, his responsibilities would continue to be project management and cost management, procurement and delivery. He would also be responsible for technical employees and technical contractors. Corporate governance needed to be tightened to ensure that no director drew money without the consent of the others, targets should be that directors are full time employees of the business drawing a salary at the rate of £5,000 per month…

6.36

However, these aspirations, if that is what they were, were never realised. Relationships between the directors deteriorated amidst arguments about money. Eventually Mr Martin and Mr Keane took a decision to terminate Mr Stack’s appointment as director of the company…

6.37

Having recited the evidence, it is necessary for me to resolve the conflict about the amount of time that Mr Stack devoted to the business, I do not find it necessary to assess what the activities were in particular, nor whether they were menial, supportive or professional. There is no evidence to show that Mr Stack did anything less than the work expected of him. It seems to be a question of hours…

6.38

The evidence of the independent witnesses, Ms Thomson, Mr Moore and Mr Kong span the period from June 2006 to the end of 2008 and some periods subsequent to that and they speak of Mr Stack performing essentially full time duties. I broadly preferred the evidence of Ms Thomson, Mr Moore and Mr Kong to that of Mr Martin. He admitted that he had been prepared to ‘spin’ information to suit his purposes and that did not endear his evidence to me…

6.39

I found that, given Mr Stack continued to have certain other personal interests in LTC and in his property portfolio, it is unlikely that Mr Stack was engaged totally full time on the activities of the respondent company. However, to put a figure on it, I found that as from June 2006 it is probable that Mr Stack operated at about 80% of full time on the company’s business.”

The Judge then proceeded to direct himself in a manner which is uncontroversial as to the classic indicia of a contract of service. In particular, he derived from the decision in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, at 515C-517B four essential elements:-

“(1)

There must be a contract between the worker and the employer in which the worker agrees to provide his work in consideration of a wage, although that contract may not be in writing.

(2)

There must be an obligation to carry out the work personally.

(3)

There must be a mutual obligation for the employer to provide work and for the employee to accept it and perform the work that has been offered.

(4)

There should be a degree of control by the employer over the worker which is consistent with an employment relationship.”

The Judge also correctly observed, at paragraph 7.6, that directors of companies are not, ipso facto, employees but may become so by entering into a contract of employment, express or implied, or again they may be workers by virtue of an agreement. The Judge said nothing about the relevant principles of contract formation, but correctly identified the first question for decision as being “Whether there was an express agreement that the Claimant would work for the Respondent and further that he would get paid for what he did.” The Judge also correctly observed that payment might be a deferred remuneration and that possibly the amount might be ascertained by reference to a factor such as what was paid to somebody else.

The Employment Judge’s key findings and conclusions are then contained in the following passages:-

“8.2

I find that it is overwhelmingly likely that the parties agreed when they were promoting this company that the claimant would perform work for the company and that that agreement was subsequently endorsed by the directors of the respondent company when it was formed. Just as it was agreed that Mr Martin would perform the sales activity, it was agreed that Mr Stack would run the operational side and provide operational director services…

8.3

The situation in reality is that a company is founded and formed by its promoters. They decide who are to be the first directors, they effectively determine the allocation of the shares and that normally reflects the respective contributions made to the equity of the company. The reality here is that these three, Mr Keane, Mr Martin, Mr Stack, wanted to form a company. They were to contribute different things. Mr Stack and Mr Keane were to provide their skills and money. Mr Martin was to deliver his skills. There is little doubt that there was nothing much to do at the beginning. Obviously, a certain amount of work needed to be done to get the company up and running in an administration sense, but principally Mr Martin needed to get on the road and drum up the business. As the business came in, hopefully, the work would have to be performed, the books kept, financial controls arranged, money managed and so on. In my finding Mr Stack was the person who was to go about and indeed go about setting up the infrastructure, the bank accounts, the trading accounts, the insurances, and all the administrative necessities of life for a limited trading company…

8.4

The company had directors’ loan accounts. They reflect the money that the directors advanced to the business. Each of the directors here had loan accounts. They also received dividends and to some extent those dividends went to pay off their indebtedness to the company by way of debit balances on the loan accounts…

8.5

The reality was also this. Mr Keane and Mr Stack were not to be full time involved with the company, certainly not initially. They had their own businesses in addition to their involvement with Ajar-Tec. There was not a major amount of administration to be done initially, but I found that it was envisaged at the time that Mr Stack would be engaged, to use a neutral term, in the company’s activities because he had the skills of project management, familiarity with audio/visual equipment, and expertise in procurement. The plan was that he would bring these to the company as much as Mr Martin would bring his skills in sales…

8.6

A shareholder does not of necessity have any involvement with the operations of a limited company. He pays for his shareholding or is given it and he can just sit back and wait for the money, hopefully, to roll in. Frequently, of course, and particularly in small companies, the shareholders are the people who actually do the work, but this does not prevent them from being employees/workers as well, subject to consideration of the standard tests. Thus I found that it was the intention of the parties and their express agreement that Mr Martin would work full time in the company and would be paid and that Mr stack would also work for the company albeit that the hours fell to be agreed at a later stage, or would be determined as needed depending on the amount of work that Mr Martin was successful in securing…

8.7

Was it express or implied that Mr Stack would work and get paid? The respondents urge an argument that it is not appropriate to imply a contractual term of this nature unless it is necessary to do so and anything that the claimant did can be explained by his being a shareholder or a director of the company, therefore there is no necessity to imply anything about payment. As I have already remarked, it would not be a requirement that a shareholder would necessarily be involved in carrying out the trading activities of the company in which he holds his shares. A director may be an employee or a worker subject to the tests enunciated above. There are many examples where directors have been held to be employees…

8.8

I questioned whether it made any sort of commercial sense in the circumstances of this case and having regard to the beginnings of this enterprise, for the claimant to be required to deploy his skills in the trading operations of the company without being paid when, for example, Mr Martin was deploying his sales skills, but was to be paid. To argue that the claimant’s rewards were limited to those deriving from his dividends again makes no sense because Mr Martin was also to benefit in this way as well as being paid for what he did by way of work. Putting it another way, if the officious bystander had asked the question on Mr Stack, Mr Keane and Mr Martin, “You’re getting together to carry out these activities, you have agreed that Mr Martin is going to work full time and will get a wage. In addition he will get dividends. Mr Stack is going to work in this business, at least part time. He is going to get dividends, is he also going to get a wage for what he does?” In my assessment the answer from all three would have been very clearly, “Yes, of course he will”. Therefore I found that there was an express agreement that the claimant would do work for the company and it was an implied term that he would be paid for what he did…

8.10

The fact that there was no provision in the accounts, and that contract documents were not signed, does not, in my finding, affect that determination. The fact that there were several opportunities for a formal contract to be entered into is actually consistent with the notion that there was some implied or verbal agreement already, but the time had not yet arrived when Mr Stack should be given a contract of employment to determine the detailed terms, including the amount he would actually be paid. I note that the directors’ remuneration was discussed from time to time and that there is reference to a need for an income stream to Mr and Mrs Stack. It is significant that the terms which were discussed or presented to the claimant tend to show that there had been an intention to create an employment relationship albeit to be fully detailed at some point not yet determined.”