May 20, 2015

Contract can still exist even absent remuneration

The Claimant was one of three director/shareholders of the Respondent and was the primary investor in the company. He acted as the company’s Operations Director although he also had other business interests outside the company. One of the other director/shareholders was the Finance Director who only played a small part in the company and also had other business interests; the third was a Sales Director who received a salary and dividends. The Claimant and the Finance Director only received dividends. There were discussions about a contract of employment for the Claimant but nothing was ever agreed or signed. The Claimant was never paid other than in respect of the dividends. When relations between the three deteriorated, and the Claimant was sacked and his appointment as director terminated, he issued claims for unfair dismissal, wrongful dismissal, unlawful deduction from wages and holiday pay.

After consideration of the evidence the Tribunal concluded that there was an express agreement that the Claimant would work for the company and an implied term that he would be paid a reasonable amount from a reasonable starting date. This decision was overturned by the EAT on the basis that it considered an express agreement that the Claimant would work for the company could not amount to a binding contract without any consideration i.e. payment. However the Tribunal judgment was restored by the Court of Appeal which held, amongst other things, that since the oral contract had in fact been made between the three directors/shareholders before the company was incorporated it was not surprising that there was no agreement for remuneration. However it held that contracts can be implied as well as express and that it had been open to the Tribunal to conclude that a contract had come into existence through a combination of what the three had discussed between them and what it was necessary to imply given the way they dealt with each other and the work undertaken by each.

This is a factually complicated case and first started off in 2010 where a Preliminary Hearing was held to determine the Claimant’s status, whether employee or worker.

This legal update is provided for general information purposes only and should not be applied to specific circumstances without prior consultation with us.

For further details on any of the issues covered in this update please contact Gemma Ospedale, Partner in Employment on 020 7583 2222.

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