Statutory directors and employment status

Often, a company director might have a service agreement with the company potentially making them an employee, in addition to being an officeholder (by virtue of their appointment as a statutory director). A well drafted service agreement will be able to provide a sense of security for the company director, as it could, for example provide for a term of employment and therefore confer certain employment rights to the statutory director.

However, to what extent is it really that straightforward for a director to be considered an employee of the company? What other employment rights, if any, might the director have if they are not an employee? 

The general position

The general position is that a statutory director is not an employee of the company by virtue of them becoming an officeholder of the company.

The courts or tribunals are prepared to presume that there is a contract of employment if the director is required to work full-time for the company in return for a salary, but much will depend on the facts of the case; Folami v Nigerline (UK) Ltd [1978] ICR 277.

In Clark v Clark Construction Initiatives Limited [2008] IRLR 364, Elias P provided the following guidance in determining a director’s employment status (at §98 of the decision):

“(1) Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee; he has on the face of it earned the right to take advantage of the benefits which employees may derive from such payments.

 (2) The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising. Nor does the fact that he in practice is able to exercise real or sole control over what the company does…

 (3) Similarly, the fact that he is an entrepreneur, or has built the company up, or will profit from its success, will not be factor militating against a finding that there is a contract in place. Indeed, any controlling shareholder will inevitably benefit from the company's success, as will many employees with share option schemes…

 (4) If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding. For example, this would be so if the individual works the hours stipulated or does not take more than the stipulated holidays.

 (5) Conversely, if the conduct of the parties is either inconsistent with the contract […] or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.

 (6) In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing... This will be powerful evidence that the contract was not really intended to regulate the relationship in any way.

 (7) The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight. There is nothing intrinsically inconsistent in a person who is an employee doing these things. Indeed, in many small companies it will be necessary for the controlling shareholder to personally have to give bank guarantees precisely because the company's assets are small and no funding will be forthcoming without them. It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contract of employment.

 (8) Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that the fact alone will ever justify a tribunal in finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected. The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee, but of itself that fact alone does not resolve those doubts one way or another.”

This was later approved by the Court of Appeal in Secretary of State for Business Enterprise and Regulatory Reform v Neufeld [2009] IRLR 475, subject to two qualifications (at §§88-89 of the decision):

“In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it; and, as we have indicated, the mere production of what purports to be a written service agreement may by itself be insufficient to prove the case sought to be made. If the putative employee's assertion is challenged the court or tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship, for which purpose it will be relevant to know what the parties have done under it. The putative employee may, therefore, have to do rather more than simply produce the contract itself, or else a board minute or memorandum purporting to record his employment.

We consider that Elias J's sixth factor may perhaps have put a little too high the potentially negative effect of the terms of the contract not having been reduced into writing. This will obviously be an important consideration but if the parties' conduct under the claimed contract points convincingly to the conclusion that there was a true contract of employment, we would not wish tribunals to seize too readily on the absence of a written agreement as justifying the rejection of the claim. In both cases under appeal there was no written service agreement, but the employment judges appear to have had no doubt that the parties' conduct proved a genuine employment relationship.”

The significance of obtaining employment status

Being an officeholder of the company does not provide the director with much security, as they may be removed from office by a simple majority of votes by shareholders at a general meeting. However, if the director is treated as an employee, he or she may be able to bring an unfair or wrongful dismissal claim if they are removed from office.

In addition, if the director is an employee, he or she may be able to bring a claim against the Secretary of State in the Employment Tribunal under the insolvency provisions of the Employment Rights Act 1996 (“ERA 1996”) (sections 182 and 188) which provides protections to employees in the event of the employer’s insolvency.

What other employment rights might the director have?

Even if the director is not an employee for the purposes of the ERA 1996, he or she may nonetheless be classified as a “worker” under section 230(3)(b) ERA 1996 depending on the facts of the case, which may, for example, enable the director to bring a whistleblowing detriment claim under section 47B ERA 1996; see, for example, Catt v English Table Tennis Association Ltd [2022] EAT 125 (concerning a non-executive director).

In addition, the definition of an employee under the Equality Act 2010 (“EqA 2010”) is broad, covering, inter alia, individuals working under a contract of service and self-employed people working under a contract personally to do work; see section 83(2)(a) EqA 2010. As such, the protection from discrimination is much broader than the protection against certain rights under the ERA 1996 such as unfair dismissal and redundancy, which only applies to those who are under a contract of employment.

Unfair prejudice petition instead of ET proceedings?

It should be noted that if the director is also a shareholder of the company, he or she may be able to bring an unfair prejudice petition under section 994 of the Companies Act 2006 (“CA 2006”), if it can be demonstrated that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner or the shareholders generally. Under section 996(1) CA 2006, the court “may make such order as it thinks fit for giving relief in respect of matters complained of". 

A typical unfair prejudice petition may include one where the shareholder is also involved in the management of the company (labelled as a quasi-partnership) and is subsequently excluded from its management.

In Wootliff v Rushton-Turner [2018] 1 BCLC 48, the High Court decided that it was possible for a petitioner to pursue relief for compensation for wrongful dismissal, alongside other remedies in a s 994 petition (in the context of a quasi-partnership).

The advantage of pursuing an unfair prejudice petition is that the court has a wide range of powers under section 996 CA 2006 if the petition is found to be well-founded, including an order providing for a purchase of the petitioner’s shareholding (which is a remedy that cannot be awarded in the Employment Tribunal).

What to take away

Whether a director has employment status will largely depend on the facts of the case. For the company director, the best step to take is to protect their position from the very outset by entering into a service agreement with the company and ensuring that the parties manage their conduct in accordance with the terms of that service agreement.

As set out in Clark (cited above), this is a strong pointer towards there being a valid and binding contract between the director and the company, particularly in circumstances where the service agreement provides for certain provisions such as stipulated holidays and working hours.

A service agreement, especially a well-drafted one, will potentially help avoid the parties undergoing a protracted dispute over a director’s employment status down the line.

In addition, depending on the facts, pursuing an unfair prejudice petition under section 994 CA 2006 may be more advantageous than undergoing Employment Tribunal proceedings since section 996 CA 2006 confers broad powers on the court’s ability to grant relief if the unfair prejudice petition is found to be well-founded.

Lucas Nacif is an employment and business disputes barrister at 42BR Barristers. Lucas welcomes instructions on issues regarding employment status, directors’ duties and unfair prejudice petitions. Please contact Lucas’ clerks at 42BR Barristers ([email protected], [email protected] or [email protected]) should you wish to instruct him.

27th Aug 2025

Lucas Nacif

Call 2021