The claimant was an investor in the respondent business. Initially he worked part-time but towards the end of his relationship he was virtually full-time. The three directors had agreed to put in place employment agreements but these had not been finalised by the time the claimant left. In the ET the judge held, broadly, that as there had been no agreement to the amount that the claimant would be paid there was no contract. Accordingly the claimant was not an employee or a worker and the claims were struck out. Underhill J, in the EAT, found that the judge had erred in law when reaching this conclusion and remitted the case back to a fresh tribunal because  "the overall position is too messy to allow me to come to a safe conclusion on the material I have."

Elias LJ agrees with that conclusion, rejecting counsel for the respondent's submission that Underhill J had misconstrued the judge's reasoning which was there had been no agreement on any remuneration whatsoever. He was more concerned with the decision to remit the issue but was persuaded to uphold that as

'there may be an issue whether the necessity test applied in the Greenwich and Tilson cases is appropriate for determining whether a contract exists in a case of this kind; and because whilst I think that on any view the claimant will face real difficulties in establishing that a contract was in place, I am not prepared at this stage to discount that possibility altogether.' 
________________

Case No: A2/2011/2037

**Neutral Citation Number: [2012] EWCA Civ 543

IN THE COURT OF APPEAL (CIVIL DIVISION)**

ON APPEAL FROM the EMPLOYMENT APPEAL TRIBUNAL

THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT)

UKEAT/0527/10/CEA

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 26/04/2012

Before :

LORD JUSTICE ETHERTON

**LORD JUSTICE ELIAS

**and

SIR STEPHEN SEDLEY

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Between :

AJAR-TEC LIMITED (Appellant)

- and -

STACK (Respondent)

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(Transcript of the Handed Down Judgment of

WordWave International Limited

A Merrill Communications Company

165 Fleet Street, London EC4A 2DY

Tel No: 020 7404 1400, Fax No: 020 7404 1424

Official Shorthand Writers to the Court)

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Mr David Reade QC and Mr Niran de Silva (instructed by Messrs Brian Harris & Co) for the Appellant

Mr Timothy Pitt-Payne QC and Mr James McClelland (instructed by Speechly Bircham LLP) for the Respondent

Hearing date : 19 April 2012

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Judgment

As Approved by the Court

Crown copyright©

Lord Justice Elias : 1. The issue in this case is whether Mr Stack is either an employee or a worker employed by the appellant company. (I shall refer to Mr Stack as the claimant, as he was before the Employment Tribunal, although he is the respondent to this appeal.) 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 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 that the employment judge had erred in law in his approach and remitted the matter to a different Tribunal to decide the issue afresh. The appellant company now seeks to restore the decision of the employment judge.

The statutory provisions.

1. 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) …

(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."

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.

The facts.

1. The appellant is an audio-visual business which designs, installs and supplies various systems for clients. It was incorporated in April 2005 and operates in West London. When it was formed four people were involved, although only three were shareholders and directors. They had equal shareholdings. They were Mr Andrew Martin, who worked from the company's inception on a full time basis and had a formal written employment contract; Mr Keane, who was a part time finance director and played a small part in the company's operation; and the claimant. There was a dispute about the extent of his involvement in the company. The finding of the employment judge was that he was not working full time in the business initially, nor indeed for the first few years, although in the last months of the relationship he was virtually full time. Neither Mr Keane nor Mr Stack had any formal employment contract.

1. The judge found that the intention was that all three directors should become employees. A draft Senior Executive Employment Agreement was prepared in 2007 and was discussed between the parties, but it never materialised into a final agreement. Mr Stack accepted that no conclusions were ever reached in these discussions. Furthermore, there was a memorandum of a meeting in April 2009 which stated that the "target was that the directors would become full time employees of the business drawing a salary at the rate of £5000 per month." However, nothing had been formalised before Mr Stack left in August 2009.

1. The employment judge summarised the contending positions of Mr Stack and the company as follows (paras 15 and 16):

"The Claimant said in evidence that [the failure to formalise the relationship] was of no great concern to him because it was always the intention of the parties that this arrangement would be formalised and there was an understanding that he was employed and that everything would be formalised when the Company became profitable.

On the contrary the Respondent, while it intended that the Service Agreement would eventually form the basis of the employment relationship that would be entered into (but the details remained to be agreed), was clearly of the view that nothing would be formalised until the venture became profitable and that, indeed, there was no real relationship between the parties at all and that anything that the Claimant was doing was done by means of protecting his investment. In truth, there was not a great deal of difference between the two positions."

1. The last sentence overstates the common ground; the claimant appears to be saying that there was in place an informal arrangement amounting to a contract and that the only question was when it would be formalised. The respondent was denying that any such arrangement existed; there was no contractual arrangement in place although the aim and intention was to introduce contracts in the future when the business became profitable.

1. There was other evidence confirming a common intention that there should ultimately be a contract. Mr Kong, who carried out audit work for the company, remembered at least two occasions when Mr Keane (who did not give evidence) had confirmed that the respondent would be paid a salary or dividends and that it would be backdated to the commencement of his employment.

1. The claimant's case, as summarised by the employment judge, was that he "worked under an implied contract … for a long period of time backdated to 2005". I take this to mean that his case was that there was an implied contract from the beginning (although as Sir Stephen Sedley pointed out in argument, it would be better to say that it was a contract to be inferred from the way the parties conducted themselves.) The employment judge accepted that the claimant did carry out an important role, though not quite as integral to the business as he had suggested.

1. The employment judge set out his conclusions. He structured them in accordance with the written submissions of Mr de Silva, counsel for the company below, who had focused on three factors in particular when analysing whether the claimant was employed pursuant to a contract or not. These were:

(a) the absence of a written agreement;

(b) the absence of any agreement as to wages or remuneration, and

(c) the conduct of the parties.

1. As to (a), the judge concluded, as he was bound to do on the evidence, that there was no agreed written contract, but he recognised that the absence of an agreement was not of itself a bar to his finding that a contractual agreement was in place.

1. The judge then considered, in paragraph 29, whether there was any agreement to pay wages or remuneration. This is the key passage in his judgment on which the outcome of this appeal turns. The relevant passages in particular are paragraphs 29.2 and 29.5:

29.2 The absence of any agreed remuneration is a vital factor in this case. In all of the cases, there has always been an agreement to pay some salary or remuneration which could be calculated.

….

29.5 On looking at all of the evidence and the fact there was no clarity about what sum was to be paid, if ever there was to be any payment, it would appear that no agreement was ever reached as to the amount that would be paid to the Claimant nor, indeed, was an agreement made as to back pay. It seems to the Tribunal that that in itself is fatal to the claim that the Claimant was an "employee" or "worker". You cannot have any contract where it is uncertain as to what the sum is that a person is working for whether it was employment or a worker's contract.

1. Finally, in relation to the conduct of the parties, the judge noted that the working hours for Mr Stack had been flexible, and that he had carried on another business whilst employed by the company. He took holidays when he wished and put money into the business and withdrew it, as he wished. It seems that the judge treated these as factors pointing away from the existence of a contract and in favour of the company's contention that he was acting in his capacity as a shareholder/director, but these findings were not of themselves decisive.

1. The judge stated his conclusion as follows (para 30):

"Taking all of the above matters into account, the Tribunal concludes that the claimant was not an employee or worker because (a) he did not have a contract whatsoever and no terms had been agreed and, in particular, there was no consideration that was agreed which was a necessary finding to show that he was working under a contract. In the Tribunal's view he was, as submitted, someone working to protect his investment rather than working as an employee or worker."

The appeal to the EAT.

1. The appeal to the EAT was on a limited basis. It was submitted that the employment judge had misdirected himself when he said, as he did in paragraph 29.5, that since no specific wage had been agreed, this was fatal to his contention that there was an implied contract in place. Mr McClelland, counsel for Mr Stack below, contended before Underhill P that this was a plain error of law which tainted the whole of the judge's analysis. The EAT agreed with that submission, concluding that it was consistent with such cases as Way v Latilla (1937) 3 All E R 759 Powell v Braun (1954) 1 WLR 401 and Currencies Direct Limited v Ellis [2002] 2 BCL C482 [2002] EWCA Civ 779. To the extent that these cases concluded that there was an implied contract to pay a quantum meruit, they are no longer good law: see the discussion by Etherton LJ in Benedetti v Sawiris [2010] EWCA Civ 1427 at paras 140-141. But they are consistent with the principle that there may in an appropriate case be an implied contractual term to pay a reasonable sum for work done.

1. Mr de Silva, counsel for the company below, realistically did not dispute that principle. He accepted that if the judge's findings could be characterised as a conclusion that there was no contract because no specific sum had been agreed, then indeed it was an error of law. His submission, and it is repeated before us by Mr Reade QC, is that when read in context, this is not what the judge was saying. The contention was that construed in the light of the submissions made to the employment judge, the judge's finding was that there had been no agreement to pay any sum, and it was this which was incompatible with the claim to a contract, not simply a failure to reach agreement as to precisely what sum was to be paid. This was what the judge meant in paragraph 30 when he said that no remuneration had been agreed. He was saying in that paragraph that the parties had not agreed that the claimant should receive remuneration in his capacity as an employee at all, as opposed to receiving director's fees or dividends.

1. The EAT preferred the submission of Mr McClelland. Underhill P summarised his reasons as follows:

" I was attracted by Mr de Silva's submissions, but in the end I must reject them. I do not think that it is possible to explain, or explain away, the passages relied on by Mr McClelland by reference to how the case was argued before the Judge: however the case was put to him, what matters is the reasoning that he actually adopted. The real stumbling-block for Mr de Silva is para. 29.5. The first half of the paragraph is no doubt simply a finding of a fact – i.e. that no agreement had ever been reached as to the amount of any remuneration; and that fact is certainly material to the question whether a contract of service or for services had been agreed. But in the second half the Judge goes on to say not simply that that finding is relevant to the issue before him but that it is decisive of it. The last two sentences are quite unequivocal and must be taken also as resolving any possible ambiguity as to what the Judge meant in para. 30."

1. Mr Justice Underhill understood that there had been a concession that if the employment judge had indeed erred as alleged, the matter would have to be remitted for a re-hearing. In fact he said that he had nonetheless considered trying to resolve the question on the material before him but had concluded that "the overall position is too messy to allow me to come to a safe conclusion on the material I have."

Grounds of appeal.

1. Essentially three grounds were advanced by Mr Reade in his attractive and succinct submissions. First, he repeated the submissions advanced below to the effect that the EAT had misconstrued the reasoning of the employment judge. Read fairly and in the light of the arguments advanced to him, he contended that the judge was concluding not merely that there had been no agreement as to the amount of any remuneration, but no agreement that any remuneration should be paid at all.

1. Second, he submitted that even if the judge had made the error of law attributed to him, it was immaterial to the central finding that there was no contract. There was a clear finding in paragraph 30 of the employment judge's decision that the claimant was someone working to protect his investment rather than working as an employee or worker. That, submitted Mr Reade, was a decisive finding of fact which of itself justified the judge's conclusion irrespective of the alleged legal error.

1. Third, he contended that in any event there was no proper basis on which any employment judge, on the material before this employment judge, could have concluded that it was possible to infer a contract from the circumstances of this case. The test, he submitted, should be whether it was necessary to infer such a contract to explain the conduct of the parties, relying upon certain dicta of Mummery LJ in James v London Borough of Greenwich [2008] EWCA Civ 35, para 23, and Elias LJ in [Tilson v Alstom Transport ]()[2010] EWCA Civ 1308, para 8. He submits that the conduct of the parties was wholly referable to the claimant's position as a shareholder or director, and that there was no room or justification for superimposing a contractual relationship to explain the terms of the relationship. There was every reason why Mr Stack would want to work in the business. He had invested in it and he wished to protect his investment, and he was able to, and did, draw money down from the business from time to time. There was no need to infer a contract.

Conclusion.

1. I reject the first submission essentially for the reasons given by Underhill P below. Whatever the employment judge had intended to say, I do not think that his judgment, which Mr Reade realistically accepts is at the very least ambiguous on this point, can be read in the way Mr Reade suggests. It follows, as Mr Reade concedes, that there was therefore a legal error in the judge's approach.

1. As to the second argument, Mr Pitt-Payne QC, counsel for the claimant, forcefully, and in my judgment convincingly, contended that the last sentence of paragraph 30 cannot be read as a self-standing finding of fact. He conceded that if it did have that status, it would demolish his case; the judge's error of law would indeed then be immaterial. But he submitted that it would not be justified to read the sentence in that way. The judge was not reaching a finding drawn from the primary facts, that the claimant was working to protect his investment; rather he was inferring that the claimant was working in that capacity precisely because of his conclusion that the claimant was not working pursuant to any contract. The finding was inextricably tied in with the judge's tainted conclusion that there was no contract in place; it was a consequence of that conclusion and not an independent finding. I agree with that submission; at any rate, I do not believe that it is possible to be satisfied that the finding was not tainted by the judge's original error, and in those circumstances I do not think it would be right to construe the finding against the claimant.

1. I confess that the third ground has caused me the greatest concern. But I am ultimately persuaded by Mr Pitt-Payne that it would be wrong to interfere with the conclusion of Underhill P that it would not be safe for the court to assess the evidence for itself. I do not reach that conclusion because of the concession, allegedly made by Mr de Silva below (but which he disputes) that the case should necessarily be remitted once the error was identified. If I were satisfied that there could be no purpose in remitting the matter, it would be pointless to hold the company to the concession and a waste of time and money to remit the case. I am persuaded because there may be an issue whether the necessity test applied in the Greenwich and Tilson cases is appropriate for determining whether a contract exists in a case of this kind; and because whilst I think that on any view the claimant will face real difficulties in establishing that a contract was in place, I am not prepared at this stage to discount that possibility altogether. Mr Pitt-Payne identified a number of factors which, depending perhaps on the appropriate test for determining whether a contract could be inferred, could lend some support to the claimant's case.

1. For these reasons, therefore, I would dismiss the appeal.

Sir Stephen Sedley:

1. I agree.

Lord Justice Etherton:

1. I also agree.