The claimant was a director and shareholder of the respondent and worked for the business without remuneration. There was a discussion between himself and another shareholder about becoming an employee but a contract of employment was never drawn up. A memorandum confirmed the intention of the parties that 'the target was that the directors would become full-time employees of the business drawing a salary at a rate of £5,000 per month'. The Tribunal ruled that the claimant was neither an employee nor a worker within the definition of Part X or II of the ERA and so could not bring his claim of unfair dismissal and unlawful deductions. The reason for this conclusion was that the claimant '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'.

Counsel for the claimant submitted, with reference to the cases of Way v Latilla and Currencies Direct Ltd v Ellis, that the EJ was wrong in law. These 2 cases had established that the absence of agreement as to the amount of remuneration was not inconsistent with the existence of a contract whether of service or for services. The EAT agreed, saying that a contract of service or services can in principle exist even if the parties have not agreed the amount of remuneration. The matter was remitted to a different Tribunal.

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Appeal No. UKEAT/0527/10/CEA

EMPLOYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 19 April 2011

Judgment handed down on 8 July 2011

Before

THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT) (SITTING ALONE)

ROBERT STACK (APPELLANT)

AJAR-TEC LIMITED (RESPONDENT)

Transcript of Proceedings

JUDGMENT

For the Appellant
MR JAMES McCLELLAND (Of Counsel)

Instructed by:
Speechly Bircham LLP
6 New Street Square
London
EC4A 3LX

For the Respondent
MR NIRAN DE SILVA (Of Counsel)

Instructed by:
Brian Harris & Co.
23 Bentinck Street
London
W1V 2EZ

JURISDICTIONAL POINTS – Worker, employee or neither

Employment Judge wrongly held that claimant could not as a matter of law be party to a contract, either of service or for services, in circumstances where the amount of his remuneration had not been agreed – Way v Latilla and Currencies Direct Ltd v Ellis referred to.

1. The Appellant is one of three shareholders and directors of the Respondent company. He claims that he was also an employee of the Respondent and that he was constructively dismissed in September 2009. He brought proceedings for unfair dismissal and for various sums said to be due. Following a Pre-Hearing Review in the Watford Employment Tribunal on 24 June 2010 Employment Judge Mordsley held that the Appellant was neither an employee so as to be able to bring a claim of unfair dismissal under Part X of the Employment Rights Act 1996, nor a worker so as to be able to bring a claim under Part II of the Act. His Judgment and Reasons were sent to the parties on 19 August 2010.

1. This is an appeal against that decision. The Appellant has been represented by Mr James McClelland and the Respondent by Mr Niran de Silva, both of counsel. (Mr de Silva also appeared before the Judge, whereas the Appellant was represented by Ms Cole of Speechly Bircham.) Both counsel made their submissions very well.

1. The terms "employee" and "worker" are defined in section 230 of the 1996 Act 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)—

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(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."

I will use the term "contract for services" as a shorthand for the kind of contract described in sub-section (3) (b).

1. I can also summarise the factual background very shortly. The business was set up in 2005. The other shareholders were a Mr Martin and a Mr Keane. Mr Martin worked in the business full-time and was treated from the start as an employee and (albeit belatedly) issued with a contract of employment. The Appellant initially did less work, but the Judge accepted that over time he began to be more fully involved and that in the last few months of the relationship he was working full-time. There was discussion about himself and Mr Keane becoming employees, and indeed in 2007 a draft contract was produced by solicitors; but nothing was ever formalised. The Appellant received, on the Judge's findings, no salary, director's fees or dividend. At para. 17 of the Reasons the Judge recorded unchallenged evidence from Mr Kong, the company's accountant, that

"… he remembered on at least two occasions when the subject of the Claimant's salary was discussed with Mr Keane, that Mr Keane had confirmed that the Claimant would be paid a salary which would be backdated from the commencement of his employment."

A memorandum dated 6 April 2009 confirmed that the intention of the parties remained that "the target was that the Directors would become full-time employees of the business drawing a salary at a rate of £5,000 per month"; but the Judge recorded at para. 18 of the Reasons that the Appellant accepted in evidence that the word "target" showed that this was "an ongoing intention" rather than "the actual reality as that moment".

1. There was no time at the end of the hearing before the Judge for oral submissions, and the parties made their closing submissions in writing. The Judge in his Reasons said that he would follow the structure of Mr de Silva's written submissions, which relied on three factors itemised as: (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. Those heads are addressed in turn at paras. 24-29 of the Reasons, although the format and paragraphing are rather odd. The paragraphs in question come under the heading "Submissions and Findings", and I have to say that it is not always clear at what points the Judge is making findings as opposed to merely recording submissions.

1. Paras. 27-29 (but not the sub-paras. under para. 29) address Mr de Silva's point (a). The Judge held that the absence of a written agreement was not decisive. No point arises on this appeal about this aspect of the reasoning.

1. Paras. 29.1-29.8 address point (b). I should set them out in full:

"No agreement as to wages

29.1 To constitute a valid contract, you need an offer and acceptance and, indeed, consideration and in this present context therefore we need to have some agreed wages or other remuneration. In the Ready Mix Concrete case in which there were three elements in determining whether there was a contract of employment one is a need for some consideration.

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.

29.3 To support his claim, the Claimant says that a salary figure of £6,000 had already been confirmed in an email of 30 May 2008. However, this was about a year after discussions about the draft Agreement of 2007. Furthermore, an email from Mr Keane of 30 May 2008 said that his payment could be in any format such as a dividend and an in email on 30 May 2008, the Claimant himself stated that 'our directors' remuneration has been partially discussed but to my knowledge not agreed'.

29.4 The Claimant suggested that he received two payments of £7,000 and £5,000 on 5 and 27 May 2009 respectively and these were salary payments. This clearly cannot be accepted by the Tribunal.

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.

29.6 To support the Respondent's claim, it was argued that the Claimant knew that a contract of employment had been agreed for Mr Martin and had done nothing to seek to have one prepared for him. We find that as a fact and it is of relevance.

29.7 It was argued that the Claimant said he did not want to become an employee of the Company. The Tribunal finds that the Claimant would be most likely to not have said that. Indeed, he did not recollect saying that and we accept that and prefer his evidence to Mr Martin on that point.

29.8 The memorandum of the meeting between the directors on the 7 April 2009 clearly used the future tense for the word "target" and that in the Respondent's view meant that this was an aspiration rather than an agreement. The Tribunal totally agrees with that point and therefore no hard agreement had been reached at that point or indeed at any time prior to the dismissal."

1. Paras. 29.9-29.11 address issue (c), i.e. the conduct of the parties. No point arises on this for present purposes.

1. The Judge's conclusion, so titled, appears at paras. 30-32 of the Reasons, which read as follows:

"30 Taking in all of the above matters into account, the Tribunal concludes that the Claimant was not an employee or a 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 was submitted, someone who was working to protect his investment rather than working as an employee or a worker.

31 It is a shame that the Claimant never sought to finalise his arrangements with the Company. He clearly had done a considerable amount of work for the Company particularly in the latter stages but had done nothing to protect himself. As an astute and experienced business man he must have known that he would need to do this to protect his own position as an employee. He did not do so.

32 In all the circumstances, the Pre-Hearing Review Judgment is that the Claimant was not an employee or worker and therefore his claim cannot proceed."

1. It is clear that the actual reasons for the Judge's decision are given in para. 30. Para. 31 is by way of comment. Various points are made in para. 30, without their precise relationship being spelt out (the missing "(b)" does not help matters). But it is clear that a, if not the, central element in the Judge's reasoning is the proposition that because "there was no consideration that had been agreed" there could be no contract of any kind – i.e. whether a contract of service or for services or otherwise.

1. Mr McClelland submitted that it is clear from para. 30, read with paras. 29.1-29.5, that what the Judge meant by saying that there was no "agreed consideration" was that no specific amount had been agreed by way of remuneration. He said that that was the natural reading of the phrases "agreed wages" and "agreed remuneration" in paras. 29.1 and 29.2, where the absence of such agreement is said to be a "vital factor"; but he added that if those phrases are ambiguous the matter was put beyond doubt by the phrase, in para. 29.2, "which could be calculated", and still more by para. 29.5, which explicitly relies on the absence of "clarity" or "certainty" about the amount to be paid.

1. Mr McClelland submitted that that approach was plainly wrong in law. He referred to the well-known cases of Way v Latilla [1937] 3 All ER 759 and Powell v Braun [1954] 1 WLR 401 as establishing that the absence of agreement as to the amount of remuneration is not inconsistent with the existence of a contract, whether of service or for services. He referred also to the decision of the Court of Appeal in Currencies Direct Ltd v Ellis [2002] 2 BCLC 482 ([2002] EWCA Civ 779). I can summarise those cases fairly briefly:

(1) In Way v Latilla the appellant was engaged by the respondent to negotiate mining concessions in West Africa. No remuneration for those services was agreed, but the House of Lords held, as Lord Atkin put it at p. 763G:

"… [W]hile there is … no concluded contract as to the remuneration, it is plain that there existed between the parties a contract of employment under which Mr Way was engaged to do work for Mr Latilla in circumstances which clearly indicated that the work was not to be gratuitous. Mr Way, therefore, is entitled to a reasonable remuneration on the implied contract to pay him quantum meruit."

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The House went on to determine what that reasonable remuneration should be. The case clearly establishes that a "contract of employment" may exist in circumstances where the remuneration has not been agreed. It is fair to say, however, that the precise nature of the contract was not in issue before the House, and Lord Atkin should not be taken as having intended to hold definitively that the appellant was employed under a contract of service: indeed at p. 760C he describes the claim as being one for "remuneration for services".

(2) In Powell v Braun the defendant, a businessman, had promised the plaintiff, his secretary, a bonus based on his trading profits in lieu of a pay increase, but the amount was not specified. The Court of Appeal, following the approach in Way v Latilla, held that that constituted a binding promise to pay a reasonable sum, which the court itself could fix.

(3) In Currencies Direct v Ellis the defendant was a shareholder and director in the claimant company. He worked for the company full-time. Over two years he was paid over £200,000 which was shown in the books as a loan. The company sued for its return. His defence was that the sums in question were in truth remuneration. The company took the point that they could not constitute remuneration because there was no agreement to pay any fixed amount. Counsel submitted, as recorded by Mummery LJ at para. 17 of his judgment (p. 486 e-f), that:

"… in the absence of any … specific agreement on the quantum or level of salary to be paid, [the claimant] was not legally entitled to be paid any … remuneration by the company. He was unable to identify either the date on which an agreement to pay remuneration was concluded or the amount that he was entitled to receive as remuneration."

That submission was rejected. Mummery LJ said, at paras. 20-21 (p. 487 b-g):

"[Counsel's] submissions are based on a misconception that a payment can only properly be characterised as remuneration if there is a specific agreement fixing the level or rate of remuneration or defining a formula for ascertaining a definite amount to be paid. … The obligation to pay need not arise from an express contract. Where no express agreement is reached on the level of remuneration, the person who has done or agreed to do work in circumstances in which it can be inferred that there was a common intention that he should be paid, is entitled to recover reasonable remuneration under an implied contract to pay a quantum meruit."

1. Mr McClelland accepted that it will be very unusual to find a concluded contract of service or for services where the parties have not agreed the amount of any part of the remuneration. But he said that that was essentially for practical reasons: in most cases remuneration is the one thing that the parties will have agreed before work starts, and, even if they have not done so, the first pay-day will usually produce explicit or de facto agreement. But there will be cases, of which he said this was one, where a contract – particularly perhaps a contract for services but in principle also a contract of service – is entered into but the parties understand that payment will be deferred for some time and leave the amount of the remuneration unagreed in the meantime. He submitted that the Judge was wrong to treat the fact that no specific sum had been agreed as necessarily negating the existence of the contract.

1. None of the authorities relied on by Mr McClelland is quite on all fours with the present case. Nevertheless I think that he must be right that a contract of service or for services can in principle exist even if the parties have not agreed the amount of remuneration. And indeed Mr de Silva accepted that if the Judge's reasoning was as Mr McClelland characterised it it would be wrong in law. But he said that it was important to read the relevant passages in the Reasons in the context of the submissions made. His case before the Judge had not, as is clear from his written closing submissions, been simply that no precise sum had been agreed but, more fundamentally, that there had been no agreement, express or implicit, that the Appellant would receive any remuneration for the work that he was doing during the period in question. Rather, he was doing that work as, technically, a volunteer – or, to put it more realistically, as someone with an interest in the business who wanted to see it thrive so that he could in due course obtain a reward by way of dividend or appreciation in its capital value or both. It was that case, he submitted, that the Judge was accepting. When the Judge said in para. 30 that "there was no consideration that was agreed", what he had meant was that there was no concluded agreement that the Appellant would be paid remuneration at all (i.e. as opposed to director's fees or dividends), not just that the amount had not been fixed: any ambiguity is resolved by the final sentence. As to the other phrases relied on by Mr McClelland, they reflect the way in which the Appellant's case had been argued: his case had consistently been that agreement as to the level of remuneration had been reached. If that was indeed the Judge's reasoning, then the authorities relied on by Mr McClelland were beside the point: they were all cases in which the plaintiff or claimant was working on the basis that he or she would receive remuneration, and the only issue was the amount.

1. 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 de Silva contended that if I accepted Mr McClelland's submissions I would be allowing the appeal on a basis which had not been argued below: the Appellant's case had, he submitted, been that his level of remuneration had been fixed, and he had not sought to rely on a quantum meruit. I do not accept that. It was the proposition on which the Judge relied, namely that there could be no contract unless remuneration was fixed, that was the new point: Mr de Silva had not argued for it, and accordingly Ms Cole had had no opportunity to controvert it. If she had, she would no doubt have argued, as Mr McClelland did, that even if the Judge did not find that any specific sum had been agreed that was not fatal to his position in law. The problem illustrates yet again the difficulties that can arise when cases are decided on written submissions only.

1. Both counsel accepted that if I found that the Judge had indeed misdirected himself the decision could not stand and the issue would have to be remitted in order to consider whether at the material times there was in force a contract of service, or a contract for services, between the parties under which the Appellant was entitled to remuneration albeit that the amount was not fixed. I have nevertheless considered whether it was not open to me to resolve that question myself on the basis of the findings of fact made by the Judge. Some of the findings in fact, if taken in isolation, might seem clearly to point in one direction or the other. But I must reluctantly agree with counsel that the overall position is too messy to allow me to come to a safe conclusion on the material that I have.

1. The remaining question is whether the case should be remitted to the same or a different Employment Judge. It is far from ideal that the parties will have to call their evidence again, particularly when the point is only a preliminary one. But that seems to me to be outweighed by the lack of confidence that the Appellant would reasonably feel in the Judge being able to approach the issues again using a clean slate. Mr McClelland submitted that the hearing should not last more than a day, which I hope is correct; and the amounts at stake are substantial.