Case Study

Employment Tribunal win against constructive dismissal

Gannons’ John Deane successfully defended a claim for unfair constructive dismissal at the Employment Tribunal in London.

Our client, the company, claimed that a founder who left had become an employee only six months earlier. The leaving founder became an employee at the point when she signed a service agreement with a market rate salary. The founder claimed unfair constructive dismissal when she left. She also unsuccessfully claimed she had been an employee for over three years, since the point when she began being paid a modest amount through the payroll. The Employment Tribunal needed to determine the point at which the founders the company became employees of their company.

Company founding

Three individuals founded the company together in August 2012. They were all shareholders and directors of the company. The claimant held 40% of the shares in the company. Meanwhile the other two founders, a husband and wife, held 30% each. A shareholder dispute occurred between the founders three years after the business started trading.

Building the company

During the earlier years, the founders worked together to build the company up. From April 2014 they decided they had enough money in the company to pay themselves dividends and low payroll remuneration. This lasted until September 2016 at which time they all signed service agreements with market rate salaries.

Lead up to unfair constructive dismissal

In April 2017 differences came to a head. The two founding shareholders who each held 30% each of the company voted to reduce salaries. They also wished to revert to the previous arrangements of paying dividends and low payroll remuneration. The claimant disagreed with this. This led to her leaving the company. Thereafter she claimed unfair constructive dismissal on the grounds of substantial reduction in salary without consent.

The law on constructive dismissal

As an employee, the claimant needed to be in continuous employment for a period of at least 2 years in order to claim constructive dismissal.

Claimant’s case

The claimant made the case that she had an implied contract of employment from April 2014. This exceeded the two-year limit she required.

She claimed the existence of an implied contract. Firstly because once she signed the service agreement in 2016, there was little change to her role, duties, and responsibilities and she still worked the same hours after she signed it.

Furthermore, the company still continued to provide her the tools for the job, before and after she signed her service agreement. Finally, in April 2014, she gave up her existing job to work exclusively for the company. She then continued to take general direction from the board.

Our case

The other two founders on behalf of the company argued that the claimant was an employee from 2016 only. Their main argument was that prior to the claimant signing the service agreement, in which key terms and conditions were expressly set out, there were no other trappings of employment such as access to sick pay, notice period, restrictive covenants etc.

Furthermore, the directors intended to become employees of the company at some point. This put these intentions into action in 2016 when they signed the service agreements. Before this, although they were taking remuneration from the company, they did not intend to be treated as employees of the company.

The result we achieved

The Employment Tribunal concluded that until the claimant signed a director’s service agreement in September 2016, she was not an employee of the company. She was a director and shareholder of the company. She was working in that capacity and was therefore remunerated as a shareholder and director by way of dividends and low payroll remuneration.

What you can learn

Shareholder disputes involving founders who fall out in early growth years will require a consideration of rights as shareholders, directors, and employees. The Employment Tribunal’s decision concluded that until a formal employment contract on market rate salary was agreed, the founders were directors and shareholders of the company working in that capacity. This favoured our client, the employer. Therefore they received remuneration as directors and shareholders.

Their method of remuneration until that time – namely dividends and minimal remuneration through payroll – did not imply a contract of employment. Hence, it would not count towards continuous service required to bring a claim for unfair dismissal.

John Deane

John solves commercial problems for SMEs and their investors. It is said that he is unbelievably practical and seasoned in finding the right solution without too much fuss. He has an established reputation in the technology, art and media industries.

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