Labour & European Law Review Weekly Issue 380 30 July 2014
Tribunals can imply a term into a contract but only if it is necessary to do so. The Employment Appeal Tribunal (EAT) held in Ajar-Tec Ltd v Stack that it was not possible to have an express contract of employment between two parties with an implied term that one of them should be paid if there was no “consideration” (remuneration) between them.
The company, which supplied audio/visual equipment, was set up in April 2005 with three shareholders. Mr Martin, one of the directors and the principal motivator behind the company, received a salary from the outset.
Mr Stack was also a director and shareholder. He did not work full time for the company to begin with and agreed that he would not be paid until it was up and running. Once that happened, he understood that he would be paid on the same basis as Mr Martin from the date of incorporation.
Early in 2007, a human resources consultancy produced a template contract for him to sign, but he did not respond to it. Later that year, the company solicitor also drafted a contract for him, but again Mr Stack did not sign it. In 2009, after relations between the directors deteriorated because of arguments about money, Mr Stack’s appointment was terminated.
The tribunal judge held that it did not make sense for Mr Stack to be required to work for the company but not be paid, particularly when Mr Martin was paid for the work he did. The argument that Mr Stack would benefit from dividend payouts did not hold water as Mr Martin also received these.
The judge concluded therefore that there was an express agreement that Mr Stack would work for the company and an implied term that he would be paid for what he did.
The EAT upheld the company’s appeal on the basis that it was not possible to have an express contract of employment between two parties with an implied term that one of them should be paid if there was no “consideration” (something of value exchanged by the parties to the contract) between them.
It said that the tribunal had failed to separate out the four main questions it needed to ask:
- was there a written (express) contract of employment?
- if not, was there an implied contract?
- was there an express term as to what Mr Stack should be paid?
- If not, was there an implied term about what he should be paid?
In this case, Mr Stack had substantial business interests other than Ajar-Tec Ltd. Mr Martin, on the other hand, had no other interests and no money and therefore worked full-time under a written contract of employment. During the three years that Mr Stack worked about 80 per cent of the time for the company, he never specifically asked to be paid. And despite being given a draft contract to sign on two different occasions, he failed to do so.
It was not therefore possible to conclude that Mr Stack worked part-time under an implied contract of employment. And given the facts found by the employment judge, it was not possible to imply a contract or a contract of employment between the parties. The EAT therefore remitted the case to a fresh employment tribunal to decide that point.
This case highlights the importance for all parties to establish their status and formalise their employment relationships from the beginning.