Employment Law – Shareholders – Employees or Third Party Contractors? – Contracts of Employment – IT

The case of Nesbitt and Another v Secretary of State for Trade and Industry [2007] involved joint shareholder claimants who had contracts of employment with their company. The claimants were husband and wife. In February 1985, the second claimant incorporated a company as the vehicle for a new business providing IT training services to businesses and public bodies. In March 1986, the first claimant joined her in the business. From that date onwards, the share capital of the company consisted of 1,000 issued shares, 529 of which were held by the second claimant, and 470 of which were held by the first claimant. One share was held by F, the second claimant’s mother.

All three were members of the board. At its height, the company had 20 employees working from four offices. From the outset the claimants had written contracts of employment with the company. Those contracts were in the same form as entered into with its first employees. The claimants were also paid salaries proportionate to their roles as the senior managers of the business. They did not receive directors’ fees or dividends.

The company was managed on a day-to-day basis mostly by the claimants, although eventually a project manager was employed. Most management decisions were taken fairly informally, board meetings were held every six months, and additional meetings were convened when required.

Unfortunately during 2006 the company became insolvent. On the 3rd of July 2006, the remaining employees, including the claimants, were made redundant by the liquidator. Subsequently, the claimants applied to the insolvency service for redundancy payments and other arrears owed to them, pursuant to sections 166 to 168 and 182 to 186 of the Employment Rights Act 1996 (the insolvency provisions).

Their claims were rejected by the insolvency service on the basis that they were not employees within the meaning of the 1996 Act. Their challenge to that decision was rejected by the employment tribunal. The tribunal held, inter alia, that they could not have been employees of the company because they were, in practice, in total overall control of the company and thus able to prevent their own dismissals. The claimants appealed.

The principal issue that fell to be determined by the court was whether the tribunal had erred in treating the fact of control as determinative of the question of whether the claimants had been employed by the company. The appeal was allowed.

In the instant case, the tribunal had erred in treating the fact of control as determinative. It was merely one of the many relevant factors that fell to be considered when determining the question of whether the claimants had been employed by the company. The claimants had proper employment contracts, and those contracts were equivalent to those issued to the other initial employees. They also received their remuneration by way of salary. The fact of control aside, there were no other factors pointing away from employee status. In such circumstances, when considering the facts found by the tribunal, the only conclusion properly open to the tribunal had been that the claimants were employees of the company. Accordingly, the claim would be remitted to the tribunal for a determination of the sums due to the claimants.

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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

Employment Contracts – Are Employment Contracts Important To Companies? Find Out

Parties enter into written agreement or contracts in order to manage expectations. A contract should clearly specify the parties’ rights, duties, and obligations. The contract is an insurance policy against a party’s failure to act in accordance with the contract terms. That said, deciding on whether to enter into employment contract with an employee is not like deciding to enter into any other type of contract. That’s because common-law already provides the foundation (i.e., the rights, duties and obligations) for the relationship between an employer and employee. That foundation is the employment at-will doctrine.

Some employees (and most unions) consider an employer’s power to discharge as being too great. Of course, no one ever questions an employee’s absolute right to terminate his or her employment at any time and for any reason. In part, this is the basis of the bargain between an employer and employee that can be stated in an employment contract.

So what does this have to do with deciding whether or not to enter into an employment contract? Everything! It makes no sense whatsoever for an employer to enter into an employment contract with 99% of employees. That’s because an employer has no need to manage expectations-he has the right to demand an employee’s adherence. It may sound like common sense, but it’s not. It’s just a well understood workplace rule. Entering into an employment contract with most employees is an unnecessary exercise that provides an employer with no greater protection than it would otherwise already have.

That’s not to say that employment contracts never make sense. There is that 1% of employees who present a problem. They are almost always high-level executives, sales employees, or employees with other technical expertise. These employees possess classified information and savoir faire, so you enter into an employment contract with these employees in order to protect yourself against future competitive disadvantage. Stated simply, you don’t want your competitors to get their hands on these employees or the information they possess. The contract adds a layer of protection that you otherwise would not have: a restriction on the employee’s ability to harm you or to aid your competitors.

While the contract may contain clauses that provide obligations on the employer, the main focus of the contract is to restrict an employee’s ability in a few key areas:

1. Competition. A non-compete clause restricts an employee’s right to accept employment with a competitor or start his own competitive venture.

2. Solicitation. A non-solicitation clause is also designed to prevent a former employee from competing against you, but by limiting his ability to solicit your clients, customers or suppliers.

3. Disclosure of Information. A nondisclosure clause restricts an employee’s right to divulge nonpublic or proprietary information. To be enforceable, the contract should define what constitutes confidential information.

4. Hiring Current Employees. An anti-raiding provision restricts an employee’s right to solicit current employees from leaving their employment.

5. Vilification. An anti-disparagement provision prohibits an employee from making statements that are contrary the company’s best interests or the best interests of your current executives.

The Bottom Line

Companies rarely need to enter into written employment contracts with the overwhelming majority of their employees. There are the situations, however, when a written employment contract is not only recommended but necessary. As always, the decision on whether to enter into a written employment contract should be made in consultation with your employment attorney. Drafting this type of contract is not something that should be done in a careless manner, but takes thoughtful consideration and the help of an expert in the field, most probably your company lawyer.

Contracts of Employment – Advice For Employers

As a vast majority of businesses need employees in order to expand, company directors, sooner or later, have to face the process of recruiting people and familiarize themselves with the employment law. Once the selection of candidates is made and the job is offered, the law comes in the way.

Employment status

There are five categories of employment: self-employed person, worker, employee, director and contractor. As they have different legal, tax and National Insurance Number implications, employers must be aware of the differences and know which category suits their business best. For example, a person can be classified as self-employed for tax purposes but as a worker or an employee for the employment rights benefits.

Contract of employment

A contract of employment is an employee’s acceptance of the terms and conditions offered by an employer, evidence of which is commencement of the work by the employee. The contract is often agreed verbally.

There are three types of contracts: a contract of employment, a contract for the personal performance of work and a contract for services. The person’s employment status depends on which contract has been agreed.

All employers are legally obliged to provide their employees hired for more than one month with a written statement of employment no later than two months of their start date.

The statement sets out what has been agreed between the employer and the employee during the recruitment process, such as job title and description, starting date, place of work, salary, benefits, required hours of work, holiday and sickness entitlement, notice periods, grievance arrangements and disciplinary procedures.

Often employers include in the contracts of employments sections such as confidentiality agreement and non-compete clauses.

It is also a common practice to provide new employees with the company’s Health & Safety policy, Equal Opportunities policy, Data Protection policy and other important company documents together with their employment contracts.

Directors as employees

Usually, an executive director is also the company’s employee through executive service contract. However it is important for a business owner to establish if a director is an employee by analyzing the following key factors:

- if mutuality of obligation exists, for example, an employer’s obligation to provide work or pay during absence from work to the director and the individual’s obligations to perform work required by the employer.

- the degree of employer’s control over the individual.

- the extend to which the director is integrated in the company by adhering to its policies and procedures such as disciplinary and grievance procedures, benefits, sick and holiday pay provision.

- duration of contract.

- exclusivity of the engagement, i.e. permission to work for other companies at the same time.

- method of payment.

- if the equipment and administrative support are provided by the director or employer.

The outcome of the analysis will have impact of the director’s entitlement to his/her employment rights and tax obligations.


Contracts of employment exist to clarify obligations from the employer and employee and should detail benefit and entitlements due to the employee as well as list what is expected from them. It is a legal obligation in the UK for employers to provide employees with a contract of employment within two months of starting work.