Buddy says:  An employee is defined as "an individual who has entered into or works under a contract of employment". A contract of employment is defined as "a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing".  While the fact that a director has a substantial shareholding can be a significant factor in deciding whether they are also an employee, it is only one of many factors that a tribunal will consider when determining employment status.  Indeed, there have been many instances of tribunal’s finding that directors who have substantial shareholdings are also employees.  Therefore, it should not be assumed that, just because an individual is a director and a substantial shareholder, that they are not an employee.

Employer information:  In the case of Clark v Clark Construction Initiatives Ltd and Utility Consultancy Services Ltd, 2007, the Employment Appeal Tribunal (EAT) considered previous case law surrounding the employment status of shareholders, and identified the following factors to consider when determining such status:

• The possession of a significant shareholding and/or the exercise of sole control over a company's activities (e.g. a controlling shareholder), does not prevent an employment contract existing.
• The fact that an individual is an entrepreneur, has built up a company up, or will profit from its success does not mean an employment contract cannot be found to exist. Whilst a shareholder benefits from a company's success, so do employees with share options.
• Conduct in accordance with the contract is a strong indication that it is valid. For example, working within contractual hours and not taking more than your allocated holidays.
• Conduct that is inconsistent with the contract (or which deviates from it in key areas) is potentially a very important factor against finding that a controlling shareholder is an employee.
• Failing to put a contract in writing is strong evidence that an employment contract was not intended.
• Giving loans or guarantees is not always inconsistent with employee status.
• In cases where an individual has a controlling shareholding, this may cast doubt on the individual also being an employee, however, that fact alone will not determine their status.

If a contract of employment is found to exist, the EAT said that there would only be limited circumstances in which it would be legitimate not to give effect to an alleged contract of employment, as follows:

1. Where the company itself is a sham;
2. Where the contract has been entered for an ulterior motive; and
3. Where the parties do not conduct their relationship in accordance with the contract (either because they never intended to or, because the relationship is no longer reflected in the contractual terms).