It is common for shareholders of small business corporations to also have an active role in the business of the corporation as an employee. Often the role of employee is not documented in a formal contract of employment and may not be referred to in a shareholders agreement among the shareholders of the corporation.
Difficulties may arise in circumstances where the individual is not performing as expected as an employee of the corporation, or worse, may have acted in a way or omitted doing something which would typically give rise to the right of termination in the usual employment relationship.
When shareholders are considering the terms of a shareholders agreement, such consideration should include the role of a shareholder as an employee. Shareholders should sign employment contracts reflecting the usual terms of employment including the expected duties as an employee, compensation and, in the case of a shareholder employee, restrictive covenants in the event such person ceases to be an employee.
The person’s status as an employee should also be reflected in a shareholders agreement among the shareholders of the corporation and provide for a purchase option in favor of the other shareholders or the corporation in the event such person ceases to be an employee of the corporation either voluntarily or as a result of the breach of such person’s contract of employment.
Failure to execute an appropriate contract of employment and ensure proper buy-sell provisions in a shareholders agreement may result in an unexpected and adversarial relationship in circumstances where a person ceases to be an employee of the corporation but may otherwise continue as a shareholder of the corporation.