Industrial Tribunals Northern Ireland Decisions

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Cite as: [2009] NIIT 6657_9IT, [2009] NIIT 6657_09IT

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THE INDUSTRIAL TRIBUNALS

CASE REF: 6657/09

CLAIMANT: Thomas James Lewis

RESPONDENT: Department for Employment and Learning

DECISION

(A) The respondent Department is not liable to make any payment to the claimant in respect of redundancy pursuant to Article 201 of the Employment Rights (Northern Ireland) Order 1996 (“the Order”).

(B) The Department was right not to make any payment under Article 227 of the Order.

Constitution of tribunal:

Chairman (sitting alone): Mr P Buggy

Appearances:

The claimant appeared in person.

The respondent was represented by Mr P McAteer, Barrister-at-Law, instructed by the Departmental Solicitors Office.

REASONS

1. The effect of Article 201 and 202 of the Order, in broad terms, is as follows. If an employee is entitled to a redundancy payment from his employer, but the employer cannot or will not pay, and the employee has made reasonable effort to seek to recover the payment from the employer, then the Department, in its role as statutory guarantor, must make a payment to the employee which is equal to the amount of the redundancy payment which was due from the employer. If the Department declines to make a payment pursuant to an Article 201 application, the employee has a right of appeal to an industrial tribunal. (See Article 205 of the Order).

2. Any such appeal will be unsuccessful if the tribunal is not satisfied that, at the relevant time, the appellant was the employee of the person who failed to make the redundancy payment.

3. The Department is also the statutory guarantor in respect of the payment of certain other employment debts. (See Article 227 of the Order). However, in the context of any particular contract, the Department’s role as statutory guarantor does not arise unless the relevant debts are owed to the claimant in the claimant’s capacity as the debtor’s “employee”.

4. If the Department declines to pay pursuant to any Article 227 application, there is a right of appeal to an industrial tribunal. However, any such appeal will be unsuccessful if the tribunal is not satisfied that, at the relevant time, the claimant was the debtor’s “employee”.

5. In this case, the claimant was the Managing Director of Europass (Ireland) Ltd. That company went into creditors voluntary liquidation on 1 May 2009. On 4 May, the claimant made a claim to the Department for redundancy and insolvency payments from the National Insurance Fund (the application being made pursuant to Article 201 and Article 227 of the Order). The applications were refused by the Department. This is my decision in respect of the claimant’s appeals against those refusals.

6. In each instance, the Department refused the application because the Department was not satisfied that the claimant was the employee of the company. Accordingly, that question (the question of whether or not the claimant was an employee of the company) is the essential issue in these appeals.

The statutory definition of “employee”

7. Article 3 of the Order provides that, for the purposes of the Order, an “employee” is an individual who has entered in to or worked under, a contract of employment. According to the same Article, a “contract of employment” means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.

The facts

8. In order to minimise duplication, and in the interests of readability, I have set out certain findings of fact elsewhere in this Decision. However, in this paragraph, I set out various findings of fact which are relevant to the questions which I have determined:

(1) The claimant was Managing Director of the company. He worked at least 40 hours every week. Generally, but on a voluntary basis, he took the same breaks, the same lunchtime, and the same holidays as all the employees who were based in the company workplace in which he was based. He had no remuneration benefits which were not available to employees.

(2) All the shares in the company are held by the claimant and two other Directors. The claimant held 53% of the shares.

(3) On the basis of the available evidence, it seems to me that the claimant diligently tried to save the company, but failed because of the overall economic climate. He strongly feels that he is entitled to a redundancy payment, partly because the demise of the company was not his fault.

(4) The claimant increased his shareholding in the company with a view to injecting further capital in to the company. He loaned the company savings of £20,000 in an effort to save the company. He did not receive any money back when the company went into liquidation.

(5) For most of the duration of the claimant’s relationship with the company, he paid Class 1 National Insurance contributions (the same as was paid by people who are recognised as undoubtedly being employees of the company). His company earnings were taxed through the PAYE system.

(6) The claimant’s functions in the company (apart from functions which were carried out purely in the context of meetings of Directors) seem to have been the type of functions which, in small enterprises, are typically carried out by a General Manager or by a Managing Director.

(7) In practice, nobody in the company was entitled to tell the claimant what to do. However, because he believed in consensus, he always sought consensus before taking any major decisions. Like other people working for the company, he put his name down on the holidays board. The timing of his own holidays reflected consensus; in practice, the claimant was a participant in a holidays rota.

The law

9. In Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] EWCA Civ 280, the English Court of Appeal has summarised principles which are relevant in the context of this case.

10. See, in particular paragraphs 80 and 81 of the judgment of the court in that case:

“80. There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee of the company under a contract of employment. There is also no reason in principle why someone whose shareholding in the company gives him control of it – even total control (as in Lee's case) – cannot be an employee. In short, a person whose economic interest in a company and its business means that he is in practice properly to be regarded as their "owner" can also be an employee of the company. It will, in particular, be no answer to his claim to be such an employee to argue that: (i) the extent of his control of the company means that the control condition of a contract of employment cannot be satisfied; or (ii) that the practical control he has over his own destiny – including that he cannot be dismissed from his employment except with his consent – has the effect in law that he cannot be an employee at all. Point (i) is answered by Lee's case, which decided that the relevant control is in the company; point (ii) is answered by this court's rejection in Bottrill of the reasoning in Buchan.

81. Whether or not such a shareholder/director is an employee of the company is a question of fact for the court or tribunal before which such issue arises. In any such case there may in theory be two such issues, although in practice the evidence relevant to their resolution will be likely to overlap. The first, and logically preliminary one, will be whether the putative contract is a genuine contract or a sham. The second will be whether, assuming it is a genuine contract, it amounts to a contract of employment (it might, for example, instead amount to a contract for services). We make clear that we are not of course suggesting that cases raising the first issue are likely to be common, and we think it probable that they will be relatively exceptional. Despite the repeated references in the authorities to the theoretical possibility of a contract being a sham, no such case has been discovered in the principal authorities to which we have been referred. We make no attempt to give any prescriptive guidance as to the resolution of such issues, but we at least offer the following general observations.”

11. At paragraph 82, the court went on to make clear that the fact that the putative employee has control over the company and the Board, and so was instrumental in the creation of the very contract that he is asserting, will obviously be a relevant matter in the court’s consideration of whether the contract is or is not a sham.

12. At paragraph 84 of Nuefeld, the Court of Appeal endorsed a statement of principles which had been set out by Elias J in paragraph 98 of his judgement in Clark v Clark Construction Initiatives Ltd & Another [2008] IRLR 364, in the following terms:

“98. How should a Tribunal approach the task of determining whether the contract of employment should be given effect or not? We would suggest that a consideration of the following factors, whilst not exhaustive, may be of assistance:

(1) Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee; he has on the face of it earned the right to take advantage of the benefits which employees may derive from such payments.

(2) The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising. Nor does the fact that he in practice is able to exercise real or sole control over what the company does (Lee).

(3) Similarly, the fact that he is an entrepreneur, or has built the company up, or will profit from its success, will not be factors militating against a finding that there is a contract in place. Indeed, any controlling shareholder will inevitably benefit from the company's success, as will many employees with share option schemes (Arascene).

(4) If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding. For example, this would be so if the individual works the hours stipulated or does not take more than the stipulated holidays.

(5) Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described in para.96) or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.

(6) In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing (Fleming). This will be powerful evidence that the contract was not really intended to regulate the relationship in any way.

(7) The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight. There is nothing intrinsically inconsistent in a person who is an employee doing these things. Indeed, in many small companies it will be necessary for the controlling shareholder personally to have to give bank guarantees precisely because the company assets are small and no funding will be forthcoming without them. It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contract of employment.

(8) Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that the fact alone will ever justify a Tribunal in finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected. The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee, but of itself that fact alone does not resolve those doubts one way or another.”

13. At paragraph 89 of Neufeld, the Court of Appeal made the following comment:

“We consider that Elias J’s sixth factor may perhaps have put a little too high the potentially negative effect of the terms of the contract not having been reduced into writing. This will obviously be an important consideration but if the parties’ conduct under the claimed contract points convincingly to the conclusion that there was a true contract of employment, we would not wish tribunals to seize too readily on the absence of a written agreement as justifying the rejection of the claim …”

Conclusions

14. References in the following paragraph are references to the numbered factors which Elias J set out at paragraph 98 of Clark.

15. I can now apply the legal principles to the facts which I have found in this case:

(1) The claimant has asserted (factor (1) of Clark) that, during the relevant period, a contract of employment was in place. I accept that the claimant paid tax under the PAYE system and National Insurance for much of the period. However, I note that there is no contemporaneous record of the making, or continuance, of the contract of employment.

(2) I accept (factor (2) of Clark) that the mere fact that Mr Lewis had a controlling shareholding did not of itself prevent a contract of employment from arising. I similarly accept that a contract of employment is not prevented from arising merely because the claimant was, in practice, able to exercise substantial control over what the company did.

(3) I also accept (factor (3) of Clark) that the circumstance that Mr Lewis was an entrepreneur, and that he had built the company up, and that he would profit from its success, are all factors which do not militate against a finding that there is a contract of employment in place.

(4) I also accept (factor (4) of Clark) that the number of hours worked by the claimant, the times at which those hours were worked by the claimant, the number of holidays taken by the claimant, and the times at which those holidays were taken by the claimant, were all circumstances which were consistent with there being a contract of employment. However, I consider those circumstances to be equally consistent with there being merely a contract of services which was being operated by a conscientious and diligent entrepreneur/service-provider.

(5) In my view, (factor (5) of Clark) the conduct of the parties (the company and the claimant) is not inconsistent with there being a contract of service.

(6) However, the conduct of the parties is also not inconsistent with there being a mere contract for services. In other words, all important aspects of the history of the relationship between the claimant and the company are entirely consistent with a situation in which the claimant was not the employee of the company, but was instead carrying out duties, and was accepting rewards, merely in his role as a Director of the company.

(7) The existence of the alleged contract of employment, and the terms of the alleged contract of employment, were never reduced into writing. (See factor (6) of Clark) I regard this as powerful evidence that a contract of employment was never intended to regulate the relevant relationship.

(8) I fully accept (factor (7) of Clark) that the fact that the claimant injected capital into the company is not a proper basis upon which to conclude that he was not an employee at the relevant time.

(9) In the factual circumstances in this case, I applied the principle (factor (8) of Clark) that the circumstances that the claimant had a controlling share-holding is a circumstance which raises doubts as to whether the claimant is truly an employee, but is also a circumstance which, on its own, does not resolve those doubts one way or the other.

16. Having considered all those matters, I have concluded that the claimant was not an employee of the company. In arriving at that conclusion, the following matters have seemed to me to be of significant importance. First, I have noted the lack of any contemporaneous documentary confirmation of the existence of a contract of employment. Secondly, I have been made aware of no event, throughout the lengthy period of the claimant’s relationship with the company, which is both consistent with there being a contract of employment and which is also inconsistent with the relationship being regulated by a mere contract for services.

17. I do not doubt that the claimant’s account of primary facts in this case is a generally honest account. However, there is no adequate basis, in my view, to infer from those primary facts that the claimant operated under an informal, unwritten, and unrecorded contract of employment.

18. I have arrived at that conclusion with regret. I note that the claimant paid the same taxes as he would have paid if he had been an employee. I note that he paid the same National Insurance contributions as he would have paid if he had been an employee. I note that he has worked hard in the company. I note that he has worked hard to save the company. I note that he is a victim of harsh economic circumstances.

19. However, I have to apply the appropriate legal principles to the facts which I have found. Having done so, I am convinced that the claimant was not an employee at the relevant time. That conclusion is fatal to the claimant’s appeals, both in relation to the redundancy payment application and in relation to applications for any other payments in respect of employment debts.

Chairman:

Date and place of hearing: 2 November 2009, Belfast.

Date decision recorded in register and issued to parties: