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Industrial Tribunals Northern Ireland Decisions
You are here: BAILII >> Databases >> Industrial Tribunals Northern Ireland Decisions >> Watson v Carter Clothing Ltd (In Admini... Department for Employment and ... Carter Clothing Ltd (In Admini... Department for Employment and ... Carter Clothing Ltd (In Admini... Department for Employment and ... [2012] NIIT 00839_11IT (21 February 2012)
URL: http://www.bailii.org/nie/cases/NIIT/2012/00839_11IT.html
Cite as: [2012] NIIT 00839_11IT, [2012] NIIT 839_11IT
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THE INDUSTRIAL TRIBUNALS
CASE REF: 839/11
1265/11
1266/11
CLAIMANTS: 1. Andrew Watson
2. David John Pennick
3. Basil Millar
RESPONDENTS: 1. Carter Clothing Ltd (In Administration)
2. Department for Employment and Learning
DECISION (“APPEALS”)
(A) The Decisions in respect of the Watson appeals are as follows:
(1) Pursuant to that claimant’s application under Article 205 of the Employment Rights (Northern Ireland) Order 1996 (“the Order”), I have determined that the respondent company (“the Company”) is not liable to that claimant in respect of any redundancy payment.
(2) That claimant’s appeal (“complaint”) pursuant to Article 233 of the Order is dismissed.
(B) The Decisions in the Pennick appeals are as follows:
(1) Pursuant to that claimant’s application under Article 205 of the Order, I have determined that the Company is not liable to that claimant in respect of a redundancy payment.
(2) That claimant’s appeal under Article 233 of the Order is dismissed.
(C) The Decisions in the Millar appeals are as follows:
(1) Pursuant to that claimant’s application under Article 205 of the Order, I have determined that the Company is not liable to this claimant in respect of a redundancy payment.
(2) This claimant’s appeal under Article 233 of the Order is dismissed.
Constitution of Tribunal:
Chairman (sitting alone): Mr P Buggy
Appearances:
Andrew Watson (“Mr Watson”) appeared in person.
David John Pennick (“Mr Pennick”), was represented by Mr P Coll, Barrister-at-Law, instructed by Murphys Solicitors.
Basil Millar (“Mr Millar”), appeared in person.
The respondent Department was represented by Mr P McAteer, Barrister-at-Law, instructed by the Departmental Solicitor’s Office.
REASONS
1. At all material times, each of the claimants was a director of, and a shareholder in, Carter Clothing Ltd (“the Company”).
2. The Department is the sole respondent to the Watson proceedings. Both the Company and the Department for Employment and Learning (“the Department”) are parties to the Pennick and Millar proceedings.
3. In these proceedings, each claimant asserts that the Company owes him money in relation to wages, holiday pay, notice pay and redundancy pay. There is a general expectation that the Company would not be able to make payments in respect of any tribunal award against it. Accordingly, for practical purposes, in this litigation, the really important issue is whether or not each claimant’s appeals, against adverse decisions which were made by the Department (in response to statutory applications which had been made by that claimant to the Department), are to be successful or unsuccessful.
4. Because the Company is in administration, the Pennick and Millar proceedings against the Company cannot go ahead without the leave of the High Court, unless and until the administrator consents to their continuation.
5. Against that background, all of the claimants and the Department agreed that the appeals against the Department’s decisions should be listed for a main hearing in advance of any listing of any main hearing of the claims against the Company.
6. Accordingly, this was a hearing only in respect of those appeals.
7. Each claimant confirmed that he was willing to treat the outcome of these appeals as being determinative, in relation to liability, of the outcome of any claims made against the Company.
The appeals
8. The effect of Article 201 of the Order is as follows. If an employee claims that his employer is liable to pay him a redundancy payment and that the employer is insolvent, and that the payment remains unpaid, that employee may apply to the Department for a payment under Article 201.
9. The effect of Article 202 of the Order, is as follows. Where, upon an application under Article 201, by an employee, in relation to a redundancy payment, the Department is satisfied both that the relevant employer is insolvent and that the employee is entitled to a redundancy payment, the Department comes under an obligation to pay to that employee, out of the National Insurance Fund, an amount in respect of the redundancy payment which that employer ought to have paid to that employee.
10. The effect of Article 205 of the Order is as follows. Where, in the context of an Article 201 application, it is claimed that an employer is liable to pay a redundancy payment, any question as to that liability of the employer must be referred to an industrial tribunal for determination.
11. In each of these three cases, the situation is as follows: the relevant claimant did make an Article 201 application, that application was refused, and the claimant, in effect, now appeals under Article 205 (by making the reference to this industrial tribunal which is referred to in Article 205).
12. The effect of Article 227 of the Order can be summarised as follows. If, upon an application made to the Department by an employee, the Department is satisfied both that the applicant’s employer has become insolvent, and that, on “the appropriate date,” the claimant was entitled to be paid wages, holiday pay and/or notice pay, the Department must pay certain amounts to that employee, out of the National Insurance Fund.
13. The effect of Article 233 of the Order is that an employee whose application under Article 227 is refused by the Department can present a complaint (can, in effect, appeal) to an industrial tribunal in relation to that refusal.
14. If, pursuant to that appeal, the industrial tribunal finds that the Department ought to make a payment under Article 227, then the tribunal must make a declaration to that effect.
15. In each of these three cases, the situation is as follows: the relevant claimant did make an application to the Department under Article 227; that application was refused; and the claimant now appeals, under Article 233, in respect of that refusal.
16. This is my decision, in all three cases, in relation to all of those appeals.
17. It was agreed and determined that all of these claims should be heard together. Accordingly, evidence in any one of these three cases is to be treated as evidence in all of these three cases, and submissions made in relation to any one of these three cases can properly be taken into account (to the extent that they are relevant) in considering either or both of the other two cases.
The evidence
18. I received oral testimony from each of the claimants.
19. I also saw an agreed bundle of documents and some miscellaneous documents.
20. I told the parties that I would not have regard, for evidential purposes, to any document contained within the bundle, unless that particular document had been drawn to my attention by one or more of the parties.
The arguments of the parties
21. The parties’ closing submissions were made solely in writing, with the consent of all the parties. The procedures in relation to those written submissions broadly followed those recommended by the EAT in Barking and Dagenham London Borough v Oguoko [2000] IRLR 179.
22. Pursuant to those arrangements, each party was free to furnish a written submission (“a Main Submission”), within a stipulated timescale, on the understanding that a simultaneous copy was to be provided to the other parties in the case.
23. Pursuant to those arrangements, Main Submissions were presented on behalf of Mr Pennick and on behalf of the Department. In considering all three of these cases, I took due notice of both of those Main Submissions.
24. Pursuant to the same arrangements, each party was entitled to provide written comments (“Comments”) in respect of any opposing party’s Submissions, provided that this was done within a stipulated timescale. No party took advantage of that entitlement.
25. As was made clear to the parties (on 27 October 2011), any party was entitled to require the convening of an oral hearing, for the purpose of considering any oral submissions (which could be made in place of, or in addition to, the Main Submissions). The parties were told that any such requirement had to be notified in writing, by 8 December 2011. Nobody asked for such a hearing, and none was held.
26. The deadlines, for the provision of the Main Submissions, and for the provision of any Comments, were agreed with the parties. The deadline for the provision of Main Submissions was 30 November 2011. The parties were told that the deadline for any Comments was 8 December 2011.
27. On 14 December 2011, at my direction, the parties were written to in the following terms:
“The relevant Chairman of Tribunals (Mr Buggy) has asked me to write to the parties on the following terms:
1. [In drafting] his decision in this case, the Chairman is minded to take account of the Supreme Court decision in Autoclenz v Belcher [2011] UKSC 41.
2. If any party wishes to have the opportunity to make submission (whether oral or written) in respect of the implications, if any, of Autoclenz for this case, that party must inform the Secretary of Tribunals in writing, to that effect, by 5 January at the latest.
3. The Chairman regrets that the
decision in this case is unlikely to be issued prior to the second week of
January 2012.”
28. The parties agreed that 19 January should be the deadline for the provision, by any party, of any Additional Submission in respect of Autoclenz.
29. On 6 January, at my direction, the two self-represented claimants, the solicitor for Mr Pennick and the respondent’s solicitor were all sent letters in the following terms:
“(a) Any additional submissions must be sent to the Secretary of the Tribunals by 19 January 2012; and
(b) ...
(c) Any party is free to comment in writing on any such Additional Submission lodged by an opposing party, but any such written comments (“comments”) must be sent to the Secretary by 25 January 2012;
(d) Any party can ask for an oral hearing (for the consideration of arguments) but any such request must be made by 25 January.”
30. The Department did lodge an Additional Submission. No other party lodged an Additional Submission.
31. No party provided written comments in respect of the Department’s Additional Submission. Nobody availed of the opportunity, as set out in the letter of 6 January, to request an oral hearing.
32. Accordingly, in deciding these appeals, I had the advantage of the following:
(1) a Main Submission which was provided on behalf of Mr Pennick (referred to below as “PS”);
(2) a Main Submission which was provided on behalf of the Department (referred to below as “DS”); and
(3) an Additional Submission which was provided on behalf of the Department (which is referred to below as “DAS”).
The issues
33. In each of the three cases, the relevant appellant and the Department agreed that that claimant’s appeals should be dismissed if I was not satisfied that he had been employed by the Company under a contract of service at all relevant times.
34. None of these three cases was a case in which the putative employee was arguing that he had been employed under a contract of employment which was wholly or partially implied, or that he had been employed under a contract which was wholly or partly oral.
35. Instead, in each of these three cases, the relevant claimant asserted that, at all relevant times, he was employed by the Company under a contract of service which was entirely explicit and which was entirely in writing.
36. Each claimant had been issued with a document which purported to be a written contract of employment (“the Contract”). Each such Contract (if it was legally effective at all) was clearly a contract of service, as distinct from being a contract for services.
37. In each of these cases, the relevant claimant asserted that the latest version of the Contract had been issued to him during the Spring of 2010.
38. Each claimant asserted that there had been earlier versions of the Contract; that the various earlier versions had operated throughout the period from November 2003, the date on which the Company had become incorporated; and that each earlier version contained terms and conditions which were in substance practically the same as the terms and conditions which constituted the main subject-matter of the Spring 2010 Contract (the Spring 2010 version of that claimant’s written contract of service).
39. Accordingly, in relation to each of these three cases, the main issues which I have determined were as follows.
(1) Were there earlier (pre-Spring 2010) versions of the Contract and, if so, did each such version contain terms and conditions which were practically identical to the main terms and conditions of the Spring 2010 Contract?
(2) Am I entitled or obliged to disregard the terms of the (Spring 2010) Contract?
The relevant times
40. As already indicated above, in each of these appeals, both parties accepted that each relevant appeal should be successful if, but only if, the relevant claimant was employed by the Company under a contract of service (a contract of employment), at the relevant time, or at the relevant times.
41. In the context of each wages appeal, the relevant time is the period in respect of which any unpaid wages were due to the relevant claimant.
42. In the context of each holiday pay appeal, the relevant period is the period when the relevant claimant accrued the relevant holiday pay entitlements.
43. In the context of each notice pay appeal, the relevant period is the period from the date on which the company became incorporated (13 November 2003) until the date of the purported dismissal of each appellant (which occurred during Autumn 2010).
44. For the purposes of each redundancy pay appeal, the relevant period, is the period beginning on the date of the incorporation of the company and ending on the dates of the purported dismissals.
45. The implications of the foregoing are as follows.
46. First, each appellant can succeed in his appeal in respect of wages and holiday pay merely by proving that the Contract (the Spring 2010 written “contract of employment”) was legally effective.
47. Secondly, in order to recover the full amount of his claim for notice pay, and in order to succeed in his redundancy pay appeal, each claimant has to prove all of the following:
(1) that the (Spring 2010) Contract was legally effective;
(2) that, throughout the period from November 2003 until Spring 2010, there were earlier versions of the Contract;
(3) that the terms and conditions of those earlier versions which were practically identical to the terms and conditions of the Spring 2010 Contract; and
(4) that each of those earlier versions was legally effective.
Why the appeals have failed
48. All of the appeals of each claimant have failed, for the following reasons:
(1) I am satisfied that each relevant claimant was not a party to any previous version of the (Spring 2010) Contract.
(2) I am satisfied that the (Spring 2010) Contract was not legally effective.
49. In relation to each claimant, my determination in relation to Issue(1):
(1) has no effect in relation to the wages appeal;
(2) has no effect in relation to the holiday pay appeal;
(3) has an effect in relation to the notice pay appeal, but only in respect of amount; and
(4) is fatal to the claimant’s redundancy pay appeal.
50. In each of these three cases, my determination in respect of Issue(2) is fatal to all of the appeals of the relevant claimant, for the following reason. Because the (Spring 2010) Contract was not legally effective:
(1) The relevant claimant did not earn his wages or holiday pay as an employee (as a person employed under a contract of service).
(2) He did not accrue holiday pay entitlements as an employee.
(3) He was not employed under a contract of service. Accordingly, the statutory guarantee in respect of notice pay does not apply to him.
(4) He was not employed under a contract of service. Accordingly, the statutory guarantee in respect of redundancy pay does not apply to him.
The structure of the remainder of this Decision
51. First, I set out some findings of fact. Secondly, I set out my conclusions in respect of Issue(1). Thirdly, in relation to Issue(2), I set out some of the applicable legal principles. Fourthly, I set out my conclusions in respect of Issue(2).
The facts
52. Carter Clothing was a men’s clothing store. For several years, until November 2003, the store was run by an unincorporated partnership, which consisted of all of the three individuals who are claimants in the present appeals.
53. When the business was run as a partnership, Mr Pennick had a 50% share in the business, and Mr Watson and Mr Millar each had a 25% share in the business.
54. The business was incorporated on 13 November 2003. A new company, Carter Clothing Ltd, was formed. The new company (“the Company”) took over the business.
55. At all times which are material for present purposes, Mr Pennick held 50% of the shares in the Company, Mr Watson held 25% of the shares and Mr Millar held 25% of the shares.
56. Upon incorporation, Mr Pennick became the Managing Director of the company. The other two claimants also became Directors. Mr Watson became the Company Secretary of the Company. That situation continued until the company went into administration.
57. The business had evolved out of a family business which had begun in September 1975. That involved into a partnership. With the passage of time, the partnership took on and lost partners. As already noted above, in the autumn of 2003, the Partnership consisted of the three individuals who are the appellants in the present proceedings.
58. The Company was formed in November 2003 on the advice of its accountants (Johnston Kennedy).
59. The Company operated profitably from 2003 until 2008. However, it was affected by the substantial downturn in the property of housing market and by the opening of Victoria Square shopping centre in March 2008.
60. On the basis of the evidence which I received in these proceedings, and without hearing from the Company’s landlord on the matter, I have concluded, on the balance of probabilities, that external repairs and scaffolding, erected on behalf of the landlord in 2009 and 2010, caused the Company’s flagship store’s visibility to be obstructed. In July 2010, there was an accident which resulted in the near 100% destruction of the Company’s flagship store’s stock.
61. That was the background, and those were the reasons, for the financial collapse of the business. On 2 September 2010, the Company went into administration.
62. Later during 2010, the Administrator purported to dismiss each of the claimants from a contract of employment with the Company. The letter of “dismissal” which she sent to Mr Watson is in substance the same as the “dismissal” letters which she sent to Mr Pennick and Mr Millar. The 17 September letter to Mr Watson was in the following terms:
“We refer to our letter dated 16 September 2010 when we discussed the Company’s proposal to dismiss you on the ground of redundancy. It is with regret that we must now inform you that your present role within the Company is redundant. This has arisen because the Company is insolvent and an urgent requirement to cut operational costs due to the fact that substantial funds have been withheld by a contractor. As a result there is not enough work to sustain your role. After completion of our redundancy procedures you have been selected for redundancy. Unfortunately, there is no alternative position within the Company due to the severe economic circumstances.
You are entitled to receive 5 weeks notice of the termination of your employment based on your years of service. You are not required to work out your notice period. We therefore confirm that your date of termination on the grounds of redundancy will be today.
You will receive your P45 in due course together with your pay to 17 September 2010. [You] may be entitled to the following payments (subject to the agreement of the Department):
1. A payment in lieu of your notice period based on your commencement date of 1 October 2004.
2. A sum in respect of accrued but untaken annual leave entitlement up to the date of dismissal.
3. Payment of redundancy based on your commencement date of 1 October 2004;
Please note that the amounts will be calculated based on the statutory entitlement and be limited to the statutory maximum permitted. If you are entitled to further amounts in excess of the statutory limit you will be able to claim this in due course along with the other creditors of the company.
Unfortunately, at this stage as the company is insolvent, the funds are not available to make these payments. In order to assist you I enclose forms RP1 and RP3 for completion. Please sign and return to the Administrator for onward transmission to the Department.
We wish you well in the future and are sorry that your employment has ended in such unfortunate circumstances. I would like to thank you for your continued support and cooperation since my appointment.
You have the right to appeal against the Company’s decision if you are not satisfied. If you do wish to appeal you must inform me in writing within five working days of receiving this decision. If you do appeal you will be invited to attend an appeal meeting in which you must take all reasonable steps to attend.”
63. A number of points are worthy of note in the context of that letter.
64. First, the letter is based on the assumption that the claimant was employed by the Company under a contract of service throughout the life of the Company.
65. Secondly, the letter is also based on the clearly incorrect premise that the claimant was also an employee of the business throughout the period when he was a partner within an unincorporated partnership. (My understanding is that, for the purpose of the present proceedings, it is not now being contended, by or on behalf of any of the claimants, that he was employed by the unincorporated partnership at any time while he was a partner within that partnership. In my view, any such contention would be clearly unsustainable from a legal point of view: see Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35, at para 31).
66. Thirdly, as is clear from the concluding paragraph of the letter, the administrator has based the letter on the assumption that the statutory dismissals procedure (as provided for Article 130A(1) of the Employment Rights (Northern Ireland) Order 1996), which applies only to contracts of employment, was applicable within the context of the purported dismissal of Mr Watson.
67. Upon the formation of the Company, the partnership assets were sold to the Company, having been valued at £300,000.
68. As already noted above, Mr Pennick had a 50% share in the partnership, Mr Watson had a 25% share in the partnership and Mr Millar had a 25% share in the partnership. Nevertheless, the partnership assets were allocated to each of the three shareholders in the Company in the following way.
69. Each received a credit of £100,000 to his Director’s Account.
70. Until Spring 2010, it had been the practice for each of the claimants to be paid the bulk of his remuneration from the company by way of dividends, with only a relatively small proportion being paid by way of purported salary. However, in Spring 2010, after payments in respect of much of the tax year 2009/2010 had already been made, or credited, to each of the claimants on the basis outlined above (on the basis that most of his remuneration was going to be by way of dividends, with only a small proportion being paid by way of salary), there was a change of plan. It was at that time decided, on the basis of the Company’s accountant’s advice, that the proportion payable to each director by way of salary would be radically and (to a substantial extent) retrospectively increased, in respect of the tax year 2009/2010. The reason for that decision was that, if the Company had continued to adopt the previous approach (of paying most of the remuneration to each director by way of dividend, as distinct from paying it by way of salary), the Director’s Account of one of the three directors would have dropped below zero, which would have caused a breach of the requirements of company law.
71. Against that background, the Company was advised by accountants to substantially augment the amount paid to each claimant by way of salary, for the tax year 2009/2010, so that each man was now, retrospectively, becoming entitled to the salary which was indicated, in respect of each claimant, in each of the relevant Spring 2010 Contracts.
72. Each of the claimants had been a full-time worker in the business, throughout the many years which elapsed from the date on which these three claimants first went into partnership together, until the date on which the Company went into administration. This was not a situation in which an entrepreneur or an investor merely “looked in” at the relevant business, from time to time, to see how it was doing.
73. For the avoidance of any doubt, all of the findings of fact which I have made in this Decision are findings of fact on the balance of probabilities.
74. For the avoidance of repetition, and with a view to improving the readability of this Decision, I have included some additional findings of fact elsewhere in this Decision.
Issue (1): Were there earlier versions of the Spring 2010 Contract?
75. In the context of the question posed above, I now set out some relevant additional findings of fact. I also set out my conclusions on that issue.
76. I am satisfied that there were no earlier versions of the (Spring 2010) Contract. I am so satisfied, against the following background and for the following reasons.
77. On both sides of the case, it was accepted that, in respect of each of the claimants, the relevant 2010 Contract consisted of two separate documents. The first such document incorporated an acceptance of terms and conditions, (“the acceptance document”) which was to be signed on behalf of the Company and by the relevant “employee”. The second such document was to be a “terms and conditions” document, which was referred to in the acceptance document.
78. It will be recalled that this is not a case in which it is being alleged that any earlier edition of the purported contract of employment was partly based on implied terms, or was wholly or partly an oral contract. Instead, what has been alleged in this case, by or on behalf of each claimant, is that each of the pre-Spring 2010 versions of his contract of employment consisted entirely of explicit terms, all of which had been contemporaneously recorded in writing.
79. No such earlier documents were made available to me.
80. If there had been any earlier versions of the (Spring 2010) Contract (“any Earlier Contracts”), I would have expected one or more of the claimants to have retained a copy of one or more of those earlier versions.
81. I do not accept that the Company itself currently has any copy of any earlier version of the spring 2010 Contract. (Certainly, if any of the claimants had reason to believe that any such document currently existed within the Company, one would have expected repeated and written applications to have been made to the administrator, with a view to making sure that those documents would be made available to me during the course of this hearing).
82.
I have carefully noted the manner
and demeanour of each relevant witness in the context of the evidence which was
given by claimants in respect of this aspect of the case. I considered that
aspect of their oral testimony to be vague and rather evasive.
83. Mr Pennick produced an acceptance document which he had signed, and which had been signed on behalf of the Company, and which was purportedly dated November 2003 by both signatories. However, in reality, as was accepted on behalf of Mr Pennick at the beginning of the main hearing of this case, the document had been signed by both parties only in the spring of 2010.
84. Mr Millar had also produced an acceptance document to the Department, in support of his own statutory guarantee application to the Department. Again, that document had been signed by Mr Millar on behalf of the Company. Again, each signatory’s signature was dated November 2003. Again, at the beginning of this hearing, Mr Watson accepted that the relevant document had been signed by both parties only in the Spring of 2010.
85. I do not accept, as was contended by and on behalf of the claimants, that it is normal or appropriate to sign a document on date X and “date” the signature as though it had been signed several years beforehand.
86. This matter was dealt with at paragraph 21 of the Pennick Submission in the follow terms:
“The basis for the Department’s query on this point in centred upon the date on the “acceptance document” being 13 November 2003 rather than the date of varied contract itself (the latest varied contract having been created on a date now unknown in our around spring 2010). DP and the other Claimants explained that it was the practice in Carter Clothing Limited for all employees, including them, to have their contracts varied on occasion to reflect for example statutory developments in employment law rights. On such occasions a new acceptance document would be created and signed and counter-signed, but the practice was to affix the date that employment had commenced, not the date of the variation, in order to avoid the confusion and maintain the integrity of the recording of that initial employment date”.
87. No doubt, the explanation contained in paragraph 21 of PS is based on Mr Call’s instructions. However, the explanation makes no sense to me. In my view, if you put a date opposite your signature on a document, you are clearly indicating, to anybody who reads that document, that you signed it on the date which you have there specified.
88. When the Pennick and Millar documents were produced to the Department, the Department’s reaction action was to cast doubts upon the genuineness of those documents, because the accompanying terms and conditions documents referred to developments in employment law which had not yet occurred in November 2003.
89. In Mr Pennick’s case, the relevant documents were enclosed with a letter dated 19 April 2011, which Mr Pennick’s solicitor sent to the Department. Those documents were mentioned in that letter, at point 12 in the following terms:
“Form of Documents – Our client had, as we have provided, a statement outlining the main terms and conditions of his employment pursuant to the legislation. This is dated 13 November 2003, and this was created at the time when all employees of the partnership were transferred over into the limited company from the partnership”.
90. Point 12 of the solicitor’s letter, which was clearly produced on the basis of Mr Pennick’s instructions, clearly implies that the “acceptance” of the Spring 2010 Contract was signed by the parties in November 2003.
91. In April 2011, solicitors acting on behalf of Mr Millar wrote to the Department, enclosing the Spring 2010 acceptance document and the Spring 2010 terms and conditions document. The letter was obviously written on the instructions of Mr Millar. The letter makes no reference to the enclosed documents being Spring 2010 versions.
92. Instead, the solicitor’s letter made the following comments in relation to those documents:
“We enclose herewith a copy of Mr Millar’s Terms and Conditions of Employment with the Company which was given to Mr Millar pursuant to Article 33 of [the Employment Rights (Northern Ireland) Order 1996]. Such a statement of employment particulars is only required for employees. All employees were given Terms and Conditions of Employment in the same form.
We enclose herewith a copy of Mr Millar’s acceptance document in relation to the Terms and Conditions of Employment, particularly highlighting how Mr Millar was expected to abide by the absence notification and certification procedures, and the disciplinary rules and procedures”.
93. None of the claimants informed the Department, or the Department’s representatives, of the fact that the Spring 2010 version of the Contract had been signed in Spring 2010 (as distinct from being signed in November 2003) until just prior to the start of the main hearing of these appeals.
94. In arriving at the conclusions set out in the immediately preceding paragraphs, I have assumed that each of the claimants is a person who has a reputation for propriety and honesty. In arriving at those conclusions, I have noted that it is relatively less likely that people with such reputations would fail to tell the truth, and the whole truth, in the context of industrial tribunal proceedings. I repeat again that all of my findings of fact in this case are findings which I have arrived at on the basis of the balance of probabilities. (In other words, I am not making any findings of fact in this case on the basis that I have no doubt as to the accuracy of the particular factual finding which I am making).
Issue (2): The law
95. I am satisfied that, in the Spring of 2010, each claimant and the Company and claimant purported to enter into a valid and binding written contract with the Company (the Spring 2010 Contract), and that each such Contract, if it was a valid contract at all, was a contract of service.
96. Accordingly, in the context of Issue(2), the crucial question for me is whether or not the (Spring 2010) Contract was valid and effective. How is a tribunal to determine whether a purported contract is, or is not, valid and effective?
97. Both Mr Coll and Mr McAteer accept that principles which were set out by Elias J in Clark v Construction Initiatives Ltd [2008] IRLR 364, and which were endorsed, subject to modification, by the Court of Appeal in Neufeld v Secretary of State for Business, Enterprises and Regulatory Reform [2009] EWCA Civ 280, are relevant in the context of that question. I agree.
98. Mr Coll (PS, paragraph 12) reminds me that, in both Clark and Neufeld, the issue was whether or not a controlling shareholder was, or was not, to be recognised as an employee, and that, in the present cases, none of the claimants had a controlling shareholding. He indicates that, in applying the Clark/Neufeld principles, in the present cases, it is appropriate to have regard to the fact that none of these claimants had a controlling shareholding. I agree.
99. What are the various “factors”, as outlined in Clark, and as endorsed, subject to certain modifications, in Neufeld, designed to address?
100. According to Clark (at paragraph 98 of the judgement) the various factors were designed to assist the tribunal in approaching:
“… the task of determining whether the contract of employment should be given effect or not …”
However, with respect, I consider that the use of the quoted phrase has the potential to mislead. The reality is that, in the context of a statutory guarantee appeal, an employment tribunal never has any discretion to decline to give effect to the terms of an effective employment contract. Instead, the tribunal’s task is simply to ascertain whether or not any relevant purported contract is, or is not, a legally effective contract of employment. Support for the latter proposition is to be found in paragraph 77 of Neufeld, in which the Court of Appeal expresses agreement with:
“… Elias J’s summary of the types of case in which the court or tribunal may find on the facts that the purported contract is not a genuine contract”.
101. Accordingly, in the circumstances of each of these cases, in the context of Issue(2), my task, in each case, is to ascertain whether the relevant Contract is legally effective, or is legally ineffective.
102. In my view, the decision of the Supreme Court in Autoclenz Limited v Belcher [2011] UKSC 41 provides clear support for the proposition that an employment tribunal is entitled and obliged to regard a particular purported contract of employment as being legally ineffective (as being “a sham”) in either of two situations:
(1) If the contractual documents have been executed by the parties with the intention of giving to others the appearance of creating (between themselves) legal rights and obligations which are different from the actual legal rights and obligations which the parties intended to create. (In other words, this is a situation in which the parties to the purported contract entered into it with a view to painting a false picture as to the true nature of their respective obligations).
(2) If the parties, without necessarily having any intention of misleading others, enter into a written “contract” which does not represent their true intentions and expectations.
103. In his additional submission (“DAS”), Mr McAteer has been at pains to seek to distinguish the Autoclenz judgement from the factual circumstances of this case.
104. First, Mr McAteer asserted that the Autoclenz principles may apply only in situations in which there is a difference between the relative bargaining power of each party to a purported contract.
105. I reject the proposition that the Autoclenz principles are limited in that way. In my view, at paragraphs 33-35 of Autoclenz, Lord Clarke is merely explaining why courts and tribunals are more intrusive in assessing the realities of a contract of employment. In my view, the comments at paragraphs 33-35 of Autoclenz do not state or imply that the enhanced scrutiny, of the legal effectiveness of a particular contract of employment, will only occur if one party to that contract of employment is at a bargaining disadvantage (in comparison with the other party). Enhanced scrutiny, in relation to all contracts of employment, is explained by the circumstance that the employee, in the context of many contracts of employment, is at a bargaining disadvantage in comparison with the employer. However, the enhanced scrutiny applies to all types of contract of employment, and not just to employment contracts between (relatively) powerful employers and (relatively) powerless employees.
106. The second ground on which Mr McAteer seeks to argue for the disapplication of the Autoclenz principles, in the circumstances of this case, is as follows. According to Mr McAteer, the Autoclenz principles apply only in situations like the situation in the Autoclenz case itself, in which particular contractual provisions, as distinct from a whole contract, are being argued to be legal ineffective.
107. In Autoclenz, in endorsing the view that a contract can be legally ineffective in the second of the two situations described at paragraph 102 above, the Supreme Court endorsed the decision of the Court of Appeal in Firthglow Ltd (t/a Protectacoat) v Szilagyi [2009] EWCA Civ 98. The Court of Appeal decision in Szilagyi was based on the proposition that there could be a sham contract of service in the second of the situations described at paragraph 102 above.
108. Furthermore, in arriving at that conclusion, the Court in Szilagyi was determining that a whole contract, a contract which purported to be a contract for service, was not effective as such a contract (thus clearing the way for the claimant to make a claim of unfair dismissal).
109. Accordingly, I reject the proposition that the Autoclenz principles (as described at para 102 above) have no application in a context in which the legal effectiveness of a whole contract is being challenged.
110. So, I am unable to accept either of the two propositions, regarding the scope of the Autoclenz principles, which have been put forward on behalf of the Department. However, for the following reasons and against the following background, I consider that my rejection of those propositions has no practical effect in the circumstances of the present cases.
111. In my view, the Autoclenz principles merely confirm and explain principles which had had already been established by the courts and tribunals, at Court of Appeal level and below.
112.
In particular, the Clark/Neufeld
principles are clearly, although to some extent implicitly, based on the
proposition that a purported contract of employment will be legally ineffective
if the written contract does not represent the true intentions and expectations
of the parties, even if the contractual documentation has not been executed
with the intention of misleading others. (Accordingly, Clark/Neufeld
are based on the proposition that a contract of employment can be legally ineffective
in the second of the situations mentioned at paragraph 102 above, in addition
to being ineffective in the first of the situations mentioned at that paragraph).
113. The proper approach for a tribunal to take, in a case in which the second situation is alleged to exist, is outlined at paragraphs 29-32 of Autoclenz. In my view, relevant guidance given in that part of Autoclenz can be summarized as follows:
(1) The question in every case is: what was the true agreement between the parties? (See paragraph 29 of Autoclenz).
(2) The tribunal must consider whether or not the words of the written contract represented the true intentions or expectations of the parties (and therefore their implied agreement and contractual obligations) when the relevant written contract was made.
(3) The tribunal must consider whether the words of the written contract represented the true intentions or expectations of the parties (and therefore their implied agreement and contractual obligations) at any later stage, if the evidence shows that, at that stage, the parties have expressly or impliedly varied the agreement between them.
(4) In either of those contexts, the aim of the tribunal’s inquiries is to discover the actual legal obligations of the parties. To carry out that exercise, the tribunal will have to examine all the relevant evidence. That relevant evidence includes the written contract itself. But it may also include evidence of how the parties conducted themselves in practice and of what their expectations of each other were.
(5) In considering what the parties’ expectations of each other were, evidence of how they conducted themselves in practice may possibly be so persuasive that the tribunal can draw an inference that that practice reflected the true obligations of the parties.
(6) But it must be remembered that it is the obligations of the parties which are the subject of enquiry. So the mere fact that the parties conducted themselves in a particular way in practice does not of itself mean that that conduct accurately reflected their legal rights and obligations. (See paragraph 31 of Autoclenz). Furthermore:
(a) The focus of the relevant enquiry is to ascertain the true nature of the rights and obligations of the parties. So the fact that a particular right was not exercised, or the fact that a particular entitlement was not actually invoked is not always an inevitable indication that the relevant right was not a genuine right, or that the relevant obligation was not a genuine obligation. The tribunal’s task must be to ascertain what was agreed between the parties.
(b) If a contractual right exists, it does not matter that it is not used. (See paragraph 19 of Autoclenz).
(c) If a particular clause of a contract genuinely reflects what might realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless. (See paragraphs 24 and 25 of Autoclenz).
114. As already noted above, in Clark, Elias J identified a number of factors which, he suggested, could usefully be taken into account in deciding whether a particular purported contract of employment was legally effective (and thus was outside the scope of the second of the “sham” situations which were subsequently described and confirmed in Autoclenz).
115. As has also already been noted above, the Clark principles were broadly endorsed, subject to some modifications, in Neufeld. Below, any comments in relation to any particular Clark factor should be construed as a comment in relation to the particular factor, as modified (if at all) in Neufeld.
116. In Clark, eight factors had been identified. (See paragraph 98 of Clark).
117. Of those eight factors, Factors (2), (3), (6) and (7) are either not potentially relevant, or are not actually relevant, in the circumstances of this case.
118. That leaves Factors (1), (4), (5) and (8), which are described below.
119. Factor (1) is in the following terms:
“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 claimants.”
In Neufeld, the Secretary of State’s counsel criticised Factor (1) as amount to a suggestion that the mere production of a written contract purporting to be a contract of employment would shift to the opposing party the burden of proving that it was not a genuine such contract. At paragraph 88 of Neufeld, the Court expressed doubt that Elias J was intending, at Factor (1), to refer to a legal burden of proof, and added the following:
“In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it; and, as we have indicated, the mere production of what purports to be a written service agreement may by itself be insufficient to prove the case sought to be made. If the putative employee’s assertion is challenged the court or tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship …”
120. Factors (4) and (5) can usefully be considered together:
“(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 [it] 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”.
121. In the context of Factor (5), “the sense described in para 96” is of paramount importance. Accordingly, we need to refer to paragraph 96 of Clark, where Elias J commented as follows:
“Support for the notion that the Tribunals are entitled to refuse to recognise the contract as a contact of employment if it fails to reflect the true nature of the relationship is supported by the fact that the guidance in Bottrill twice emphasises the potential relevance of whether the conduct of the parties is consistent with the contract. That is not to say that any minor breach of the terms will invalidate the contract. However, if the controlling shareholder acts in a manner which suggests that the contract is being set at nought or is treated as no more than an irrelevant piece of paper, then the tribunal will be entitled to refuse to give effect to it”.
122. When Factor (5) is considered within the context of paragraph 96, its real meaning is as follows:
Conversely, if the conduct of the parties is either inconsistent with the contract (in that the employee acts in a manner which suggests that the contract is being set at nought, or that it is being treated as no more than an irrelevant piece of paper by the parties) or in certain key areas where one might expect it to be governed by the contract it 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.
123. Factor (8) merely notes that the fact of there being a controlling shareholding on the part of the claimant is always relevant and may be decisive, but that that factor alone will hardly every justify the tribunal in finding that there was no contract in place.
Issue (2): Conclusions
124. I have no hesitation in concluding that each (Spring 2010) Contract was not a legally effective contract, between the relevant claimant and the Company, because the purported contract was not legally effective. I am satisfied, in each instance, that the relevant contract was being treated by the relevant claimant and the Company as an irrelevant piece of paper. (In each instance, the signing of the relevant Contract did not in any way affect the extent or nature of the rights and obligations of each of the relevant parties). I have arrived at those conclusions against the following background and for the following reasons.
125. I have already concluded (as set out above) that there were no earlier versions of the Spring 2010 Contracts. So, why were the 2010 Contracts entered into? Why did the claimants, for the first time, enter into “contracts of employment” with the Company in the Spring of 2010? The claimants have not been frank about the reality of the situation (which is that the Spring 2010 versions of the Contracts were the first versions of those Contracts); therefore, I have not been provided with any potentially credible reason for the existence of the Spring 2010 Contracts.
126. During the course of Mr Pennick’s oral testimony, I asked him why the claimants had felt it appropriate to enter into contracts of employment with the Company at all. His response was along the lines that, because the claimants were all workers, who were working alongside those workers in the Company who had no shares, it was appropriate that they, like them, should have contracts of employment.
127. That rationale reeks of symbolism, rather than substance. In other words, if that rationale were to be believed, the claimants were entering into contracts for the purpose of showing solidarity with others.
128. In DAS, Mr McAteer has suggested that the real reason for the creation of the Spring 2010 “Contracts” was that it had then become necessary, in light of the need under company law to prevent any Director’s Account from falling below zero, to change the sources of Company remuneration for each claimant (so that such remuneration would now be paid exclusively by way of salary). Perhaps Mr McAteer’s suggestion on that matter is correct. Perhaps it is incorrect. I do not need to arrive at a conclusion on that matter, for the purpose of deciding this case.
129. According to the claimants, the terms and conditions by which they were purportedly bound, pursuant to the Spring 2010 Contracts, were terms and conditions which, in substance, applied to them long before the Spring 2010 Contracts were “made”. Against that background, it is noticeable that, when Mr Pennick had Chamber of Commerce duties to perform during a particular year, he took extensive absences from the Company, during normal working hours, without those absences being formalised in any way. It is clear that, at that point, his absences were agreed among the claimants, without any reference to any requirements of any contract of employment. This is an indicator that the Spring 2010 Contract terms would have been ignored by the parties if any of the claimants, during the post-Spring 2010 period, had had occasion to be absent from the business, for lengthy periods, because of other commitments. (Instead, in such a situation, the matters would have been the subject of a consensus among the claimants, without any reference being made to the requirements of any “contract of employment”).
130. As Mr McAteer has pointed out in his Submissions, there has been confusion among claimants, in the various documents which they have signed in connection with the statutory guarantee claims and in connection with the proceedings, as to the precise extent of their respective holiday entitlements. This also is an indicator that the Spring 2010 Contracts did not have practical significance within the context of the working lives of the claimants.
131. None of the claimants was able to point to any feature of his working life which changed as a result of the innovation of purporting to make him subject to a contract of employment.
132. In each of these three cases, the rights, privileges and obligations of the relevant claimant, within the context of his working relationship with the Company, were governed by arrangements and understandings which the various claimants had arrived at in their roles as shareholders of the Company, as distinct from being governed by the terms of any contract of employment. In my view, these cases are a classic instance of purported contracts of employment being treated by the parties to them as being no more than irrelevant pieces of paper. (See above).
133. In my view, the foregoing discussion and conclusions adequately address the issues which were raised in Factors (4) and (5) of Clark.
134. The general thrust of Clark Factor (1), as explained in Neufeld, is as follows. Where there is a contract ostensibly in place (as is the situation, from Spring 2010, in these cases), there is an evidential burden on the party seeking to deny the effect of the relevant contracts to satisfy the tribunal that the relevant contracts are not what they appear to be. In my view, that evidential burden has comfortably been overcome by the Department, not least by pointing to the differences between what was required by the various “Contracts” and what was actually done by the parties. I consider it to be noteworthy that, until the Spring of 2010, the great majority of each claimant’s remuneration from the company consisted of dividends (which were foreshadowed or recognised by increases in each Director’s Account), as distinct from salary.
135. I do not consider that I need to make any detailed comments upon the applicability of Factor (8) in the circumstances of this case, except to note that Mr Watson and Mr Millar were merely minority shareholders, and that Mr Pennick did not have a controlling shareholding.
Chairman:
Date and place of hearing: 7 and 27 October 2011, Belfast.
Date decision recorded in register and issued to parties: