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Industrial Tribunals Northern Ireland Decisions
You are here: BAILII >> Databases >> Industrial Tribunals Northern Ireland Decisions >> Morrow v Department for Employment and ... Department for Employment and ... [2012] NIIT 01477_12IT (17 October 2012)
URL: http://www.bailii.org/nie/cases/NIIT/2012/1477_12IT.html
Cite as: [2012] NIIT 01477_12IT, [2012] NIIT 1477_12IT
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THE INDUSTRIAL TRIBUNALS
CASE REF: 1477/12
1503/12
CLAIMANTS: 1. William Morrow
2. Trevor Morrow
RESPONDENT: Department for Employment and Learning
DECISION
(A) The Decisions in respect of the William Morrow 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 Northern Whig Ltd (“NW”) is not liable to that claimant in respect of any redundancy payment.
(2) The claimant’s appeal (“complaint”) pursuant to Article 233 of the Order is dismissed.
(B) The Decisions in the Trevor Morrow appeals are as follows:
(1) Pursuant to that claimant’s application under Article 205 of the Order, I have determined that NW 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.
Constitution of Tribunal:
Chairman (Sitting alone): Mr P Buggy
Appearances:
The claimants were represented by Mr P Hopkins, Barrister-at-Law, instructed by Carson McDowell LLP Solicitors.
The respondent was represented by Mr A Sands, Barrister-at-Law, instructed by the Departmental Solicitor's Office.
REASONS
1. For many years, until February 2012, each of the claimants in these proceedings worked on a full-time basis for NW. In February 2012, NW went into administrative receivership.
2. From June 2003, NW was 100% owned by Inspiration Contractors Ltd (“Inspiration”). From that time onwards, and at all material times since then, 70% of the share capital of Inspiration was owned by the claimant, William Morrow, and 30% of the share capital of Inspiration was owned by the claimant, Trevor Morrow.
3. At all material times since March 2001, William Morrow was a director of Inspiration. At all material times from June 2003, Trevor Morrow was a director of Inspiration.
4. At all material times since 2000, William Morrow was a director of NW. At all material times from June 2003, Trevor Morrow was a director of NW.
5. Each of these claimants asserts that NW owes them money in respect of wages, holiday pay, notice pay and redundancy pay. The respondent Department (“the Department”) is the statutory guarantor in respect of certain employment debts. For the purpose of these appeals, the Department accepts that administrative receivership triggers that obligation, in respect of wages, holiday pay and notice pay, as well redundancy pay.
6. Each of the claimants made an application to the Department, in its role as statutory guarantor. Each of those applications was unsuccessful because, according to the Department, the relevant claimant was not an “employee” within the meaning of the 1996 Order at any relevant time.
7. This is my Decision in respect of each claimant’s appeals against those determinations.
The legislation
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, the Department is satisfied both that the relevant employer is “insolvent” (within the meaning of the statutory guarantee provisions of the Order) 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. 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.
12. The effect of Article 233 of the Order is that an employee whose application under Article 227 is refused can present a complaint (can, in effect, appeal) to an industrial tribunal in relation to that refusal.
13. 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.
The central issues
14. In each instance, the Department had refused the relevant claimant’s Article 201 (redundancy pay application) on the basis that the relevant claimant had not been an “employee” at any time after Inspiration bought NW.
15. In each instance, the Department had refused the relevant claimant’s Article 227 application also on the basis that the relevant claimant had not been “employed” by NW at any time after Inspiration bought NW.
16. In each of these cases, the parties are agreed that the crucial issue is whether or not the relevant claimant was an “employee” within the meaning of the Order at the relevant times. The parties are agreed that each claimant’s claim must fail if he was not an employee at those times, and that the relevant claimant’s appeal must succeed if he was an employee at those times.
Chronology of events
17. A helpful written chronology of events was provided for me. Some of the key events in that chronology were as follows.
Pre-2000
18. In October 1973, the claimant, Trevor Morrow, became an employee of NW.
19. In April 1992, the claimant, William Morrow, began employment with NW.
2000 - 2005
20. By the end of March 2000, William Morrow was already a director of NW. (He may have been a director even prior to 1998).
21. In March 2001, William Morrow became a director of Inspiration.
22. In June 2003, Trevor Morrow became a director of Inspiration.
23. In June 2003, Trevor Morrow also became a director of NW.
24. In June 2003, Inspiration acquired the entire issued share capital of NW.
2010 - 2011
25. In 2010, Trevor Morrow loaned £30,000 to NW.
26. In September 2011, Trevor Morrow loaned £66,000 to NW.
27. In 2011, William Morrow loaned £40,000 to NW.
28. In April 2011, each of the claimants agreed to temporarily waive his “entitlement to a salary” from NW.
February 2012
29. On 7 February, the employees of NW were informed that they were being made redundant.
30. On 9 February, NW went into administrative receivership.
The evidence
31. It had been agreed and directed that these two claims should be heard together. Accordingly, the evidence in one of these two cases is to be treated as evidence in the other case.
32. I received oral testimony from each of the claimants.
33. I saw an agreed bundle of documents and some miscellaneous documents.
34. 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.
“Employee”
35. The term “employee” is defined in the Order. For its purposes, a person is an employee if he is employed under a contract of service. That is the only aspect of the Order’s definition of “employee” which is relevant for the purposes of these proceedings.
36. In this Decision, whenever I refer to an employee, or to employment, I am referring to an employee, or to employment, under a contract of service.
37. The Department accepts that William Morrow was an employee of NW at least until he became a director of that company.
38. The Department accepts that Trevor Morrow was an employee of NW until the takeover, in June 2003, of NW (by Inspiration).
The relevant times
39. As already indicated above, in each of these cases, both parties accept that each appeal should be successful if, but only if, the relevant claimant was employed by NW at the relevant time, or at the relevant times.
40. For the purposes of each redundancy pay appeal, the relevant period is the period beginning in 1992, and ending in February 2012.
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 during which the relevant claimant allegedly 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 claimant first became an employee of NW until February 2012.
44. The implications of the foregoing are as follows.
45. Each claimant cannot succeed in his appeals in respect of notice pay or redundancy pay unless he proves that he was employed under a legally effective contract of employment with NW during the weeks immediately prior to 7 February 2012.
46. Each claimant cannot succeed in his wages claim unless he was an NW employee during the period from April 2011 until February 2012.
47. Each claimant cannot succeed in his appeal in respect of holiday pay unless he proves that he was an employee of NW during the period from 1 January 2011 until 7 February 2012.
Why the appeals have failed
48. In each of these cases, all of the appeals of the relevant claimant have failed, because I am not satisfied that that claimant was employed by NW, during any relevant period, under a legally effective employment contract.
The structure of the remainder of this Decision
49. During the course of my discussion of the legal principles, and in the context of setting out my conclusions, I refer to some of the arguments of the parties and also set out some findings of fact.
The law
50. My understanding is that the parties are agreed that the legal principles which were set out by Elias J in Clark v Construction Initiatives Ltd [2008] IRLR 364, as endorsed, subject to modification, by the Court of Appeal in Neufeld v Secretary of State for Business, Enterprise and Regulatory Reform [2009] EWCA Civ 280, are relevant in the context of this case. I agree.
51. As I made clear during the hearing, I consider that the principles which emerge from the decision of the Supreme Court in Autoclenz Limited v Belcher [2011] UKSC are also relevant in the context of these proceedings.
52. I am satisfied that the cases cited in the last two preceding paragraphs established principles which are applicable whenever an industrial tribunal is determining whether a purported contract of employment was, or was not, legally valid and legally effective.
53. In both Clark and Neufeld, the issue was whether or not a controlling shareholder was, or was not, to be recognised as an employee.
54. In this case, William Morrow had a controlling shareholding. Trevor Morrow did not have a controlling shareholding. In applying the Clarke/Neufeld principles in the Trevor Morrow case, it is appropriate to have regard to the fact that that claimant did not have a controlling shareholding.
55. Various “factors” were outlined in Clark, and endorsed, subject to certain modifications, in Neufeld. What are those factors designed to address?
56. According to Clark (at paragraph 98 of the judgment) the factors were designed to assist the tribunal in approaching:
“…the task of determining whether the contract of employment should be given effect or not…”
57. 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 a legally effective employment contract. Instead, its task is simply to ascertain whether or not any relevant purported contract is, or is not, a legally effective contract of employment.
58. Support for that proposition is to be found in paragraph 77 of the Court of Appeal judgment in Neufeld, in which the court 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.”
59. Accordingly, in the circumstances of each of these two cases, my task, in each case, is to ascertain whether the relevant purported contract of employment was legally effective, or was not legally effective, at the relevant time, or at the relevant times.
60. In my view, the decision of the Supreme Court in Autoclenz 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 legal terms) if the purported contract did not represent the true intentions and expectations of the alleged employee and the alleged employer.
61. In my view, the Autoclenz principle which has been referred to in the last preceding paragraph merely confirms and explains principles which had already been established by the courts and tribunals, at Court of Appeal level and below. 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 it does not represent the true intentions and expectations of the parties, even if that has not been done with the intention of misleading others.
62. 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 “sham” situation which was described above at paragraph 60).
63. Below, any comment in relation to any particular Clark factor should be construed as comment in relation to that factor as modified (if at all) in the Court of Appeal judgment in Neufeld.
Conclusions
64. Eight factors were identified at paragraph 98 of the Clark judgment.
65. In the remainder of this Decision, a reference to a particular factor is a reference to that factor as set out in Clark (subject where appropriate, to any modification decided upon by the Court of Appeal in Neufeld). Thus, for example, a reference below to factor (1) is a reference to factor (1) in Clark, and a reference to factor (2) is a reference to factor (2) in Clark, and so on.
66. It is convenient to take those factors out of order.
67. Factor (2) emphasises that the mere fact that an individual has a controlling shareholding does not of itself prevent a contract of employment arising; nor does the fact that he is in practice able to exercise real or sole control over what the company does.
68. Accordingly, the fact that William Morrow had a controlling shareholding does not of itself prevent a contract of employment between William Morrow and NW arising or continuing (during the period after Inspiration became the sole shareholder of NW). Furthermore, the fact that William Morrow was able to exercise real control over what the company did, after the takeover, did not prevent a contract of employment, between himself and NW from arising or continuing. Similarly, the fact that Trevor Morrow was able to exercise some influence over what the company did, after the takeover, is not a fact which prevented a contract of employment from arising or continuing between Trevor Morrow and the Company.
69. Factor (3) emphasises that the fact a particular appellant is an entrepreneur, or has built the company up, or will profit from its success, are not matters militating against a finding that there was a contract in place during any relevant period.
70. Accordingly, those are not matters which militate against a finding that there was a legally binding contract of employment between William Morrow and NW, or between Trevor Morrow and NW, at any relevant time.
71. Factor (7) points out that although the fact that an individual guarantees a company’s debts could exceptionally have some relevance in analysing the true nature of the relationship between that individual and the company, in most cases it will not be a circumstance which is likely to carry any weight.
72. I accept, that, in the circumstances of these cases, the fact that William Morrow and Trevor Morrow made loans to the company, and the fact that they temporarily waived any salary entitlement, are matters which do not carry any weight, in the context of the tasks (of ascertaining whether each purported contract was legally effective) which I have to carry out.
73. Factor (8) notes that the fact that there is a controlling shareholding may raise doubts as to whether the relevant individual is truly an employee, but emphasises that that fact alone does not resolve those doubts one way or another.
74. I have taken those comments fully into account in deciding whether or not William Morrow had a contract of employment at any relevant time.
75. Thus far, I have not referred to factors (1), (4), (5) and (6). I now address those factors.
76. According to factor (1), where there is a contract ostensibly in place, the onus is on the parties seeking to deny its effect to satisfy the tribunal that it is not what it appears to be. However, at paragraph 88 of the judgment in Neufeld, the Court of Appeal stressed that there is no legal burden, in the circumstances envisaged in factor (1), upon the party which is seeking to deny its effect to satisfy the tribunal that a purported contract of employment is not what it appears to be. Instead, the position remains that, where the putative employee is asserting the existence of an employment contract, it will be for him to prove it. (Perhaps there is an evidential burden upon opposing party in that connection, but there is no legal burden of proving a negative).
77. At factor (1), reference was also made to the implications where an individual has paid tax and national insurance as an employee. I accept that this is a matter to be taken into account in deciding whether or not a particular putative contract of employment is legally effective.
78. In these cases, at all relevant times, both of the appellants paid tax and national insurance as an employee, in relation to all of the remuneration which, in these appeals, they alleged had been obtained as remuneration under contracts of employment. That is a significant matter, in deciding whether or not each appellant’s legal relationship with the company constituted a legally effective contract of employment.
79. According to factor (6) in Clark, the assertion that there is a genuine contract of employment will be undermined if the terms of that contract have not been identified or reduced into writing; this, according to Clark, will be powerful evidence that the contract was not really intended to regulate the relationship in any way.
80. However, at paragraph 89 of Neufeld, the Court of Appeal pointed out that factor (6), as set out in Clark, “…may perhaps have put a little too high the potentially negative effect of the terms of the contract not having been reduced into writing”. Nevertheless, the Court also recognised that the lack of a written contract would “…obviously be an important consideration …”.
81. In these cases, each claimant did undoubtedly have a contract of employment with NW at some time prior to the takeover of NW by Inspiration. However, in each instance, some of the terms of that earlier contract of employment would undoubtedly have became inappropriate, in light of the difference in each man’s role, and the changes in each man’s circumstances, once the takeover had happened. Nevertheless, in each instance, the terms of any post-takeover contract of employment (which would necessarily have been significantly different from the terms of the pre-takeover contract of employment), were never reduced, even partially, to writing. It seems to me that, in the circumstances of this case, that is a matter which is of significance, and one which I must take into account in deciding whether or not each appellant had, or had not, a legally effective contract of employment with NW at any relevant time.
82. Factors (4) and (5) are best considered together.
83. I have not forgotten that those factors were devised in litigation involving an issue as to whether a controlling shareholder was an employee. However, I consider that the principles which emerged from those factors are also applicable in situations in which the putative contract of employment is between a non-controlling shareholder and a company. I consider that those factors provide authority for the following propositions:
(1) If the conduct of the parties is in accordance with the contract (for example, if the individual works the hours stipulated or does not take more than the stipulated holidays), that would be a strong pointer towards the contract being valid and effective.
(2) Conversely, if the conduct of the parties is either inconsistent with the putative contract, 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 potentially be a very important factor, militating against a finding that the “employee” is in reality a true employee.
84. In the context of factor (5), in commenting upon situations in which the conduct of the parties is inconsistent with the contract, Elias J referred to paragraph 96 of the Clark judgment. At that paragraph, he commented as follows:
“Support for the notion that the Tribunals are entitled to refuse to recognise the contract as a contract of employment if it fails to reflect the true nature of the relationship is supported by the fact that the guidance in Botrill 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”[My emphasis].
85. I consider paragraph 96 of Clark to be of considerable significance in the context of these appeals.
86. Mr Hopkins’ strongest point was his argument that each of the claimants had undoubtedly been employed under a contract of service, throughout some period prior to the takeover of NW by Inspiration, and that thereafter those contracts were never formally terminated. Perhaps not, but I am convinced, on the basis of the evidence presented by the claimants, and on the basis of the documentary material which was provided to me, that, throughout the period after the takeover, any contracts of employment which the claimants had had were then being treated as being irrelevant to the regulation of their respective relationships with the company.
87. After the takeover, the roles, duties, responsibilities, and entitlements of each of these claimants were clearly very different from those that had been operative prior to the takeover. However, nobody ever bothered to specify those differences, either completely or incompletely, in any written document or documents. In the circumstances of these cases, I consider that those omissions to be of considerable significance.
88. I am satisfied that, after the takeover, each claimant’s duration of work hours, and the timing of his work hours, were matters either decided by himself, or matters which were agreed between the two claimants, in their respective capacities as directors and shareholders in the company.
89. I am satisfied that, from the time of the takeover onwards, neither claimant ever conducted his working life by reference to any contract of employment. To the extent that their working hours coincided with the working hours of true employees of the company, that was dictated by the needs of the business, rather than being dictated by any contract of employment.
90. I am satisfied that there was no post-takeover situation in which either claimant’s pay during sickness was affected, or limited to any extent, by any contract of employment.
91. I am satisfied that, when each man took holidays, that was by agreement between them, and that the extent of each man’s holidays was not dictated by any contractual stipulation.
92. These were people who worked regular hours, of lengthy duration. However, they did so because it was in their commercial interests to do so, or they did so as an example to the company’s true employees. They were not constrained to do so by any contract of employment.
93. Mr Hopkins has urged me to take a broad and purposive approach to the interpretation of the concept of a contract of employment, in the circumstances of these cases. He argues that I ought to be slow to undermine the protection of the statutory guarantee provisions of the Employment Rights Order.
94. However, those provisions, rightly or wrongly, apply only to people who served under contracts of employment.
95. I have considerable sympathy for the situation in which these two claimants find themselves. It seems to me that they worked hard in building up, and developing, their business. They worked long and regular hours. They were as intimately involved in the day-to-day workings of the business as any true employee would be. However, the reality is that the statutory guarantee provisions provide protection only for people who are employees within the meaning of the Order.
96. I have assessed each claimant’s appeals in light of the Clark factors, while reminding myself that those factors are only a guide to what must be an overall assessment.
97. I have regretfully concluded, in each appellant’s case, in relation to every relevant time, that a contract of employment was not the operative basis upon which that individual conducted his economic relationship with NW.
98. Each claimant paid tax and national insurance. In each case, that circumstance is a matter which assists the relevant claimant in seeking to prove that he was truly an employee. (See factor (1) of the Clark factors). However, in each case, if the putative contract of employment was really intended to regulate the relationship between the relevant claimant and the company, one would expect that it would have been at least partially reduced to writing. (See factor (6) of the Clark factors). Having carefully considered the oral testimony of each claimant, I am satisfied, in each case, that the relevant claimant’s conduct, in his working life within NW, was regulated by what was agreed between the two claimants, in their capacity as directors and shareholders (as distinct from being regulated by any contract between the relevant claimant and the company). In these cases, I consider that factors (4) and (5) were of considerable significance.
99. For the sake of completeness, I add the following comment. In the Department’s initial written responses in each of these cases, it argued that the relevant claimant exerted a level of control over his terms and conditions of employment that was inconsistent with an employment relationship. I reject that argument. I am satisfied that that argument is inconsistent with factor (8) of the Clark guidelines.
Chairman:
Date and place of hearing: 17 October 2012, Belfast.
Date decision recorded in register and issued to parties: