United Kingdom Employment Appeal Tribunal

BAILII case number: [1994] UKEAT 312_94_1212

Appeal No. EAT/312/94

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 12 December 1994

HIS HONOUR JUDGE J HULL QC

MR D A C LAMBERT

MR A D SCOTT

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MR M TOWNSEND          APPELLANT

K B M ASSOCIATES LTD          RESPONDENTS

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Transcript of Proceedings

JUDGMENT

PRELIMINARY HEARING

Revised


 


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APPEARANCES

For the Appellant IN PERSON


 


JUDGE HULL QC: This is an appeal by Mr Townsend, who applied to the Industrial Tribunal sitting at London (South) on 1 February 1994, with Mrs Mason in the Chair; he complained that he had been unfairly dismissed by a small private company, KBM Associates Ltd. He said that he had been employed as "Director/Company Secretary". The Respondent Company denied that Mr Townsend was an employee. The terms of any "contract of employment" were, they said, not intended to create legal relations.

There were two shareholders, Mr Townsend and his wife. Both were directors. The larger shareholding was that of Mrs Townsend. So she was the dominant person on the board as having the largest shareholding and thereby, in one way and another, could always ensure that, in the long run at any rate, her wishes would be the ones which would prevail if there was any dispute between the two directors. The business of the company, we are told, was as a specialist recruitment agency.

The Industrial Tribunal had to decide, and did decide, whether Mr Townsend was in truth an employee. As he has pointed out to us, the Inland Revenue accepted that he was an employee in the sense that they were content that his National Insurance and his salary should be paid under deduction of PAYE in the usual way. That cannot be conclusive.

The Inland Revenue are usually very happy if a person, in the position of a director, concedes that, because it means that they get their money under PAYE, and do not have to raise assessments under Schedule D, or whatever the appropriate schedule is; and perhaps wait a year or more to get their money, with the insecurity which to the Revenue that involves. So that cannot be conclusive, although of course it is an important factor, particularly in the sense that of course, if PAYE were not the method by which tax were paid, it would be a powerful argument the other way.

The Tribunal considered these matters and they said, quite rightly, that their task was to consider whether there was a contract of employment. They said they accepted the fact that Mr Townsend was an officer of the company, but that did not exclude the possibility that he was also an employee. They say, "we have considered the various indicators which helped the Tribunal" and they referred to tax and National Insurance. However, when they looked at his drawing of salary, it was clear that there was no fixed amount. He and his wife agreed that they would not draw more than each other, but what they did was to draw according to their domestic outgoings and what they thought the company could stand. That meant a variable amount, from time to time, and there was no evidence of regular payments of the same gross amount, which is characteristic of an employee's salary. They then found that Mr Townsend was free to work for other employers, which is some indication that he is not an employee in the ordinary sense, though not again conclusive. And then they say, and this is very much to the point:

"6. We have also looked at the matter of control. There is no doubt that Mr Townsend's wife had at first 51% of the shares and later 67% of the shares and to that extent she had control over Mr Townsend. The Tribunal considers that that was the control of a co-Director rather than the control of an employer".

In other words Mr Townsend was subordinate on the board to his wife's wishes, but he was not controlled, they found, in the way that an employer controls an employee. In paragraph 7:

"7. The Tribunal, looked for terms and conditions under which Mr Townsend worked. We could not see any indications that there was a contract of employment existing between Mr Townsend and the company apart from his position as a co-Director".

Pausing there, Mr Townsend points out, quite rightly, that the chief executive of the company, we understand that to be Mrs Townsend, was the one with the responsibility for issuing a contract of employment. That, of course, is in the sense of written terms of employment. A contract of employment can also exist, so far as the common law is concerned, leaving aside statute, as an oral agreement or even an implied agreement between two people, so they were right to put it as generally as that and look for indications, quite apart from any written contract; and they said they could find none. And then they came to their conclusion, which is far the most important part of their Decision:

"6. Conclusions. We conclude that this was not a contract of employment and that Mr Townsend was not an employee. In reality, this was a partnership between husband and wife with limited liability and neither husband nor wife were employees of the Company".

So in those circumstances, they found Mr Townsend was not qualified to make a complaint under the Employment Protection (Consolidation) Act 1978, and of course, on the basis of that finding, they were right to do so.

Mr Townsend appeals, and he has told us the rest of the story. The company has now gone into liquidation. He says that the Industrial Tribunal said that this was a partnership, but he said that is inconsistent with the fact that he only owns 34%, or owned 34%, of the controlling equity in the company. That, with respect, is not a good point in law, because partnerships are very often unequal.

There are partnerships, which in their deeds contain all sorts of provisions which give dominance to perhaps one partner or perhaps a section of the partners, and impose different duties on different partners and give different shares in the partnership to different partners. The fact that that may not be the ordinary understanding of an equal partnership is beside the point. It does not necessarily contradict the existence of a partnership.

He then told us about the view of the Inland Revenue and I have dealt with that. And he told us about the history of the shareholdings in the company and how he had been removed by special resolution on 10 February 1993.

This case is in our list under our Practice Direction because we can only consider points of law. That is because of the statute which creates our jurisdiction. Parliament has said that we are not to consider questions of fact. The Industrial Tribunal is said to be the industrial jury which has the sole jurisdiction over questions of fact.

In this case, the question whether Mr Townsend was, indeed, an employee of the company or whether the true position was that it was in the nature of a partnership, was essentially one of fact. In very small companies, and we see a good many such cases, where husband and wife work, or perhaps two old friends or three old friends work, together, it must always be a question whether this is, in the strict sense, any more than a mere form imposed on the reality; which reality is, in many cases, that of a partnership. That is to say, there is no true control, and it would be an abuse of language in reality to call the person who nominally may be called a chief executive or company secretary or whatever it may be, an employee of the company. That must depend on looking at the reality of the situation. Here, the Tribunal did. There were some factors which told one way. There were other factors which told the other way. One of the factors in favour of Mr Townsend's contention, perhaps the most important one, was of course that he was under the control of his wife, who could always out-vote him on the board. The Tribunal dealt with that. They found that another very important factor (they were quite right) was that each of Mr and Mrs Townsend drew, from time to time, by way of salary, what they thought the company could stand in view of its takings. There was no set amount. Another factor of importance was that he could work for others.

They were entitled to take all these matters into consideration and it was ultimately a question of fact for them whether they found that it was a contract of employment or whether, on the contrary, it was truly in the nature of a partnership. They found it was in the nature of a partnership. They were entitled to do that. There was evidence to support that and in spite of Mr Townsend's help, we have not been able, any of us, to perceive any point of law here that is fairly arguable.

In those circumstances the position is that we have no jurisdiction to entertain the appeal further. We have to say that it must not go on and we must dismiss the appeal today.