United Kingdom Employment Appeal Tribunal

BAILII case number: [1994] UKEAT 624_93_0512

Appeal No. EAT/624/93

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 5 December 1994

Before

THE HONOURABLE MR JUSTICE MUMMERY (P)

MR D A C LAMBERT

MR A D SCOTT

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MR E L BOOBYER          APPELLANT

(1) TONE INTERIORS LIMITED

(2) SECRETARY OF STATE FOR EMPLOYMENT          RESPONDENTS

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Transcript of Proceedings

JUDGMENT

Revised


 


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APPEARANCES

For the Appellant (THE APPELLANT IN

PERSON)

For the Respondents (NO APPEARANCE ON

BEHALF OF THE 1ST

RESPONDENT)

For the 2nd Respondents MR P KILCOYNE

(of Counsel)

Treasury Solicitor

Queen Anne's Chambers

28 Broadway

London SW1H 9JS


 


MR JUSTICE MUMMERY (PRESIDENT): This Appeal raises an unusual point on a common problem: when is a person, in the position of a managing director of a company, properly regarded as an employee of a company?

The point arises in an Appeal against the unanimous Decision of the Industrial Tribunal held at Exeter on 18 June 1993. The Tribunal unanimously decided that the Applicant, Mr Eric Boobyer, was not an employee of the company called Tone Interiors Limited, which was in liquidation. That gave rise to a claim by Mr Boobyer against the Secretary of State for Employment under the provisions of the Employment Protection (Consolidation) Act [1978]. They provide for an employee of an employer, who has become insolvent, to make application to the Secretary of State for payment out of the National Insurance fund of an amount which, in the opinion of the Secretary of State, the employee is entitled to in respect of debts to which the provisions apply.

In this case, Mr Boobyer made an application to the Secretary of State. The reaction of the Secretary of State was to resist the claim on the basis that, although it was admitted that Tone Interiors limited was insolvent, it was not admitted that Mr Boobyer was an employee of that company within the meaning of Section 153(1) of the 1978 Act. Accordingly it was not admitted that Mr Boobyer was entitled to receive any payment under the provisions of that Act.

The Tribunal, having heard argument from Mr Boobyer in person and having heard the legal advisor from the Redundancy Payments Office, found in favour of the Secretary of State. Mr Boobyer appeals against that Decision. His ground of appeal is that, during the hearing, the Tribunal found that he was an employee at one stage, but then rejected his claim on a basis which, in his view, contained an error of law. He submitted in his Notice of Appeal that the case had wider implications and that the whole matter was being looked into by his member of Parliament.

On the hearing of the Appeal, Mr Boobyer has again appeared in person and he has provided a written summary of his arguments following a preliminary hearing of his Appeal on 2 February 1994, at which this Tribunal ordered that his Appeal be allowed to continue to a full hearing on the basis that the Appeal raised an arguable point of law. The Secretary of State resists the Appeal. He is represented today by Mr Kilcoyne.

Before we deal with the submissions, it is necessary to sketch the facts which have given rise to the dispute. These are summarised in the Tribunal's Decision. Tone Interior Limited was formed in June 1983. The shareholding at that stage was Mr Boobyer 34% and Mr Beasley and a Mr Drew each holding 33%. Mr Drew was subsequently expelled from the company. The shareholding then remained the same for Mr Boobyer and Mr Beasley and Mr Beasley's daughter held the 33% previously held by Mr Drew.

From the time when the company was formed in 1983, Mr Boobyer was the managing director. He continued to be the managing director until the company ceased to trade on becoming insolvent. The Tribunal said that for the last nine months of the time when the company traded, Mr Boobyer took over all the shares of Mr Beasley and Miss Beasley. That finding is disputed to this extent, that Mr Boobyer says that it was for the last 6 1/2 months that he held 99% of the shares and his mother held 1%. The company ceased to trade in January 1993.

Mr Boobyer, the Tribunal found, was a working managing director attending to the day to day management of the company and all the duties normally done by a person in that position. He was paid a salary; he paid P.A.Y.E. and National Insurance Contributions as an employed person; he had the use of a company car and the expenses incurred in running it were reimbursed by the company. No evidence was obtained for the Tribunal to prove any written agreement. The Tribunal was unable to find any minute in the minute book; there was no executed service agreement. There was nothing in the Articles of Association of the company relating to Mr Boobyer's employment.

It was accepted by the legal advisor of the Redundancy Payments Office that the wages records recorded deductions as an employed person from Mr Boobyer's remuneration, not a self-employed person. The Tribunal noted, that by reason of the change in share-holdings, Mr Boobyer was liable to be out-voted by other shareholders up to the last 6 1/2 months of the active life of the company, but during that last 6 1/2 months, there was no possibility of anyone out-voting him.

The Tribunal considered the relevant statutory provisions and came to these conclusions: first, that Mr Boobyer was an employee of the company up to the date when he acquired the whole of the share-holding. They said there was no express contract of employment, but there was an implied one. They implied one from the fact that he was paid a salary, that tax and National Insurance Contributions were deduced under P.A.Y.E. and that he was under the control of the other two shareholders who could out-vote him. The Tribunal were not, however, prepared to make that implication in respect of the period after he had acquired 99% of the shareholding. In respect of that period, the Tribunal found that, although Mr Boobyer was doing more than the formal duties of a director, he was not under the control of the board of directors, rather he was under the control of himself and was acting as though he was the sole proprietor of the business, mainly concerned at that stage in getting the company out of its financial difficulties. The Tribunal said:

"... We therefore find that lack of control in this particular case does not point to the applicant being an employee although other factors do. We therefore dismiss the application..."

The Tribunal finished by saying in paragraph 11 of their Decision:

"... the applicant has referred to Section 153(1) of the Employment Protection (Consolidation) Act [1978], and the definition of "employee" and "contract of employment" and we have not, therefore, referred to it in this decision as the applicant has correctly interpreted their meanings."

Those reasons were notified to the parties on 24 June 1993.

Following the preliminary hearing, Mr Boobyer elaborated his arguments in a written submission sent to the Tribunal on 5 February. He has amplified those submissions on his Appeal today by particular reference to the decision of the Privy Council in the case of Lee v. Lee's Air Farming Limited [1961] AC, page 12.

In his arguments, Mr Boobyer makes the following general points on the law. First, that there are identifiable factors which indicate the existence of a contract of employment, notably remuneration by way of payment of wages or salary. He refers to other factors, such as payment during absence for illness, paid holidays and membership of a company pension scheme. He submits, in the light of the general principles, that the Tribunal at Exeter were incorrect in their assessment of the importance of the 99% shareholding for the last 6 1/2 months of trading. Mr Boobyer builds his case on the implied contract that the Tribunal were prepared to find and did find in respect of his first nine years or so as managing director. He points out that he only appears to have lost the case on the basis of the change that occurred in the last 6¹/₂ months. He submits that it is important to get that change into context. During the period of the last 6¹/₂ months, neither his function nor any of his benefits changed. The change in the shareholding was, he submitted, not the decisive factor which the Tribunal thought it was, and it was. At that point that he cited the case of Lee v. Lee's Air Farming Limited as very close to his case. That case concerned a controlling shareholder who was also the governing director of a company. He held 2,999 shares out of the 3,000 shares into which the capital of the company was divided. It was decided by the Privy Council that Mr Lee, as controlling shareholder and managing or governing director, was a worker within the meaning of Section 3(1) of the Workers' Compensation Act [1922] of New Zealand. A worker was there defined as a person who has entered into or works under a contract of service with an employer. So, Mr Boobyer argues, if Mr Lee was an employee under a contract of service, why not him? The fact that Mr Lee managed the company and owned all the shares in it, did not prevent him from having a contract of service and an employment relationship. The opinion of the Privy Council was given by Lord Morris. He stated that the Law Lords, who sat on that Board, could see no reason to doubt that a valid contractual relationship could be created between the company and Mr Lee. They explained that the company and the controlling shareholder and governing director were separate legal entities. It was perfectly possible for them to be in an employment relationship with each other, under which the right to control existed with the company, even though it would be for Mr Lee, in his capacity as agent for the company, to decide what orders to give and what decisions to make. The Privy Council said that it was legally possible for an individual acting in one capacity to give orders to himself in another capacity, just as it was possible for a man acting in one capacity to make a contract with himself in another capacity.

Building on that case, Mr Boobyer concluded his submissions by saying that, if a contract of employment could be implied from the earlier years of his managing directorship of the company, there was no reason why that did not continue down to the date when the company became insolvent. Throughout the whole period, he was rendering services to the company as an employee, was taxed accordingly and there was no ground in law for regarding his last 6¹/₂ months as creating a different legal relationship that had previously existed.

Mr Boobyer also referred to the well-known judgment of Lord Denning in Stephenson Jordan and Harrison Limited v. Macdonald and Evans [1952] 1 Times Law Reports at page 101, where Lord Denning considered the decisive test as to whether a person was an employee or not, was whether he was fully integrated into the employers' organisation. He cited Lord Denning as saying that one feature that seems to run through the cases is that, under a contract of service or contract of employment, a man is employed as an integral part of the business, but under a contract for services his work, although done for the business, is not integrated into it. On that test, Mr Boobyer also submitted that his employment was an integral part of the business of this company. He emphasized the fact that the implied contract, which the Tribunal had found for the first nine years, should continue to exist, because he remained an integral part of the business of the company.

Mr Boobyer's argument is that, having found that he was an employee by implication from the facts stated in the Decision, the Tribunal erred in law in holding that by the time the company had become insolvent, he was no longer an employee. He points out that there was no express agreement altering the relationship from one of employment to some other relationship. There were no grounds, he argued, for coming to a different conclusion at the date of insolvency, than there had been, say, a year earlier in his relationship with the company.

Although the point is an unusual one, we find no difficulty in resolving it by reference to well-established principles. We agree with Mr Kilcoyne, for the Secretary of State, that there was no error of law in the Tribunal's Decision. We have come to this conclusion for these reasons: the starting point is the definition of employee to be found in Section 153 of the Employment Protection (Consolidation) Act [1978] an:

"... "employee" means an individual who has entered into or works under...a contract of employment..."

It is necessary to look at the definition of a contract of employment which is a contract of service, express or implied and whether it is oral and in writing in the case of an express contract.

There is no definition in the legislation as to what is meant by a "contract of service". In order to decide, in any particular case, whether there is a contract of service, it is necessary to look at the cases decided by the Courts over the years which identify the various criteria used for defining a contract of service, as opposed to a contract for services. There are a number of tests elaborated in the cases, which Mr Kilcoyne has identified variously as the control test, the organisation test and the economic reality test. We accept his submission that, in contemporary cases, the tribunals and this Tribunal look at all the relevant factors and interpret the arrangement as a whole. There is no one test that always produces the right answer; control is an important factor, but is not necessarily decisive. The organisation test, enunciated by Lord Denning, can be helpful, but is not decisive. Looking at the economic reality of the situation can sometimes beg as many questions as it answers. It is necessary to look at the whole history of the relationship between the persons, between whom it is said there is an employment relationship and decide what is the legal nature of it. In doing that, it is helpful to look at cases like Lee v. Lee's Air Farming Limited which are on one side of the line. That is on the side of creating an employment relationship. The facts, as set out in the Report, quote, from the Articles of Association of the company, express provisions that the company would employ Mr Lee as a chief piolet at an agreed salary and that in respect of such employment, the law of master and servant would apply as between him and the company. That was an express contract of service and, unless it was demonstrated to the Court or the Tribunal that it was a sham, that it did not reflect what was really agreed or what was really the situation, the Tribunal or Court would have to give effect of it. That is on one side of the line. Mr Boobyer is not able to bring this case clearly on that side of the line, because at no time has he been able to provide evidence of a written agreement or anything in the Articles or any written minute, establishing that the company had agreed that he would be at all times an employee of the company. It was for this reason that the Tribunal, in our view, correctly said the matter had to be resolved by implication. That is the way that the law may resolve problems where there is no express agreement. An agreement has to be constructed by the Court by implication from the facts that are known. The Tribunal looks at the facts and seeks to interpret them. In looking at the facts, the Tribunal is entitled to look at the various criteria or factors identified by Judges as pointing in the direction of an employment relationship. On this aspect of the case, Mr Kilcoyne helpfully referred to several cases which I will identify without citation of the passages in them. Readymix Concrete (SA) v. Minister of Pensions [1968] 1 ALL ER, 433 at 439; Withers v. Flackwell Heath Football Supporters Club [1981] IRLR 307 at page 308, Eaton v. Robert Eaton Limited [1988] ICR 302, at 303 (H) and a transcript of a decision given by this Tribunal in the Judgment of Mr Justice Garland on 23 June 1987 Wilson v. Trenton Service Station Limited.

The reason why it is not necessary to cite any detail from these cases, is that they all point to the same general proposition, that it is a question of fact for the Tribunal to decide whether someone has a contract of service or not. You look at all the facts and interpret them by focussing on such considerations as what the person did, how they did it, how they were paid, who controlled them and so on. If the Tribunal looks at the facts and interprets them one way or another, it is difficult to appeal to this Tribunal on a question of law. That was emphasized by the judgments of the Court of Appeal in O'Kelly v. Trust House Forte plc [1983] ICR, 728, notably the Judgment of Sir John Donaldson M.R. at pages 761 and 762.

The Tribunal in this case came to the correct conclusion by the process of implication. We see no error in implying, down to the last 6¹/₂ months of the active life of this company an employment relationship between Mr Boobyer and the company. They made it clear, in paragraph 8 of their Decision, that one of the key factors in their making this implication, was that Mr Boobyer was not in control; he was under the control of the other two shareholders. There was, therefore, a board of directors on which he could be out-voted. So in a very real sense, the company could exercise, through the other two shareholders, control over Mr Boobyer's position, including the power to dismiss him. It would be quite possible for the board, as constituted at that stage, to reach a decision terminating Mr Boobyer's employment. There was, however, a significant change. The Tribunal were entitled to find that in the last 6¹/₂ months of the company's active life, it was not possible to make this implication. Although his tax position was not changed with the Inland Revenue, his position in the company had crucially changed from being someone under the control of the other two shareholders, to someone in sole control of the company. So it was not possible to say that he was under control of the company. There was no-one else who could decide to dismiss him, or make him redundant, or to control his manner of working. He was, as the Tribunal said, under the control of himself. In those circumstances there was no error in the Tribunal's Decision that they could not imply that he was employed.

An important feature of an employment relationship is that a person who is employed can be dismissed by somebody else. That somebody else may not be able to control his day to day work, in the sense of telling him what to do in detail, when to do it and how to do it, but an employer ultimately has the power to say "I do not want you to work for me any more". It is difficult to see how this company could be the employer of Mr Boobyer, when it was he himself who would decide whether he would continue to work for the company or not. There was no other person who was boss. In those circumstances, we are unable to find that there was any error of law; it was a permissible finding of the Tribunal to say that, down to a certain stage, Mr Boobyer had an implied contract of employment, but thereafter, because a significant shift in the shareholding resulting in him becoming the controlling shareholder, it was no longer possible to make the same implication. For those reasons, there is no error of law in this Tribunal's Decision. We therefore dismiss the Appeal.