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United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> Smalley v Secretary Of State For Employment [1996] UKEAT 866_95_2201 (22 January 1996)
URL: http://www.bailii.org/uk/cases/UKEAT/1996/866_95_2201.html
Cite as: [1996] UKEAT 866_95_2201
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At the Tribunal
HIS HONOUR JUDGE J ALTMAN
MR D G DAVIES CBE
MR R H PHIPPS
JUDGMENT
PRELIMINARY HEARING
Revised
APPEARANCES
For the Appellant MR T SADIQ
(of Counsel)
For the Respondents MR R JAY
(Counsel)
The Treasury Solicitor
Queen Anne's Chambers
28 Broadway
London
SW1H 9JS
JUDGE ALTMAN: This is an appeal from the decision of the Industrial Tribunal sitting in Liverpool on 25 May 1995. It was a decision reached by the Chairman sitting alone and it arose from an application by the Appellant to the Respondent, the Secretary of State for Employment for payments due, we were told, for redundancy but which were found, certainly in the reasons of the decision, to have been made under Section 122 of the Employment Protection (Consolidation) Act 1978, not under Section 106 as would then have been appropriate though it makes no difference.
The Secretary of State admitted that the company of which the Applicant alleged herself to have been an employee was insolvent for the purposes of paving the way for such payments to be made under either section, but contended that in fact the Applicant was not an employee.
That was the sole issue for determination by the Tribunal which required findings of fact and considerations of the fact, by the Tribunal. The exercise that the Chairman set himself was the traditional exercise of in effect drawing up a check list of factors relating to the employment of the Applicant so as to be able to balance the issues and come to a conclusion as to what the position was.
The company concerned was called J & A Smalley Ltd and it appears that this was a very old established company, over a 100 years old, and was incorporated as a limited company in 1922. It had always been a family business dealing with wholesale paper bag distribution and stationery, an industry which has suffered considerably in recent times, for economic reasons.
In 1971 the Applicant joined the company at a time when there were three Smalley family members as the shareholders and directors. She joined initially in a capacity which is not made clear, but she did not join as a Director or as someone in a senior position. But there were shareholding movements, as so often happens in these family businesses, and she received 100 shares in the late 1970s and became a Director and, indeed, by 1989 the changes were such that the Appellant and her husband were the only shareholders although the Appellant was very much a minority shareholder.
The situation of this company was not untypical of very small businesses in the late 1980s who found the economic circumstances being not quite those that they had anticipated or been led to believe by the euphoria of general opinion at all levels of the country in the preceding years. They needed to raise further capital and their house, that of the Appellant and her husband, became charged so it appears to the company to secure the overdraft from the bank and in exchange for allowing that charge the Appellant received consideration of a further issue of shares but she remained a minority shareholder.
Throughout what was described by the Chairman as "this period", the Appellant worked in the business and had a contract of employment, the latest of which was produced in 1992 and she was described there as a Director. We have had an opportunity of seeing the contract but it does not seem to us that we need to go behind the findings of fact in the Chairman's reasons for the purposes of this appeal and we have not substantially been asked to do so.
In the main period she received a weekly wage, paid National Insurance and her income was dealt with on the Pay As You Earn system, but for 80 weeks before the company finally went into liquidation, as it appears, she received no salary, which was described as a sacrifice by the Chairman indicating, on balance, an entitlement to salary.
Those were the facts that the Chairman found and it is clear that he was looking at the issues on the one hand of her being enmeshed in the overall ownership of the company as a family business, showing the way that had increased over the years and in showing that it was also a substantial tie for her because of her part share in her home being charged also. On the other hand, he also demonstrated the fact that she did work under a presumed document called a contract of employment and he dealt with the remuneration and the lack of remuneration, both factors over the relevant period.
Then, having described the stance of the Secretary of State in the decision, the Chairman went on as follows:
"12 All of the factors to which I have referred are relevant in considering whether or not Mrs Smalley had the status of employee [and one of the factual issues that I have already referred to was then added into the decision]."
The Chairman then went on to deal with the question of control to which I will return later on.
On behalf of the Appellant, who was the Applicant before the Industrial Tribunal, Mr Sadiq has helpfully put the case and suggested to us that the finding of the Tribunal was mistaken in law in their concluding, from those factors, that there was any particular ground to support the proposition that she was not an employee.
The grounds of appeal furnished refer principally to the matters which then followed in the decision. But at the point of the decision to which I referred above, it is true to observe that a number of features were referred to by the Chairman which are consistent with employment, notably the receipt of a weekly wage, National Insurance and Pay As You Earn and the fact of working in the business. However the Chairman did not, at that stage, describe the work or say whether he concluded it was consistent either with Directors working to help the business along informally or with actual employment as an employee, and the contract of employment also was referred to.
It is true to say that there were facts set out in the early part of the judgment which related to the area of family responsibility and financial interest in a small business which do often lead people to do work for a business in that capacity also.
I turn now to the next part of the decision where the Chairman (and I think it is right to quote all the words) dealt with what he referred to as the question of control in the following way.
"13. Worthy of particular mention is the question of control. In her submission to the Secretary of State she claims that she was subject to control or guidance on the basis that she was `responsible for VAT documentation, responsible for wages, PAYE, plus NHI, husband and I responsible to bank, providing cash flows, monthly debentures etc, adhering to the demands made on all limited companies'.
14. Insofar as these matters can be described as `control' at all, they are strictures externally applied. Control in the sense in which that word is relevant for these matters relates to internal control i.e. the extent to which her views as to the way the Company carried on might be subordinated to others.
15. In this case, there were only 2 share-holders and 2 directors - Mrs Smalley and her husband. Normally when one uses the expression `quasi partnership' it relates to the situation where an actual partnership is incorporated, the same partners then becoming directors.
16. That was clearly not the case here but in my view the description is still apt. The very use of a word such as `control' in this context becomes meaningless.
17. In my view and in the light of all the matters to which I have referred, Mrs Smalley was not an employee of the Company. Accordingly, the Secretary of State is under no obligation to make any payment under Section 122 of the Act and the application is dismissed."
On behalf of the Appellant, Mr Sadiq has carefully drawn our attention to cases that are relevant in relation to control. He has referred us to the section in Palmer's Company Law, paragraph 8.002 which makes the point which is well known to Industrial Tribunals and, indeed, to the Employment Appeal Tribunal, that a director and an employee are separate entities, even though they are positions which may, in a particular case, apply to one person. A director receives fees and an employee receives a wage.
We were referred to the case of Eaton v Secretary of State for Employment [1988] IRLR p83 which was a decision of the Employment Appeal Tribunal, chaired by Sir Ralph Kilner-Brown pointing out that a director of a company is normally the holder of an office, not an employee. The headnote to which we refer goes on:
"... evidence is required to establish that a director was in fact `employed'. Some of the factors to be considered by an Industrial Tribunal in determining whether a director was an employee include a descriptive term, such as managing director or technical director; whether there was an express contract of employment or a board minute or written memorandum constituting an agreement to employ the person as such director; whether remuneration was by way of salary as opposed to by way of director's fee; whether that remuneration was fixed in advance rather than made on an ad hoc basis; whether the remuneration was by way of entitlement rather than gratuitous; and the functions actually performed by the director, ie was he merely acting in a directorial capacity or was he under the control of the board of directors.
However, every case depends upon its own facts and an Industrial Tribunal's decision is one of fact which, unless perverse, cannot be interfered with."
Mr Sadiq argues that some of those factors were not properly considered and particularly in relation to the question of control were not properly adverted to in the decision. He says that the question of control, as to whether the person is under the control of a board of directors or acting in a directorial capacity, was not dealt with as suggested in that case.
The Employment Appeal Tribunal have considered the submissions in the context of that case but it seems to us that insofar as there were facts in the case before us which are the same or analogous to those sort of matters, they were all set out in the early part of the judgment as factors which the Chairman took into consideration.
We were also referred to the helpful case of Falami v Nigeline (UK) Ltd [1978] ICR 277 and that was a decision of the Employment Appeal Tribunal, presided over by the then President, Phillips J. That case was a very interesting one, it involved employment in this country of a man who was a managing director of an English company which was a wholly owned subsidiary of a Nigerian company. He was in effect the chief executive and performed his duties and was paid a salary. On page 280 Phillips J said this:
"It seems to us that where it is established that a person has been appointed managing director of a company, but his duties include effective management of the affairs of the company in all its aspects, that he has discharged those duties, and that he has been remunerated by that company in the sense that he has received a salary from the hands of that company, the prima facie conclusion to be drawn is that he is an employee of the company."
The judgment goes on at the bottom of page 282:
"Leaving out of account the employee's particular position as a director, in an ordinary case of a person acting as an employee in fact, and being paid remuneration for so doing, the natural conclusion would be that he was an employee of the person from whom he received the remuneration. The only reason why a different conclusion should follow in the case of a managing director arises from the special position which he has as a director, it being possible to claim that his remuneration was as director and not as employee. But in view of the authorities cited above, and the nature of the duties in fact performed by the employee as managing director, we can see no reason why the conclusion which would be drawn in the case of a person who is not a director should not also in this instance, at all events, be drawn in the case of a director who is a managing director. Accordingly, we find that we cannot agree with the view of the industrial tribunal on this point.
It seems to us that the employee having been the only witness, and this the only oral evidence, supplemented by the agreed bundle of correspondence and documents, there was in truth nothing here from which a conclusion could be drawn opposite to that which we consider would be the presumptive conclusion to be drawn from the facts summarised earlier in this judgment."
That there were substantial factual differences between that case and this goes without saying. A managing director is a very different person insofar as carrying out work for a company is concerned than the person who, as the wife of the major shareholder and having through the marriage gradually increased her shareholding, is the person dealing with what can loosely be described as the books of the company. This Appellant is obviously in a superficially more anomalous position than would be a managing director and the question really that was being addressed, it seems to us by Phillips J in that case, is really to try to resolve the proposition and the question as to whether there is a difference between a director and an employee and the way in which they are different and to try to draw a line and show that there is a line capable of being drawn between the two. But it is also an important decision in that it shows that the interference by this Tribunal with the decision of the Industrial Tribunal only arose in a case in which the Employment Appeal Tribunal found that there was really no countervailing evidence whatsoever to the proposition that the person there was an employee. They were really concerned with an analysis of the implications of directorships in relation to the question of who is an employee.
We were also referred to the helpful case of Lee v Lee's Air Farming Ltd [1961] AC 12. This was a decision of the Privy Council. We were referred to a number of passages from that decision, but this was a case in which an appeal was being heard from the Court of Appeal of New Zealand and the headnote provides:
" ... that the deceased was a `worker' [for the purposes of the Workers' Compensation Act, 1922] ... . His position as sole governing director did not make it impossible for him to be a servant of the company in the capacity of chief pilot, for he and the company were separate and distinct legal entities which could enter, and had entered, into a valid contractual relationship, which was not invalidated by the circumstances that the deceased was sole governing director in whom was vested the full government and control of the company and also the controlling shareholder. They were separate legal entities also so as to enable the company to give orders to the deceased. One person may function in dual capacities, and acting in one capacity give orders to himself in another capacity. The contractual relationship was that of master and servant, and a contract of service was entered into and operated and the deceased was a `worker' within the statutory definition."
We were referred to a number of passages from the judgment in which the Court, at some length, in the judgment of Lord Morris demonstrated that there was a separate and distinct entity, as there has been long established between a company and the individual and therefore, just because one person is both, as it were, the eyes and mind of the company, that person may also be the employee. Whilst the company controlled, as Lord Morris said, what little he did and how he did it, this control remained the control of the company whoever might be the agent empowered by the company, to exercise it and the control was exercised by him on behalf of the company when he was acting as a director. The question being asked really is how can there be a dual capacity? And the answer given was that there was a dual capacity, two separate and distinct legal entities. So it meant that the company could give an order to Mr Lee, even though it was Mr Lee, behind the company framework who constructed the order itself and therefore, he concluded on page 30:
"The right to control existed even though it would be for the deceased in his capacity as agent for the company to decide what orders to give."
The question of control was addressed in the appeal before us by the Chairman. It seems to us that it was addressed in the context of the arguments that were put forward by the Appellant to support her claim for the benefit on insolvency in which she described her various duties. The Chairman then pointed out that that was not really the control that was mentioned and he said that the sense in which the word is relevant is where the matter:
"14. ... relates to internal control i.e. the extent to which her views as to the way the Company carried on might be subordinated to others."
That is a difficult sentence it seems to us in reading what the Chairman meant and in understanding it. We do not adopt, as others have said we must not adopt, the fine tooth comb approach to those words. On the face of it it looks as though the Chairman, by referring to the way the company carried on is referring to the overall management of the company and who controlled it.
The difficulty arises, it seems to us, in that the word `control' in the cases has been used in different ways. In the cases to which we have been referred, it is all about the control of the company and the extent to which a person can control the operations of the company, or be ordered by the company. But of course we are also alive to the large number of authorities that deal with the issue of those times when attempts have been made to distinguish between a contract for service and a contract for services. And there the issue of control is about the way a person does his or her job and that, in our experience and generally, is one of the ingredients to take into account in measuring the question of employer and employee.
It cannot be, it seems to us, that the Tribunal was simply adverting to the question as to whether the control of the work was being done by the Appellant because she was a shareholder, or the control of the work and the operations of the company were being done by her as an employee because the work she did was not an exercise of control. The Chairman had rejected that and it seems to us quite clear from the context of his words, that he was talking about the work that she did and whether there was any control upon her by the company. But whether or not we are right about that, the Chairman goes on to point out that although this is not strictly a case of a "quasi partnership" where there used to be a partnership that has become incorporated without making any notable difference to the way the business is run, there is still the element of informality in this company, so as to make it referable to the concept of quasi partnership and therefore the question of control, the Tribunal find, is meaningless.
The arguments put forward on behalf of the Appellant are that the Tribunal erred in this respect and that they found the element of control against the Appellant as part of the conclusion that her job was as a controlling influence in the company structure as a shareholder and not as an employee. But we cannot read that except by twisting the meaning of the words of the Chairman in the decision that he has made.
It seems to us that what the Chairman is doing is answering an argument raised by the Appellant in support of her contention that she controlled or guided the company by saying in effect that on the facts, as he saw it, her involvement as part of a small family company and the extent to which she was involved in controlling, made the issue of control of little help in this particular case in reaching his decision. That seems to us the only way in which we can read that decision.
It is significant to look at the structure of the decision. All the Chairman's findings about control are after the point where he indicates that he has made the findings of fact and it seems to us that that is the context in which it must be read. Has he erred in law in this respect on the findings of fact that have been made? This is not a case in which the Tribunal should have considered the issue of control in the context of "was she answerable to somebody or could she decide how to do the work herself" which is a common question of control, nor it seems to us is it one in which the issue of control is one of the company's control when you look at the actual sort of work that she has done.
We are very mindful of the fact that the Chairman of the Tribunal had before him all the evidence and he set out in his decision all the issues of fact and the factual ingredients which he had to weigh up in order to reach his decision. We have had misgivings about the decision and we make no pretence about it. The chances are that had we been making a judgment upon the facts as found, as contained in this decision, we may well have come to a different conclusion. There are a large number of facts which would support a finding, contrary to that of the Chairman, that the Appellant was an employee; a contract, wages, even a period of time in which wages were not paid because they were foregone which, it seems to us, may be evidence of someone being an employee.
But on the other hand, it cannot be said, as in the case of Falami that there was no countervailing evidence and so whilst it may be that we may have come to a contrary conclusion, we do not consider that it can be said that the way in which the Chairman approached the decision, the findings of fact he made or the principles of law that he set out or, finally, the way in which he applied those principles of law to the findings of fact which he had earlier made, were such that no reasonable Tribunal, properly directing itself, could possibly have come to so as to constitute what is nowadays, perhaps rather emotively, called "perversity"; that is which constituted such error of law as to lead us to interfere.
We wish to reiterate however, that this is a small business. There are many small businesses and there may be very many small businesses where the only shareholders are two directors and where both those directors work all the time in the company and they may well be employees. Nothing in this decision should lead anyone to draw any general conclusions one way or the other.
Our decision is simply that on the facts and the law as found and applied by the Chairman, there was no error of law such as to justify our interference. Accordingly, this appeal is dismissed.