United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR S GORTON (of Counsel) Steggles & Mather 121A Saughall Road Blacon Chester CH1 5ET
For the Respondents	MR R EMM (of Counsel) Hammond Suddards 2 Park Lane Leeds LS3 1ES


 


MR JUSTICE KIRKWOOD: This is an appeal by an employer, Motor Auctions (Leeds) Ltd, from an award of compensation for unfair dismissal of two former employees, Mr Dyson and Mr Earle on 10 May 1996. The Industrial Tribunal's Extended Reasons followed upon request on 8 July 1996. It is the amount of the awards and the method of calculation that are in issue in this appeal.

Until very early in 1995, Mr Dyson and Mr Earle were both employed by the Appellant company to which I will refer as "Motor Auctions". Motor Auctions was, as its name implies, in the business of selling motor cars by auction, and the shareholders and directors were Mr Elliott and Mr Rostron.

Some sort of business disagreement arose between Mr Elliott and Mr Rostron, the details of which are immaterial. I think it may be that Mr Elliott ceased to be a Director. In the events that happened, early in 1995, both Mr Dyson and Mr Earle were dismissed by Motor Auctions. Mr Dyson, on 6 February 1995 and Mr Earle on 6 March 1995. On 6 June 1996 the Industrial Tribunal found that both had been unfairly dismissed.

Following his dismissal and having considered other employment options, Mr Dyson resolved to go into business in the motor trade on his own account. He had no capital. Mr Elliott decided to help him. Mr Elliott arranged for a company of his, Kanica Properties Limited, to obtain a bank borrowing facility for £40,000 against his personal guarantee. He also arranged for that company to open a bank account entitled "Kanica Properties Motor Account" through which Mr Dyson was to do his business.

Very soon afterwards and following the dismissal of Mr Earle in March 1995, Mr Dyson and Mr Earle agreed that they would conduct the business Mr Dyson had started as equal partners. The story is taken up from the findings of the Industrial Tribunal in these terms:

"3. Although both applicants were put on the books of Kanica Properties Ltd for the purpose of paying National Insurance stamps and Income Tax, the Tribunal is satisfied having heard the evidence, that that is the only aspect of their relationship with Kanica Properties Ltd that could possibly be advanced as evidence of an employer/employee relationship and that all other aspects of the relationship point to the fact that they are, in effect, self-employed. These other aspects include the fact that although Mr Elliott or his company have guaranteed the £40,000 facility at the bank, the arrangement between the applicants and Mr Elliott is that the applicants are personally responsible, in the event of a shortfall in the amount to be repaid to the bank, to pay the amount due. In addition, it is clear that the applicants themselves are entitled alone to share in any profits of the venture and Mr Elliott exercises no control whatsoever of the business activities of the applicants. In those circumstances, had such an issue come before an Industrial Tribunal to decide whether the applicants were employees of Kanica Properties Ltd or Mr Elliott, the Tribunal unhesitatingly comes to the conclusion that the finding would have been that they were self-employed."

Having found, as it was entitled to do, that on all the evidence and looking at all the circumstances, Mr Dyson and Mr Earle were self-employed, the Industrial Tribunal proceeded to calculate the awards in accordance with Sections 72 to 75 of The Employment Protection (Consolidation) Act 1978, which was the legislation then in force. In each case the basic award had been agreed: £840 for Mr Dyson and £1,680 for Mr Earle. Equally, for loss arising from breach of contract, that is pay in lieu of notice, an amount had been agreed in each case, namely £1,344 for Mr Dyson and £3,866 for Mr Earle. What was not agreed was the compensatory award.

By reference to net earnings for the year 1994 to 1995, the Industrial Tribunal was able to arrive, in each case, at an uncontroversial figure of loss of net pay and benefits from the date of dismissal to the date of hearing on 2 April 1996. In Mr Dyson's case that was £19,552; in Mr Earle's case it was £26,064. What however, is controversial, was the proper figure to deduct from that by way of actual earnings over the previous 52 weeks in order to establish the amount of net loss.

The Industrial Tribunal also held that the net continuing loss, which they found, would certainly continue for a period in excess of six weeks from 2 April 1996, so that the Industrial Tribunal's calculation of net loss is relevant to that aspect as well. The Industrial Tribunal dealt with its approach to the amount of actual earnings to be deducted in this way:

"6. The Tribunal, having seen the figures of the earnings of the applicants since dismissal is satisfied that the net profit they have made in the period since their dismissal is £24,071. They are equal partners and therefore they are each entitled to the sum of £12,035 before tax. The figures showing their drawings which the applicants produced are, in the view of the tribunal, immaterial for the purposes of our calculation; as if, in fact, their drawings exceed their profits then they are drawing against the £40,000 facility referred to in paragraph 3 of this decision. If there is a shortfall in that facility that is, for example, if their drawings have exceeded their profits then such excess amount would be repayable by them as a debt. Similarly, if they had underdrawn their profits, they would not have been entitled, as against the respondents, to claim higher compensation.

7. Taking those figures together for the purpose of calculating the applicants' respective losses, the following are the calculations in accordance with the figures above,

(a) Mr Dyson was earning the equivalent of £376 per week net with the respondents including benefits. We calculate that his current income after Tax and National Insurance is £180 per week. He is therefore losing £196 per week. For the 52 weeks from the date of his dismissal down to today's date, that gives a figure of £10,192 which is a continuing loss. We are satisfied that such loss will certainly continue for a period in excess of six weeks from today and thus will bring the figure to in excess of £11,000 which is the maximum sum the Tribunal can award in respect of this head.

(b) In the case of Mr Earle, his take-home pay with the respondents including the benefits as set out above, was £543 per week. We calculate that his take-home pay is rather higher than Mr Dyson's as Mr Earle has four children and a higher mortgage. He is therefore losing the equivalent of £363 per week. 48 weeks have elapsed since the date of his dismissal and this brings the figure of loss to today's date under this head , to £17,424. The maximum award the Tribunal can make, of course, is £11,000."

Accordingly, the Industrial Tribunal looked not at actual drawings, but at net profits. It is that that the Appellant complains of. In its Extended Reasons the Industrial Tribunal expressed no findings as to the actual drawings made by Mr Dyson and Mr Earle, expressing its finding that actual drawings were not relevant. But in the Appellants skeleton argument we are told, and, indeed, it is not controversial, that in the relevant period Mr Dyson in fact drew £19,183.76 and Mr Earle in fact drew £27,271.39. Those figures are taken from documents that were before the Industrial Tribunal.

It is those figures, says the Appellant, that the Industrial Tribunal should have applied as actual earnings to be deducted from the figures of loss of net pay and benefits from the date of dismissal to the date of hearing, in order to arrive at a figure for net loss to date and continuing net loss. Had they done so, it is argued, the actual net loss for Mr Dyson would have been £19,552 less £19,183 resulting in a net loss of £369 as against the figure of £10,193 as found by the Industrial Tribunal. For Mr Earle there would have been no loss. The figure of £26,064 of pre-dismissal earnings have to be stood against £27,271 of actual drawings in the new business.

Accordingly, what this appeal boils down to is whether the Industrial Tribunal should have approached deductions and continuing loss in respect of earnings on the basis of net profits of the business of Mr Dyson and Mr Earle or on the basis of actual drawings.

For the Appellant, Mr Gorton argues firstly, that each man in fact drew a monthly amount, net of his liability on the grossed up amount for National Insurance contributions and Income Tax. Secondly, the amount of actual drawings is the relevant amount. Thirdly, the net profit of the business over the period, shown in documents that were before the Industrial Tribunal, bears no real resemblance to the money each man was drawing month by month to live on and it is not relevant.

Fourthly, to the extent that actual drawings were in part made against the bank borrowing facility, as they plainly must have been, then the probability is that that bank borrowing would have evaporated as the business prospered so that whatever the theoretical legal or moral liability of Mr Dyson or Mr Dyson and Mr Earle to Mr Elliott in respect of it, they would not in fact have to pay.

Fifthly, in any event, there was wholly insufficient evidence before the Industrial Tribunal for the Tribunal to make a determination as to whether Mr Dyson or Mr Dyson and Mr Earle in fact had a liability in respect of the borrowing, or as to how, when and in what circumstances it would have to be repaid or the likelihood of Mr Dyson or Mr Earle doing so.

As to the latter point, the Industrial Tribunal made a clear and robust finding that Mr Dyson and Mr Earle would have to pay off the borrowing. I have already referred to the Industrial Tribunal's findings in that regard. We would add that despite Mr Gorton's endeavours to point to shortcomings in the evidence, we are all entirely satisfied that the Industrial Tribunal was entitled to make the findings it did on the evidence before it. In that regard we notice in passing that the only material evidence before the Industrial Tribunal was that of Mr Dyson and Mr Earle and none was adduced on behalf of Motor Auctions.

Accordingly, there were findings that Mr Dyson and Mr Earle were effectively self-employed and that they were personally responsible for paying off the borrowing. The borrowing of money, when setting up a business, and drawing on those borrowings to meet living expenses is commonplace. In an instance such as in this case the necessity for it was a direct result of the loss of the previous employment. At the outset Mr Dyson and Mr Earle agreed how much each would need to draw each month to meet their respective and different living expenses.

It is no coincidence that that broadly equated with their salaries when employed by Motor Auctions, but manifestly those drawings were met in part from borrowings. The fact that that part of their drawings was treated as liable to be brought into account for the purposes of National Insurance contributions and Income Tax in no way alters that. The incidence of National Insurance and Tax merely goes to increase the amount of borrowing that will have to be repaid. But how is it to be repaid? How more precisely can it be repaid without cost to Mr Dyson and Mr Earle?

Repayment from enhanced profits of the business is repayment by Mr Dyson and Mr Earle, since in practical terms they are the business. Whether that is properly reflected in a diminution in future net profit, or in diminution of the net asset value of the business, is neither here nor there. We are satisfied that it is quite fallacious to argue that the borrowing may be repaid without any loss or any cost to Mr Dyson and Mr Earle. Mr Dyson and Mr Earle were only able to sustain their incomes at pre-dismissal levels by borrowing money that they would have to repay.

The Industrial Tribunal was enjoined by Section 74 of The Employment Protection (Consolidation) Act 1978 to award such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal.

That is just exactly what the Industrial Tribunal did and we are wholly unpersuaded that in approaching the matter as it did the Industrial Tribunal erred in law or, indeed, in any other material way and this appeal will be dismissed.

Following our unanimous decision in this case, the Respondent applies for an order that the Appellant should pay their costs. The provision for costs is contained in The Employment Appeal Tribunal Rules 1993 of Rule 34 in these terms:

"34(1) Where it appears to the Appeal Tribunal that any proceedings were unnecessary, improper or vexatious or that there has been unreasonable delay or other unreasonable conduct in bringing or conducting the proceedings the Tribunal may order the party at fault to pay any other party the whole or such part as it thinks fit of the costs or expenses incurred by that other party in connection with the proceedings."

It is the Appellant's position that it was necessary to bring this appeal towards a full hearing and that the point of law upon which it was brought was as to the proper calculation of loss under Section 74(1) of the 1978 Act. The Appellant also draws on the fact that this case was the subject of a preliminary hearing before His Honour Judge Byrt QC and two members on 18 October 1996. We have a transcript of Judge Byrt's decision. In it he says that Counsel for the Appellants had demonstrated to their satisfaction that there is a certain ambiguity about the figures, disclosed in paragraph 6 of the Industrial Tribunal's reasons.

For our part, we can see no ambiguity in those figures in paragraph 6, nor was Counsel able to demonstrate any to us. Secondly, Judge Byrt felt that it seemed that the drawings to which Mr Gorton had been referring had been considerably in excess of that which it would have been permissible for these two people [that is Mr Dyson and Mr Earle] to draw from their self-employed business, even having regard to the credit facilities they had through the bank.

On our examination of the figures, that statement by Judge Byrt is plainly wrong. The only part of Judge Byrt's judgment on this aspect of the case that bears resemblance to what we have heard today, is where the learned Judge recited that Mr Gorton's suggests the income is significantly greater than that which has been attributed to them by this Industrial Tribunal when they found that they were each limited to £12,000.

Judge Byrt went on:

"We feel that the reasons set out in paragraph 6 of the tribunal's reasons originally gives insufficient information to enable us to be sure that they have approached this matter in the right and proper way."

It was for that reason that the preliminary hearing felt the matter should go to a full hearing and it was ordered that to assist the Tribunal at that full hearing stage, the Tribunal should have the notes of the Chairman dealing with the issue of remedy and a direction was given for the production of the Chairman's notes on that aspect of the case.

Mr Gorton's argument today, I have already summarised in the judgment I have given, that it was wrong to take net profits rather than actual drawings. It seems to us, that that argument depends on the subsidiary argument that the Industrial Tribunal was not entitled to conclude that there was an obligation on these two employees to repay the borrowing, but as we found, on looking at the notes of evidence that have, in fact, been produced, there was ample material to justify that finding. The amount of drawings less the element that is attributable to borrowing, is necessarily equal to the figure for net profit.

In our judgment, the Appellant should have taken stock, on receipt of the notes of evidence, and appreciated that the argument about repayment was in reality untenable in the light of those notes, so that it was not right and, indeed, unnecessary to proceed thereafter.

Accordingly, we have concluded unanimously that the costs of the Respondent should be paid by the Appellant from seven days after service of the notes of evidence, and that those costs should be taxed in accordance with the rules, if they cannot be agreed.