United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR A WATSON (of Counsel) Messrs Sherringtons Solicitors Top Floor Premier House 112 Station Road Edgware HA8 7BJ
For the Respondent	MR R BRITTEN (Solicitor) DTI Legal Services Directorate B 10 Victoria Street London SW1H 0NN


 


MR JUSTICE KEENE: This is an appeal against a decision of an Employment Tribunal sitting at Bedford and entered on the Register on 10th September 1999. By that decision the tribunal determined that the appellant, Mr Farleigh, was not an employee of Novatex Limited ('the Company') and was therefore not entitled to payment on grounds of redundancy from the National Insurance Fund. The Company had gone into liquidation on 29th May 1998.

1. The issue in this appeal concerns the Employment Tribunal's approach to the meaning of the word "employee" in section 230 of the Employment Rights Act 1996.
2. Section 230(1) provides:

"In this Act "employee" means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment."

Subsection (2) makes it clear that the contract may be oral or in writing.

3. The appellant had begun working for the Company when he left school in 1971. It was at that time a company controlled by his parents, his father being majority shareholder. He worked in various capacities over the years, becoming a director in the 1980's with executive responsibilities. He held at that time 30% of the Company's shares. In about 1989 his shareholding increased to 36% as did that of his brother, and the two of them became joint-managing directors. By 1992 the appellant's brother had ceased to be a director. A dispute arose between the two of them which was eventually compromised in August 1997. As a result of that compromise agreement the appellant became the sole shareholder. He then invested heavily in the Company and he also gave personal guarantees to the bank to the extent of £250,000. His salary continued to be paid subject to deductions of tax and National Insurance under the PAYE system. The Company, however, got into difficulties and, as we have already said, went into liquidation in May 1998.
4. The tribunal found as a fact that from 1997 onwards, when the appellant became the sole shareholder:

"3.2 … there was no-one within the company to whom the [appellant] was answerable; there was no-one who could dismiss the [appellant]; there was no-one to control his actions; he was in effect the sole proprietor of this business and it was he who dismissed the employees of Novatex Limited when the company went into liquidation. The only other director of the company was the [appellant's] wife who also worked for the company but had no shareholding."

5. The tribunal heard argument on the authorities including the Court of Appeal decision in The Secretary of State for Trade and Industry v Bottrill [1999] ICR 592. It expressly acknowledged that a controlling shareholder could be an employee of a company for these purposes and it said this:

"5. … We have looked at the entire history of the relationship and are satisfied that until 1997, the relationship between the [appellant] and Novatex Limited was that of employer/employee. That is not however the end of our enquiry, as we cannot ignore the factual changes which occurred in the relationship after that date. In 1997, the [appellant] did not merely become the sole shareholder of Novatex Limited, he became the owner of the company and as a result the relationship between the [appellant] and the company was varied. He invested heavily in the company and was prepared to personally guarantee loans to it. It was he who controlled what the company did and there was no-one to control him. He was answerable only to himself and was incapable of being dismissed. It was he who dismissed the staff when the company became insolvent. It is apparent to us that the [appellant's] status changed dramatically in 1997 as from that time on, we are satisfied that the [appellant] was in business on his own account trading under the protection of a limited company and thus was not an employee at the time that the company became insolvent and therefore is not entitled to payment out of the National Insurance fund. We reject the contention that because the relationship was originally that of employer/employee that relationship endured despite the variation in 1997."

6. On behalf of the appellant Mr Watson emphasises that the tribunal below found that the appellant was an employee until 1997. He submits that the tribunal does not in its extended reasons explain how that original bona fide contract was changed when the appellant became the sole shareholder. It is argued that the tribunal was misled by the earlier decision in Buchan v Secretary of State for Employment [1997] IRLR 80 because it seems to have assumed that the appellant could necessarily no longer be an employee if he was the sole shareholder. Reliance is place by the appellant on the earlier decision of the House of Lords in Lee v Lee's Air Farming Ltd [1961] AC 12, for the proposition that even a sole governing director may be a servant of the company in question. He may play a dual role and he and the company may be separate legal entities. Mr Watson does not seek to suggest that a sole governing director must be an employee because he accepts that this a question of fact. But he contends that a crucial fact in this case was that the appellant had been an employee up till 1997, he was before that date already the controlling director and then 1997 he became the controlling shareholder. It is contended that the tribunal below was wrong in seeing that change in shareholding as making the appellant no longer an employee. It is argued that there is no evidence that the contract was varied, and Mr Watson draws attention to the fact that the appellant was still being paid on PAYE as an employee. He accepts that it is a relevant consideration that the appellant was prepared to give and eventually did give personal guarantees to the bank for the Company's liabilities and that he invested some £45,000 in it. But he relies on the decision in Bottrill and also on Smith v The Secretary of State for Trade and Industry [2000] IRLR 6. It is emphasised that the tribunal must take into account the fact that the appellant had been an employee for some 26 years. It is suggested that it would take remarkable circumstances to bring about a change in that relationship.
7. For the Secretary of State Mr Britten submits that there is no error of law in the Employment Tribunal's decision here. He refers to paragraph 5 of the decision and contends that that shows that the Employment Tribunal directed itself correctly and in accordance with the Court of Appeal's decision in Bottrill. It is emphasised that the tribunal's extended reasons show that it accepted that a controlling shareholder can be an employee and therefore Mr Britten argues that the appellant is entirely wrong in suggesting that the tribunal fell in to the Buchan fallacy. It is said that the tribunal weighed the various relevant matters; it gave emphasis to the change in the share ownership and to the financial arrangements, that is to say the appellant's investment in the Company and his personal guarantees, and the tribunal was entitled to see those factors as outweighing the fact of the previous role of the appellant as an employee. Mr Britten argues that the issue of status must be treated at the material date. He accepts that the tribunal can take into account the previous history of the relationship, but he says that clearly the tribunal did that in this case. It is sought to distinguish the decision in Bottrill on its facts, which is said to be very different, and so far as Lee is concerned, the respondent submits that that case simply shows that a sole controlling director may be an employee of the company in question but does not suggest that such a person must be treated as an employee. Mr Britten contends that to accept that latter proposition would be to lay down a rule of law which is precisely what the Court of Appeal in Bottrill indicated was wrong.
8. It is well established, as both parties here accept, that the issue of whether a person is an employee is a question of fact for the Employment Tribunal, with whose decision this Appeal Tribunal can only interfere if the Employment Tribunal misdirected itself in law in some way or arrived at a perverse decision. There is no rule of law that a controlling shareholder cannot be an employee, but it seems to us quite clear that the tribunal below recognised that in this case.
9. The proper approach as a matter of law for a tribunal to adopt was spelt out by the Court of Appeal in Bottrill. The tribunal is required to look at all the relevant circumstances in order to arrive at a conclusion. A number of matters may be relevant in the individual case. While the possession of a controlling shareholding may not by itself be determinative of this question, Bottrill did not suggest that that was not a relevant factor. Indeed, the Court of Appeal there expressly acknowledged that it is likely to be a significant fact and in some cases may be decisive (see page 603B-C). What the Court of Appeal was anxious to emphasise in that case was that the possession of a controlling interest did not automatically mean that that person could not be an employee. Nor did it absolve the tribunal from considering all the circumstances. It seems to us that Lee v Lee's Air Farming Ltd is really on all fours with that. That decision in Lee indicates, as did Bottrill, that a sole controlling director is not automatically ruled out as an employee. So Lee is a decision entirely consistent with Bottrill. The Court or the tribunal in question must consider all the circumstances simply because the issue is one of fact. It is also clear from the Court's reasoning in Bottrill that, even where there is a genuine contract in being between the individual and the company, the question remains of whether that contract gave rise to an employer/employee relationship. In that context, the degree of control exercised by a company over the individual will be important, as the Court of Appeal said, and so it may be appropriate to consider whether there are other directors and whether the individual is in reality only answerable to himself or herself.
10. In the present case the Employment Tribunal did seek to have regard to what it saw as the relevant factors when it came to determine this issue. It took account of the fact that before 1997 the appellant had been an employee. It also took account of the fact that from 1997 onwards the appellant invested heavily in the Company and was prepared personally to guarantee loans to it and did eventually do so. We agree with the Inner House of Court of Session in Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 at page 684, paragraph 9, that such financial matters are relevant to this issue. The Employment Tribunal did undoubtedly in this case take account of the fact that the appellant became the sole shareholder, but for reasons which we have already referred to, that was a relevant consideration. No authority suggests that its is not. The fact that he was answerable only to himself was a matter which the tribunal could legitimately take into account, as Bottrill expressly recognised. Indeed, it seems to us that the Employment Tribunal here had the language of the Court of Appeal in Bottrill very much in mind. So it is not the case that the tribunal fell into the trap of regarding it as automatic that a controlling shareholding ruled out employee status, though it patently did regard that as an important consideration. That trap seems to have been what the Employment Tribunal fell into in Smith v The Secretary of State, because, as we read that decision, the EAT appears to have regarded the Employment Tribunal as having followed Buchan in accepting a submission that a majority shareholder can never be an employee (see paragraphs 11, 16 and 17). This is not a flaw to be found in the present case. The tribunal below was entitled to attach such weight as it thought fit to the sole shareholding of the appellant as a factor in its evaluation of this matter, but it did not regard that consideration as constituting the sole test. We have already indicated that it seems to us clear from the decision that the tribunal did take into account the previous enduring status of the appellant as an employee.
11. As for the conclusion of the Employment Tribunal that the relationship between the Company and the appellant changed in 1997, we do not accept that that was a conclusion not open to the tribunal on the evidence. There was no contract in writing at any time in this case and there was no evidence of any express oral agreement. There appears to have been no board minute or written memorandum. The terms of the legal relationship between the Company and the appellant in this case therefore had to be deduced from all the surrounding circumstances, especially the conduct of the parties as Mr Watson accepts. As those circumstances and conduct changed, so, in principle, could the relationship both in fact and in law. The appellant himself in his Originating Application referred to himself as having "ended up with control of the company". Clearly there were changes occurring around this time and it was open to the tribunal to regard those changes as altering the legal status of the appellant vis-à-vis the Company. Nor, in our judgment, was it perverse to regard the appellant becoming a sole shareholder and his investment and personal guarantees as being factors which, when added to those matters already in being prior to 1997, led to him ceasing to be an employee. The proper approach involves considering a number of factors. Some of those factors may have been in existence before the material date. When some of the factors change, so may the end result.
12. The tribunal's conclusion in this case was not outside the range of permissible conclusions which a reasonable tribunal properly directing itself could arrive at. This was a somewhat more extreme case than Buchan, where the individual was only a 50% shareholder. It was also factually different from Bottrill, where the tribunal saw Mr Bottrill's status as sole shareholder as being only temporary and his control of the company as only theoretical. In the present case Mr Farleigh's control was genuine and was accompanied by the factors to which the tribunal referred.
13. We can find no error of law in the tribunal's decision here. Its approach as a matter of law followed that indicated by Bottrill because the tribunal sought to have regard to all the relevant circumstances and to arrive at its conclusion as a result of an examination of all those factual circumstances. It did not regard any one factor as being the sole consideration which it should take into account. Its conclusion was not perverse.
14. It follows that this appeal must be dismissed.