When is a director and shareholder also an employee? In Nesbitt and Nesbitt v Secretary of State for Trade and Industry the Employment Appeal Tribunal (EAT) said that, in deciding this question, tribunals must have regard to all the circumstances and not just the issue of control.
Mr and Mrs Nesbitt (the Nesbitts) were directors and together majority shareholders of APAC Computer Training Limited (APAC). The Nesbitts had written contracts of employment in the same form as the company’s employees and managed the business on a day-to-day basis. They were paid salaries commensurate with their positions, but did not receive directors’ fees or dividends.
In 2006, APAC became insolvent and the liquidator made the Nesbitts and the remaining employees redundant.
The Nesbitts applied to the Insolvency Service for redundancy payments and other arrears, which are payable to employees under the insolvency provisions of the Employment Rights Act 1996. It rejected their claims on the grounds that they were not employees.
A tribunal agreed on the basis that the Nesbitts were in control of APAC and had the power to prevent their own dismissals.
On appeal, the EAT said the tribunal had been wrong to treat the issue of control as the determining factor. The question of an individual’s control of a company in their capacity as a director and/or shareholder was just one factor that should be considered when determining whether that same individual is also an employee of the company. The fact that an individual is a majority shareholder and director of a company should not, in itself, lead a tribunal to decide that they are not an employee of that company, unless the tribunal finds that the company is a ‘mere simulacrum’ (something having merely the form or appearance of a certain thing, without possessing its substance or proper qualities) and as a result the employment contract between the company and the individual employee is a sham.
In this case, the EAT decided that the Nesbitts were employees of APAC. They had written contracts of employment in the same form as other employees, received salary rather than dividends or fees and, with some exceptions, the relationship had been conducted in a manner consistent with that of an employment relationship.
This case is likely to be most significant for companies where the directors and controlling shareholders are heavily involved in day-to-day management activities and integrated with the rest of the workforce. Even then, it is probably the case that directors and majority shareholders will seek to exercise employment rights in only a narrow category of circumstances where the benefit to them as individuals outweighs the detriment to the company of doing so. Making a claim for a redundancy payment under the insolvency provisions is one such example. Another would be when control of the company passes out of the hands of the majority shareholder/employee (eg, following a share sale).
That said, it is still important to bear in mind the key message of this case that having theoretical control of the employing entity does not necessarily prevent an individual being an employee of that entity themselves. And, as this case demonstrates, there will be some circumstances where being a majority shareholder employee and/or a director does not give an individual absolute control over their own destiny.
Niki Walker, managing associate and Heather Mansbridge, associate, Addleshaw Goddard