The claimants, Mr Neufeld and Mr Howe, were controlling shareholders and directors of their respective companies, which had become insolvent. Both claimed that they were employees of their companies, with the consequence that they would be entitled to certain payments from the National Insurance Fund (NIF).
Neufeld was a 90% shareholder of his business, where he was one of three directors. He also worked as part of the sales team. He had made personal loans to the company and given guarantees in respect of equipment and finance.
Howe was the 100% shareholder of his business and was sole director. He was paid a salary but had also provided personal guarantees in respect of finance.
Both businesses became insolvent and the pair claimed, under the Employment Rights Act 1996, that they were eligible for payment from the NIF in lieu of redundancy pay, notice pay, and holiday pay. At first instance, at tribunal, Neufeld was found not to be an employee of his company, but it was found that Howe was an employee of his.
The Court of Appeal – Lord Justice Rimer presiding – held, following a detailed review of the relevant authorities, that both claimants were employees of their respective companies. The court rejected the view, which had been reflected in some previous cases, that an individual could not be an employee of a company if they were also a controlling shareholder. It took the view that there was no reason in principle why a director and shareholder could not also be an employee. Further, in Neufeld’s case, the judge had taken account of considerations that were not relevant in reaching his decision, including that Neufeld had provided personal guarantees and loans to the company.
The court held, perhaps unsurprisingly, that whether there is an employment relationship is a question of fact for the court or tribunal to decide. The court also gave guidance as to factors the tribunal should consider when deciding whether a particular director/shareholder is also an employee. These factors included the work that had been done under the contract, how the worker had been paid – if he was a director – and whether the worker had acted in accordance with the contract – for example, by taking no more than the permitted number of holidays.
It may also be necessary in a minority of cases to establish whether the purported contract was a genuine contract or a sham. If the parties had, for instance, not acted in accordance with the purported contract at all, this would support the conclusion that it was a sham.
The case is of considerable significance as a large number of similar tribunal claims by directors of insolvent companies had been stayed pending the outcome. It was stated in the case that 12,000 claims were made by directors on the NIF in 2008, a significant proportion of which would be likely to involve a controlling shareholder. Given the economic climate, more claims are expected this year.
The case also has implications beyond claims on the NIF. Since employees have a number of rights not afforded to other types of worker – including the right to bring unfair dismissal claims, the right to a redundancy payment etc – it is often important to be able to establish the correct status of a worker, and this case gives some useful guidance where the workers who are also directors and or shareholders are involved.
Bob Cordran, partner, Thomas Eggar