Mrs S Cullingford and Mr S Cullingford v Cullingford Carpets Ltd (In Administration) and The Secretary of State for Business and Trade: 1400745/2024 and 1400746/2024
EMPLOYMENT TRIBUNALS
Case No 1400745/2024, 1400746/2024
Between
Mrs S Cullingford and Mr S CullingfordClaimantCullingford Carpets Ltd (In Administration) and The Secretary of State for Business and TradeRespondent
Before
Employment Judge Mr P CadneyDate 15 May 2025
JUDGMENT
[1]The first and second claimants were not at the date of the insolvency of the first respondent employees within the meaning of s230 Employment Rights Act 1996.[2]The claimant’s claims that the Secretary of State (R2) is liable to make payments to them pursuant to s166/182 Employment Rights Act 1996 is not well founded and is dismissed. ---1---
REASONS
[1]By this claim the claimants bring claims against R1 for a statutory redundancy payment, notice pay, unpaid wages, unpaid holiday pay, and protective awards.[2]They both assert that they were employed directors. R1 has not entered a response and has not participated in this hearing. R1 has no funds to meet any judgment, and the only purpose of any judgment against it would be to obtain payments from the Secretary of State, to whom the claimants have made claims which have been refused. They also pursues those claims against the Secretary of State (R2 “SoS”) for payments from the National Insurance Fund pursuant to s166/182 of the Employment Rights Act 1996. R2 accepts that R1 is insolvent within the meaning of those sections but disputes liability on the basis that it asserts that the claimants were not employees of R1.[3]The case came before EJ Gray for a TCMPH, and he listed the case for today’s Preliminary Hearing to determine: i) The claimants’ employment status - specifically whether they were or were not employees of R1; ii) Subject to that decision to give further directions for any future hearings. Evidence[4]The only evidence I have heard is from Mrs Cullingford (C1). Mr Cullingford (C2) is suffering from a brain injury (having had a stroke in 2019 and then suffering a head injury a fall in 2023) and is not now, and is not likely in the foreseeable future, to be able to provide any written evidence and/or attend to give evidence. All parties are agreed that in the circumstances I will have to resolve the issues in his case on the evidence provided by Mrs Cullingford (C1). This is not ideal as the claims do not necessarily stand or fall together, but in the circumstances it is accepted that there is no alternative.[5]In terms of Mrs Cullingford’s evidence she was in my judgement a wholly honest and reliable witness and I accept her evidence. For the reasons set out below it is impossible not to feel enormous sympathy for Mrs Cullingford for the events of the past few years, in particular her husband’s ill health and the consequent collapse of the business which they had both built over decades. However the tribunal must make its decision by applying the law to the facts and cannot be swayed by sympathy for one party or another. ---2--- Facts[6]It is not in dispute that the first respondent is insolvent, having entered into administration in November 2023, and that, subject to the issue of their employment status, that the Secretary of State (SoS – R2) would be liable to make the statutory payments. As set out above the primary issue is whether either or both were employees of the first respondent.[7]The background is that the business was set up by C2 in 1978. The couple were already going out, Mrs Cullingford describing him as her first boyfriend, and they married in the 1980s and had children. It is agreed that initially the business operated as a partnership at will between the two of them, although there was never any formal partnership deed or any other form of contractual relationship. On both claimants behalf Ms Dawson accepted that this was a genuine partnership and that neither were employees prior to 2005. It follows that on the incorporation of the first respondent in 2005 that it is accepted that they did not transfer as employees, and that if either was or became an employee the earliest date on which that could have occurred was 2005. The original assertion of earlier dates has therefore fallen away as an issue.[8]In January 2005 the first respondent was incorporated. The ownership of / shareholding in the first respondent has fluctuated over the years, but at the point at which it went into administration both claimants held 37.5% of the issued shares with the balance being held by Mr Christopher Hussey who had also been a director. Mrs Cullingford’s evidence is that following his stroke in 2019 Mr Cullingford’s behaviour and decision making became increasingly erratic, and Mr Hussey resigned his directorship and left in January 2023 because of it, although he retained his shareholding.[9]The evidence of Mrs Cullingford is that they were advised at the time of incorporation that they should have formal Director’s Service Agreements / Contracts of Employment; and that they were drawn up and signed. None of the parties have access to the original 2005 contracts but they were revised in November 2012, and both the revised contracts are in the bundle. Mrs Cullingford’s evidence is that they are very similar to the original contracts, and she believes the amendments were relatively minor although she cannot specifically recall what they were.[10]Both parties rely to significant extent on the terms of the contracts. They are described as Director’s Service Agreements, and specifically provide that the directors will be employed by the company and that the employment commenced on 1st January 1980 (C1) and 1st January 1978 (C2), although as set out above Ms Dawson accepts that this is incorrect, and that the employment of both began in 2005. Clause 3.2 provides that the core hours will be directed by the Board but acknowledges that as the director is able to determine the duration of his or her own working time the exemptions available in Reg 20 Working Time Regulations 1998 apply (unmeasured working time - see below). Clause 5 provides that the salary will be that agreed from time to time with the company, and no figure is set out in the ---3--- contract. Clause 8.1 provides for 25 days annual leave in addition to Bank and Public Holidays; the leave year runs from Janusary 1st to December 31st and there is no right to carry over any untaken leave. Clause 12 provides for the termination of the contract in a number of circumstances including incapacity / mental ill health.[11]Discipline/Termination – The claimant contends that the discipline/termination provisions in Clause 12 of the contract were entirely genuine and had been used once previously. A former employee/director had been discovered to be diverting customer payments to his private bank account and was dismissed as an employee/director. She therefore contends that had she committed any form of misconduct she would similarly have been liable for disciplinary action / dismissal, which reflects genuine employment status.[12]Salary/Directors Dividends - The monies that the claimants received from the first respondent was divided between salary and directors dividends. C2 contends that in total until the last few months when the respondent was unable to pay their salaries / dividends in full, that she received a total of £4,166.66 per month (£49,999.92 per annum). The P60s for the last three years of employment show earnings of £8,800 (2021) and £9,540 (2022/23); with the balance being paid by way of dividend. This was a tax efficient way of dividing the earnings as it meant little or no tax was paid on the element of pay identified as salary from employment.[13]National Minimum Wage – The respondent asserts (see below) that if the claimant worked 38-40 hours per week, which it does not dispute, and if she was genuinely an employee then she was necessarily paid below the national minimum wage, which at the point the respondent went into administration was £10.42 per hour (£416.80 per week/ £21,673.60 per annum.) On the basis of a 38 hour week Mrs Cullingford earned some £4.78 per week, less than half the minimum wage. Looked at another way, if she did receive he national minimum wage it can only have been for some 17 hours per week, with the balance being paid as directors dividends. It follows either that the first respondent was significantly in breach of the national minimum wage regulations, or that if it was not her employment was attributable to a much smaller number of weekly hours than 38-40; or, as they in fact contend that this was a tax efficient arrangement to maximise the directors overall remuneration and that in reality neither of the claimants were in fact employees of the company.[14]The claimant contends that the issue of national minimum wage is more illusory than real. As set out above the contracts provide for the Reg 20 exemption from the National Minimum Wage Regulations and no question of breach of them arises. She accepts that the whole of her income related to the hours she worked for the first respondent and to attempt to distinguish between hours worked as an employee and hours worked as a director is wholly artificial. There is no evidence that certain parts of either claimant’s duties were specifically allocated to employment or duties as directors. In essence the claimants contend that given that they had contracts of employment and were therefore employees of the company that all of their earnings, however paid should be regarded as salary arising from employment. On this basis, their Schedules of Loss are predicated on the contention that the whole of their ---4--- earnings, including directors dividends should be taken into account in determining the SOS’s liability. My conclusions as to these issues are set out below.[15]Holiday - The claimant accepts the each year she and her husband took less than their holiday entitlement . Again the respondent suggests that this would be unusual for anyone genuinely employed, who would have no reason not to take their full holiday entitlement, particularly as it cannot be carried over, but is wholly consistent with the claimants in fact being in business on their own account. .[16]Decision Making/Control - In terms of decision making Mrs Cullingford’s evidence is that decisions were taken by Mr Cullingford following discussions with the Board. In the end he had the final say in respect of all major decisions. She gave an example of a proposed new IT system which in the end he vetoed as the costs outweighed the benefits in his judgement. In reality although she had an equal shareholding and was a director, the first respondent was, and was treated as Mr Cullingford’s company, and the final decisions were always his and his alone. She was able to, and had over the years dealt with all aspects of the respondent’s business except finance and accounting for which she was not qualified and did not involve herself. She was paid overall at an hourly rate comparable to other sales staff, and she regularly worked a 38-40 hour week.[17]Administration – Ms Cullingford’s evidence is that after his fall in the summer of 2023 she discovered that her husband had for some time been making very poor decisions in relation to the business. It was operating at a loss and had been unable for some time to pay their own dividends / salaries in full; and Mr Cullingford had, unbeknownst to her being using substantial sums from their savings to prop up the business. Once he was no longer able to run the business, and as she had never done and was not able to do so , and given the company’s financial situation it had no choice but to go into administration. Secretary of State’s Liability[18]The liability of the Secretary of State to make any payment derives from the Employment Rights Act 1996 as set out below: i) Section 166 of the Employment Rights Act 1996 (“ERA”) provides: s166 Applications for payments.(1) Where an employee claims that his employer is liable to pay to him an employer’s payment and either— (a)that the employee has taken all reasonable steps, other than legal proceedings, to recover the payment from the employer and the employer has refused or failed to pay it, or has paid part of it and has refused or failed to pay the balance, or ---5--- (b)that the employer is insolvent and the whole or part of the payment remains unpaid, the employee may apply to the Secretary of State for a payment under this section. (2)In this Part “employer’s payment”, in relation to an employee, means— (a)a redundancy payment which his employer is liable to pay to him under this Part, (aa)a payment which his employer is liable to make to him under an agreement to refrain from instituting or continuing proceedings for a contravention or alleged contravention of section 135 which has effect by virtue of section 203(2)(e) or (f), or (b)a payment which his employer is, under an agreement in respect of which an order is in force under section 157, liable to make to him on the termination of his contract of employment. … ii) Section 182 of the ERA provides: 182 Employee’s rights on insolvency of employer. If, on an application made to him in writing by an employee, the Secretary of State is satisfied that— (a)the employee’s employer has become insolvent, (b)the employee’s employment has been terminated, and (c)on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies, the Secretary of State shall, subject to section 186, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt. iii) Section 184 of the ERA applies section 182 to arrears of pay; accrued holiday pay and statutory notice pay (but subject to maximum amounts). iv) For the Secretary of State to be liable the Claimant must be an employee: S. 230 of the Employment Rights Act 1996 provides “230 Employees, workers etc (1) 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. ---6---(2) In this Act “contract of employment” means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.(3) In this Act “worker” (except in the phrases “shop worker” and “betting worker”) means an individual who has entered into or works under (or, where the employment has ceased, worked under)— (a) a contract of employment, or (b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual; and any reference to a worker's contract shall be construed accordingly.(4) In this Act “employer”, in relation to an employee or a worker, means the person by whom the employee or worker is (or, where the employment has ceased, was) employed.(5) In this Act “employment”— (a) in relation to an employee, means (except for the purposes of section 171) employment under a contract of employment, and (b) in relation to a worker, means employment under his contract; and “employed” shall be construed accordingly.” Employment Status – General[19]The s230 definition distinguishes between “employed” individuals on the one hand, and self-employed individuals, or independent contractors, on the other; that is between those working under a “contract of service” and those working under a “contract for services”. However, the statute does not set down the circumstances in which an individual may be said to work under a contract of employment.[20]In the absence of any comprehensive definition of a contract of employment, courts and tribunals have developed a number of tests over the years aimed at helping them identify such a contract. It is now accepted that no single factor will be determinative of employee status and a number of factors must be looked at.[21]There are three essential elements which must be present in every contract of employment. They are frequently referred to as the ‘irreducible core’ without which a contract cannot be regarded as a contract of service, taken from MacKenna’s judgment in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER 433, QBD. They are: ---7---a. There must have been an obligation for the Claimant to have provided the work personally;b. There must have been mutuality of obligation;c. The Claimant must have been expressly or impliedly subjected to the control of the Respondent. Personal service[22]With regards to the first element, even if the contract contained a limited power to delegate, there may still have been the obligation present for the employee to have provided work personally, but where there was a clear express contractual term which did not impose personal obligations, that would ordinarily militate against an employment relationship unless it was a sham or had been varied (Staffordshire Sentinel-v-Potter [2004] IRLR 752). Mutuality of obligation[23]With regards to the second element, an employer and an employee must have been under legal obligations to one another during the entire contractual period under focus. Ordinarily, the obligations will have been upon the employee to undertake work when required/asked and upon the employer to have paid for it. Casual workers ordinarily fall outside of the ambit of this principle (Carmichael-v-National Power [2000] IRLR 43). Further, where the express terms of a contract made it clear that such obligations did not exist, there cannot have been an employment relationship. Gaps between assignments were just as relevant as the assignments themselves when considering all of the circumstances (Sec of State for Justice-v-Windle [2016] EWCA Civ 459). Control[24]Finally, the employer must have had a sufficient degree of control, in terms of the general sense of authority exercised over an employee, for such a relationship to have existed. ‘Control’ in this sense was not to have been equated to the undertaking of work under close supervision.[25]If the three essential elements were present, the relationship can have been one of employment, but it is also necessary to consider all of the other surrounding circumstances to finally determine its true nature. Those circumstances can include the degree of personal financial risk, the extent to which the individual provided his/her own equipment, whether the claimant was paid holiday and/or sick pay and whether he/she paid their own tax and national insurance or whether that was achieved through PAYE. There were many different factors that could have been relevant. ---8--- Sham arrangements[26]A number of cases are relevant to a consideration of situations in which a party alleges that the contractual documentation was a sham and did not reflect the reality of the parties’ relationship in law; Autoclenz Ltd v Belcher and Others [2010] IRLR 70 CA and [2011] UKSC 41; Consistent Group Ltd v Kalwak [2008] IRLR 505 CA; Firthglow Ltd (t/a Protectacoat) v Szilagyi [2009] ICR 835 CA and Snook v London and West Riding Investments Ltd [1967] 2 QB 786].[27]For the reasons set out below I have not concluded in this case that the agreement was a sham, and it is not necessary to set the authorities out in detail. Employment Status - Directors and Shareholders[28]The position of shareholders and/or directors has been considered in a number of cases. The earlier view was that controlling shareholders were not under the control of the employer because they could block any attempt to dismiss. A director’s level of control over the business undertaking generally led to a similar conclusion (see Buchan-v-Secretary of State for Employment [1997] IRLR 80 EAT in which the Claimant was the managing director and a 50% shareholder, but was not deemed to have been an employee).[29]However, in Neufeld v Secretary of State for Business Enterprise and Regulatory Reform [2009] IRLR 475, the Court of Appeal held that there was no reason in principle why someone who is a shareholder and director of company cannot also be an employee under a contract of employment. It was held:a. Whether or not a shareholder/director is an employee is a question of fact. There are in theory two issues: whether the putative contract is genuine or a sham and secondly, where genuine, that it is a contract of employment. (para 81)b. In cases involving a sham, the task is to decide whether such document amounts to a sham. This will usually require not investigation into the circumstances of the document , but also the parties purported conduct under it. The fact that the putative employee has control over the company and the board, and was instrumental in the creation of it will be a relevant matter in the consideration of whether or not it was a sham (para 82)c. An inquiry into what the parties have done under the purported contract may show a variety of things:(i) that they did not act in accordance with the purported contract at all, which would support the conclusion that it was a sham; or(ii) that they did act in accordance with it, which will support the opposite conclusion; or(iii) that although they acted in a way consistent with a ---9--- genuine service contract arrangement, what they have done suggests the making of a variation of the terms of the original purported contract; or(iv) that there came a point when the parties ceased to conduct themselves in a way consistent with the purported contract or any variation of it, which may invite the conclusion that, although the contract was originally a genuine one, it has been impliedly discharged. There may obviously also be different outcomes of any investigation into how the parties have conducted themselves under the purported contract. It will be a question of fact as to what conclusions are to be drawn from such investigation. (para 83)d. In deciding whether a valid contract of employment was in existence, consideration will have to be given to the requisite conditions for the creation of such a contract and the court or tribunal will want to be satisfied that the contract meets them. In Lee’s case the position was ostensibly clear on the documents, with the only contentious issue being in relation to the control condition of a contract of employment. In some cases there will be a formal service agreement. Failing that, there may be a minute of a board meeting or a memorandum dealing with the matter. But in many cases involving small companies, with their control being in the hands of perhaps just one or two director/shareholders, the handling of such matters may have been dealt with informally and it may be a difficult question as to whether or not the correct inference from the facts is that the putative employee was, as claimed, truly an employee. In particular, a director of a company is the holder of an office and will not, merely by virtue of such office, be an employee: the putative employee will have to prove more than his appointment as a director. It will be relevant to consider how he has been paid. Has he been paid a salary, which points towards employment? Or merely by way of director’s fees, which points away from it? In considering what the putative employee was actually doing, it will also be relevant to consider whether he was acting merely in his capacity as a director of the company; or whether he was acting as an employee. (para 85)e. We have referred in the previous paragraph to matters which will typically be directly relevant to the inquiry whether or not (there being no question of a sham) the claimed contract amounts to a contract of employment. What we have not included as a relevant consideration for the purposes of that inquiry is the fact that the putative employee’s shareholding in the company gave him control of the company, even total control. The fact of his control will obviously form a part of the backdrop against which the assessment will be made of what has been done under the putative written or oral employment contract that is being asserted. But it will not ordinarily be of any special relevance in deciding whether or not he has a valid such contract. Nor will the fact that he will have share capital invested in the company; or that he may have made loans to it; or that he has personally guaranteed its obligations; or that his personal investment in the company will stand to prosper in line with the company’s prosperity; or that he has done any of the other things that the ‘owner’ of a business will commonly do on its behalf. These considerations are ---10--- usual features of the sort of companies giving rise to the type of issue with which these appeals are concerned but they will ordinarily be irrelevant to whether or not a valid contract of employment has been created and so they can and should be ignored. They show an ‘owner’ acting qua ‘owner’, which is inevitable in such a company. However, they do not show that the ‘owner’ cannot also be an employee. (para 86)[30]In Eaton v Robert Eaton Ltd v Secretary of State for Employment [1988] IRLR 83, it was ruled that a director of a company is normally the holder of an office and not an employee. Therefore evidence is required to establish that the director was in fact employed.[31]In Fleming v Secretary of State for Trade and Industry [1997] IRLR 682, the Court of Session held that whether or not a person is an employee is a question of fact. The fact that a person is a majority shareholder is always a relevant factor and may be decisive. However the significance of the factor will depend on the circumstances and it would not be proper to lay down any hard and fast rule. In that case the Claimant was not found to have been an employee because, amongst other things, he had personally guaranteed loans, had no written contract and had decided not to draw a salary in the hope of saving the business).[32]In Rainford-v-Dorset Aquatics Ltd EA-2020-000123-BA, UKEAT/0126/20/BA, it was further said that; “Although there was no reason in principle why a director/shareholder of a company could not also be an employee or worker, it did not necessarily follow that simply because he did work for the company and received money from it he had to be one of the three categories of individual identified in s. 230 (3) of the Act. Overall, the tribunal's conclusion that the appellant was not an employee or worker was one of fact based on relevant factors and was not perverse.”[33]That was a case involving a claimant who had been a director and a 40% shareholder who was found to have been neither an employee nor a worker. The Claimant had drawn a ‘salary’ which was subject to PAYE and NI deductions, on the advice of the company accountants.[34]In Secretary of State for Trade and Industry-v-Bottrill [1999] ICR 592, CA, (as applied in Sellars Arenascene Ltd-v-Connolly [2001] ICR 760, CA) Lord Woolf MR suggested that Tribunal’s should consider the following questions:(a) Was there a genuine contract between the business and the shareholder? One which was not a sham?;(b) If so, did the contract actually create an employment relationship? Of the various factors which had to be considered, the degree of control is important. It was not just a case of looking at who had the controlling shareholding. A Tribunal had to ---11--- consider where the real control lay; what role did any other directors/shareholders actually take?[35]In Clark-v-Clark Construction Initiatives Ltd [2008] ICR 635, EAT, the list was broadened to include some of the further following factors; Whether the individual was an entrepreneur and/or had built the company up and/or would profit from its success. It was also held that there were three sets of circumstances where it may be legitimate to not give effect to what is alleged to be a binding contract of employment:(1) where the company is a sham,(2) where the contract is entered into for some ulterior purpose, such as to secure some statutory payment from the secretary of state, and(3) the parties had not conducted their relationship in accordance with the contract.[36]In Rajah v Secretary of State for Employment EAT/125/95, it was held that the relevant date for the purposes of who the secretary of state is liable to make payments out of the National Insurance fund is the date when the company became insolvent and not the position it was two, five or ten years previously. Respondent’s Submissions[37]The respondent submits that there are a number of features of the evidence which are contra-indications of employment status. It accepts that none are individually determinative or conclusive but submits that when taken together they do not reveal a genuine employment relationship: i) The written contracts of employment with the company, do not genuinely reflect an employment relationship in particular in that they makes no provision for any agreed salary or mechanism for agreeing the salaries, and (which is the basis for the exemption from the National Minimum Wage Regulations) does not only not set any hours of work but explicitly recognises that as directors the claimants would set their own hours. Neither of these is consistent with a genuine employment relationship;. ii) The history of the business is that for some twenty-five years the claimants operated in partnership and were necessarily in business on their own account, and neither was an employee of the business (as set out above this is now accepted by the claimants); iii) That on incorporation there is no evidence that the business was run any differently than it had been before; or that in reality anything changed in the running of the business; iv) . The claimant was paid a salary below national minimum wage rate. This is compatible and consistent with remuneration as an office holder, but not with genuine employment status. It is not open to an employer to pay, or an employee to agree to receive, less than the national minimum wage. However, it is always open to an office holder to agree to receive any amount of remuneration for ---12--- holding the office and/or set their own rate of remuneration, which is the position in this case. The fact that the claimants agreed to receive less than the national minimum wage is therefore indicative of the fact that they were in reality office holders and not employees. v) No attempt was ever made to attribute any particular hours or duties to employment or directorship;. vi) The claimants had not taken their full holiday entitlement which is unusual in an employee but entirely consistent with them being in business on their own account; vii) The first claimant received no pay for May, June, July 2023, and only a total of £2,942.00 for August , September and October; the last two months of his employment. The claimant’s acceptance of this arrangement is inconsistent with employment status. viii) She and the other directors had given personal guarantees for the company overdrafts and for leasing forklift trucks which is at least unusual for an employee and in reality a contra-indication of employment status. ix) Both claimants benefitted from their remuneration being paid in the most tax efficient way to optimise their directors’ remuneration. This is simply not open to or possible for any bona-fide employee who by definition does not possess that privilege. In reality the payment of a relatively small salary and the balance as directors dividends was simply a financial device to limit tax liability and does not reflect a genuine employment relationship x) On the evidence neither claimant, or at very least the second claimant, were not in reality subject to any control. Claimant’s Submissions[38]The claimants submit that : i) The employment contracts are entirely genuine and that they became employees of the first respondent in 2005, and remained so from 2012 under the terms of the varied contracts; ii) As Neufeld demonstrates there is nothing inconsistent about being an employee and/or a director/shareholder; iii) They necessarily had the mutual obligations contained in the contract; iv) They were necessarily required to perform those services personally; ---13--- v) They were under the control of the first respondent, in particular as exemplified by Clause 12 of the contract and the ability to discipline them, which was genuine and had been used in the past against an employee director; vi) It follows from points iii) -v) above that they met the Ready Mixed Concrete test for being employees vii) The payment of salaries as an employee at or about the income tax /NI threshold was standard and accepted practice and occurred on the advice of their solicitors/accountants; viii)The assertion that they were paid less than the national minimum wage is artificial and ignores the totality of their income;. ix) In the circumstances the retrospective contention that they were not employees cannot be sustained.
Conclusions
[39]This claim exemplifies a problem which comes before the tribunal with increasing regularity. The owners / directors of a business receive legal and/or accountancy advice to incorporate the business, as happened here. As part of that advice they are advised to become employees of the incorporated entity; and to maximise their income by dividing it in the most tax efficient way between employee salary and director’s dividend. This usually results, as in this case, with payments referrable to employment being at or below the personal allowance for income tax and/or the payment of national insurance contributions, and results regularly in any salary being below the national minimum wage if all of the hours worked are referrable to employment. The individuals do not question this advice, and proceed on the basis that they are shareholders/directors/employees of the incorporated business. This causes no difficulty unless and until the business fails and becomes insolvent, and the question arises as to whether the SoS bears any liability, at which point the question arises as to whether they were in reality ever employees. Claimants not unreasonably protest that they followed professional advice and their status has not been challenged for years, or decades; and the SoS not unreasonably contends that it is responsible for dispensing public money and can only do so if it bears a genuine legal liability.[40]Second Claimant – It is accepted that the two claims do not necessarily stand or fall together and I will start by considering the claims of the second claimant. There is no dispute that he established the business in the late 1970s, and entered into partnership with the first respondent in or about 1980. This was a genuine partnership which lasted some twenty five years until they accepted the advice to incorporate. Following incorporation the evidence of the second claimant is that the business essentially remained that of the first claimant. Whilst he took advice from the board in the final analysis he had the final say, and all important business decisions were take by him. Although he had a written contract of employment: ---14--- i) It is an unusual contract in that it provides for no set working hours and not set salary for working those hours; ii) Although he was paid a portion of his earnings as an employee there is no evidence or suggestion before me that his duties were ever divided between those of a director and those of an employee; iii) No attempt was ever made to ensure compliance with the national minimum wage regulations with reference to his employment.[41]In relation to the standard tests set out above it is clear that in effect he controlled the company and there was no one who could or did ever exert control over him. There are other contra-indicators of employment status such as the fact that he did not take all of his holiday entitlement; and in particular that he guaranteed the overdraft and other expenses, and when the business was in financial difficulty he paid his own money into the company. Whilst these considerations do not all bear the same weight, none of them point to a genuine employment relationship. In the end, looked at overall and taking all of the factors into account, I am forced to the conclusion that in reality the creation of an employment relationship was simply a device to allow for the maximisation of director’s earnings and does not reflect any genuine employment relationship.[42]First Claimant – Many of the same points apply in relation to the first claimant. There are, however , significant points of difference. Firstly she did not involve herself in the financial/accounting side of the business which was wholly in the hands of the second claimant, and she was not an ultimate decision maker in relation to the running of the business, which again always lay in the hands of the second claimant. She certainly fulfils the mutual obligation and personal service requirements of the Ready Mixed Concrete test; and I accept her evidence that there was at least potential control in the sense of the genuine exposure to disciplinary process and termination in the event of misconduct. It follows in my judgement that her relationship with the first respondent looks on the face of it more like a straightforward employment relationship than in the case of the second claimant.[43]However, the difficulty for the first claimant is that it is not in dispute that for some twenty five years she was a partner in the business and not an employee. Again, whilst she entered into a contract of employment it is not suggested that anything changed about her role. In my judgement, as with the second claimant in reality the creation of an employment contract was a legal device (I am not suggesting that it was a sham) so as to allow, amongst other things the most tax efficient way to allow both claimants to receive their directors remuneration. This reflects a significant practical difficulty. The claimants invite me to conclude that all of their earnings, including director’s dividends should be regarded as salary from employment, which in my judgement is simply not possible. Any award would have to be based on the ---15--- part of their remuneration paid as salary, and in order to avoid breaching the National Minimum Wage Regulations I would have to attribute the salary to a lower number of hours than were actually worked. This would necessarily involve me inventing a division was is not reflected in the contracts, or in reality.[44]Although the decision is more finely balanced in the case of the first claimant looked at overall and weighing all the factors in the balance, I am somewhat reluctantly forced to the conclusion that the second claimant was also not an employee of the first respondent, in particular because of the matters set out in paragraph 43 above..[45]As all of the claims against the SoS depend upon the claimants being employees of the first respondent, it follows automatically that the claims against it must be dismissed.