P Brown and D Heald v Secretary of State for Business and Trade: 1401465/2024 and 1401466/2024
EMPLOYMENT TRIBUNALS
Case No 1401465/2024, 1401466/2024
Between
(1) Paul Brown (2) Daniel HealdClaimantSecretary of State for Business and TradeRespondent
Before
Employment Judge GardnerIn person for claimantDate 3 March 2025
JUDGMENT
The judgment of the tribunal is:(1) The complaints for compensatory pay, holiday pay and notice pay are within time by virtue of s.188(2)(b) of the Employment Rights Act 1996 as the Tribunal is satisfied that it was not reasonably practicable to bring the claims within the 3 month time limit and the Claimants brought the claims within a reasonable period thereafter.(2) The Claimants were not employees and their application for payment from the National Insurance Fund is not well-founded. The Claim is dismissed.
REASONS
[1]In this case the Claimants, Mr Paul Brown and Mr Daniel Heald, have brought a claim against the Respondent, the Secretary of State, seeking payment from the National Insurance Fund. Specifically, a redundancy payment, compensatory pay, holiday pay and notice pay.[2]The Respondent denies that the Claimants were employees and accordingly asserts that there is no liability to the Claimants. The Respondent also submitted that the complaints for compensatory pay, holiday pay and notice pay under s.188 of the Employment Rights Act 1996 (“the 1996 Act”) are out of time (but accepted the redundancy claim under s.166 of the 1996 Act was within time).[3]This is the judgment following a hearing to determine(1) whether all aspects of this claim are brought within time and(2) the employment status of the claimants.[4]At the beginning of the hearing I identified the above as the issues for me to determine and no party disagreed or suggested alternative issues. I had access to a hearing bundle and authorities bundle prepared by the Respondent which I have read and considered. In this judgment I will only refer to the particularly relevant documents. I did not have copies of written witness statements from the Claimants, the Claimants explaining to me that they considered the directions of the Tribunal, dated 11 November 2024 requiring the same to mean they should be able to give oral statements at the Tribunal hearing. The directions of 11 November 2024 are quite clear that a written witness statement was required 7 days in advance but having regard to the overriding objective in r.3 of the Employment Tribunal Rules 2024 to deal with cases fairly and justly, including avoiding delay, I formed the view that the Claimants could and should give oral evidence in lieu of their witness statements. Both parties confirmed that they were content with that approach.[5]Both of the Claimants gave oral evidence before me, albeit the bulk of the Claimant’s evidence was given by Mr Brown, with Mr Heald confirming he agreed with and adopted Mr Brown’s evidence. I also heard submissions from Mr Soni on behalf of the Respondent and both Claimants. Primary Facts[6]The primary facts were not substantially in dispute. I found the following facts proven on the balance of probabilities after considering the whole of the evidence, both oral and documentary, and after listening to the factual and legal submissions made by and on behalf of the respective parties.[7]BHP Global Limited (“the Company”) was incorporated on 30 May 2007. At the time of incorporation it was Mintsearch Ltd, on 6 June 2008 it changed its name to BHB Marketing Ltd, and on 20 January 2014 it changed its name again to BHP Global Limited. It was a company which undertook business advertising, search engine optimisation and was also at one point registered as a claims management company. It also did referral work for another company on website design at one point.[8]By February 2023, the Company was encountering financial difficulties. It tried to generate new business but that was not effective. Mr Brown and Mr Heald contacted an insolvency practitioner and in October 2023 started the process of administration.[9]The Company is now insolvent within the meaning of sections 166 and 183 of the Employment Rights Act 1996 (“the 1996 Act”), having entered into creditors voluntary liquidation on 29 November 2023. The appointed Insolvency Practitioners are Company Liquidations Limited, Saxon House, Saxon Way, Cheltenham, GL52 6QX.[10]Both Mr Brown and Mr Heald were the directors of the Company. Mr Brown became a director on the day of incorporation. Mr Heald on 14 September 2007. Over the years there have been other directors and shareholders. Mr Brown informed the Tribunal that by 2013 and until the company went into administration, Mr Brown and Mr Heald were the only directors and shareholders, each with a 50% stake. Companies house records suggest a Rebecca Heald also owned shares (above 25% but no more than 50%) until 4 June 2018, but on either account Mr Brown and Mr Heald were the only directors and had a 50% stake since at least 2018.[11]Mr Brown and Mr Heald undertook work for the Company as an Office Manager and Sales Director respectively. Mr Brown saw his role as overseeing the day to day operations, including HR and administration. Mr Heald saw his role as sales and customer services. Mr Heald notes he never had access to the bank accounts. By the time of the Company entering administration, there were only 3 persons working at the company, Mr Brown, Mr Heald, and another person. Prior to 2020 there were 7 employees, in 2013-2014 there were around 14. All employees were sales agents and/or worked in after sales.[12]Both Claimants had signed a contract of employment with the Company which they signed on 3 September 2012. The Claimants were advised to enter into this formal written contract by their accountant. The written contact contained the usual provisions to be found in the contract of employment, such as those relating to salary, holiday pay, sick pay, restrictive covenants and termination provisions.[13]The salary payable under the written contract was expressed to be £650 per week for 30 hours work per week, Monday to Friday. However, whether the Claimants in fact worked those hours or received that salary has greatly varied over the years.[14]Mr Brown confirmed in evidence and I find that both Mr Brown and Mr Heald held a number of different roles in a number of different companies. For example, there was a company (a nutrition company) not connected to BHP Global in which they both worked over a number of years whilst also directors of BHP Global. They started to become more involved in that company in 2014 and reduced the hours they worked for BHP Global. They remained active in BHP Global on advice of their accountant. A final decision to wind up that business was made in 2022 but they still did not work 30 hours a week at BHP Global as, Mr Brown in particular, was also dealing with a private landlord business. They began to increase hours per week from February or March 2023 from 16 per week to around 30 in the weeks approaching the Company going into liquidation.[15]Consideration of the Company’s bank statements as provided from 3 December 2022 to 2 March 2023 does not make it clear what wages were paid to the Claimants or what dividends they were paid (albeit it is clear from the Company accounts and was accepted by Mr Brown that dividends were paid in 2022 of £44,000 and 2023 of £10,306). The payments shown as made to the Claimants from the Company accounts varied and did not record the purpose of the payments. The Claimants could not in evidence assist with the purpose of the payments, due to the passage of time since they were made.[16]Mr Brown’s gross earnings which are recorded in his HMRC forms P60 were £9483.19 to tax year ending 5 April 2021; £9499.88 to the tax year ending 5 April 2022, and £9499.88 to the tax year ending 5 April 2023. Mr Heald’s gross earnings which are recorded in his HMRC forms P60 were £9339.41 to tax year ending 5 April 2021; £9415.37 to the tax year ending 5 April 2022, and £9499.88 to the tax year ending 5 April 2023.[17]From July 2023, the Claimants began taking a gross weekly wage of £630 per week, as evidence by payslips from the period 28 July 2023 to 13 October 2023, albeit those payslips do not state the hours that were worked for that pay.[18]The Claimants were thus in a position to control how they received remuneration from the company (wages or dividends). The Claimants as directors chose to vary the payments they received from year to year depending upon the success or otherwise of the company and also varied the hours when they would undertake work for the company, depending on which of their businesses was deemed the better to work for at any particular time. These are not benefits which are afforded to a bone fide employee who would not have such privileges.[19]Following the administration of the Company, the Claimants applied to Secretary of State for payment of compensatory pay, notice pay, holiday pay, and redundancy pay from the National Insurance Fund on 11 December 2023. That claim was rejected on 5 February 2024 on the basis that the Secretary of State did not consider that they were employees within the meaning of s.230 of the 1996 Act and, thus, they were not entitled to such payments.[20]On 25 March 2024, the Claimants filed a claim with the Employment Tribunal under claim number 1400676/2024. In that claim the Claimants ticked the box that read “Another person I'm making the claim with has an Acas early conciliation certificate number” and later provided an ACAS certificate issued on 26 March 2024.[21]On 28 May 2024, the claim was rejected by the Employment Tribunal on the basis that the Claimants began the claim before they had been issued with an ACAS certificate, contrary to s.18A(8) of the Employment Tribunal Act 1996 (see Pryce v Baxterstorey Ltd [2022] EAT 61).[22]Mr Brown informed me, and I accept, that he did not understand why the initial claim was rejected and he thought it may be “as the date pre-dated the code”. He believed that as he had an invalid code from ACAS he needed to start again and request a new certificate from ACAS and start a new claim.[23]On 10 June 2024, the Claimants applied for a further ACAS certificate which was issued on 11 June 2024.[24]On 18 June 2024, this claim was received by the Employment Tribunal.
The Law
[25]The relevant legislation is the Employment Rights Act 1996 (“the 1996 Act”). Timing[26]Part XII of the 1996 Act provides for certain employee rights on the insolvency of an employer. Under that Part of the Act, the Secretary of State has an obligation to pay employees debts to which they are entitled out of the National Insurance fund in certain prescribed circumstances. The debts to which Part XII applies include arrears of pay, holiday pay and notice pay. They do not include redundancy payments. There is a different regime governing entitlement to such payments, found in Part XI of ERA.[27]Under ss.164(1) and (2), a claim for a redundancy payment must be made within 6 months of the termination of the Claimant’s employment (per s.145 of the 1996 Act). Where such a claim is made, s.170(1) of the 1996 Act provides that any question as to the liability of the employer to pay the employer’s payment shall be referred to an Employment Tribunal. Section 170 does not provide any time limits for such a referral, but in determining such a referral, the Tribunal must concern itself with the employer’s liability to pay which liability is restricted by the time limits found in s.164 of 1996 Act.[28]Under s.188(2) of the 1996 Act, the Employment Tribunal may not consider a complaint raised under s.188 (in this case compensatory pay, notice pay, holiday pay) unless it is presented within 3 months of the date the Secretary of State’s decision was communicated to the Claimants or within a reasonable period where it was not reasonably practicable for the complaint to be presented within 3 months.[29]In Lowri Beck Services Ltd v Brophy [2019] EWCA Civ 2490, the Court of Appeal summarised the approach along the following lines. 1) The test should be given a “liberal interpretation in favour of the employee”. 2) The statutory language is not to be taken only as referring to physical impracticability and might be paraphrased as to whether it was “reasonably feasible” for that reason. 3) If an employee misses the time limit because he or she is ignorant about the existence of the time limit, or mistaken about when it expires in their case, the question is whether that ignorance or mistake is reasonable. If it is, then it will not have been reasonably practicable for them to bring the claim in time. Importantly, in assessing whether ignorance or mistake are reasonable, it is necessary to take into account enquiries which the claimant or their adviser should have made. 4) If the employee retains a skilled adviser, any unreasonable ignorance or mistake on the part of the adviser is attributed to the employee (Dedman v British Building and Engineering Appliances Ltd [1974] ICR 53). 5) The test of reasonable practicability is one of fact and not of law (Palmer and Saunders v Southend-on-Sea Borough Council [1984] IRLR 119). Employee Status[30]Under s.166(1) of the 1996 Act, where an employee claims that his employer is liable to pay to him an employer’s payment and either(a) 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(b) 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. Section 166(2) defines an “employer’s payment”, which includes redundancy pay.[31]Under s.182(1) of the 1996 Act, on an application made to him in writing by an employee, if 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 s.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. A refusal may be subject of a complaint to the Tribunal under s.188 of the 1996 Act.[32]Section 184 of the 1996 Act provides that arrears of pay, accrued holiday pay, and statutory notice pay apply for the purposes of s.182 (but subject to maximum amounts).[33]For the Secretary of State to be liable, any such claimant must have been an employee. Employees are defined in s.230 of the 1996 Act. An employee is an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment. A contract of employment is defined as a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.[34]I was referred to a number of cases by the Secretary of state which I have considered. The following cases, in particular, are in my view particularly pertinent to the question as to whether the Claimants were employees of the Company: Autoclenz Ltd v Belcher and Others [2010] IRLR 70 CA; [2011] UKSC 41; Neufeld v Secretary of State for Business Enterprise and Regulatory Reform [2009] IRLR 475 CA; and Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497.[35]As confirmed in paragraphs 18 and 19 of Lord Clarke's judgment in Autoclenz: 18 : As Smith LJ explained in the Court of Appeal of paragraph 11, the classic description of a contract of employment (or a contract of service as it used to be called) is found in the judgement of McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, 515C : "a contract of service exists if these three conditions are fulfilled:(i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.(ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.(iii) The other provisions of the contract are consistent with its being a contract of service … Freedom to do a job either by one's own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be". 19: Three further propositions are not I think contentious: i) As Stephenson LJ put it in Nethermere St Neots Ltd v Gardiner [1984] ICR 612, 623 "There must … be an irreducible minimum of obligation on each side to create a contract of service". ii) If a genuine right of substitution exists, this negates an obligation to perform work personally and is inconsistent with employee status: Express and Echo Publications Ltd v Tanton (“Tanton”) [1999] ICR 693 per Peter Gibson LJ at p 699G. iii) If a contractual right, as for example a right to substitute, exists, it does not matter that it is not used. It does not follow from the fact that a term is not enforced that such a term is not part of the agreement: see eg Tanton at page 697G.[36]The Supreme Court upheld the Court of Appeal in the Autoclenz decision, and the approach to be adopted where there is a dispute (as in this case) as to an individual's status.[37]In short, the four questions to be asked are: 1) What are the terms of the contract between the individual and the other party? 2) Is the individual contractually obliged to carry out work or perform services himself (that is to say personally)? 3) If the individual is required to carry out work or perform services himself, is this work done for the other party in the capacity of client or customer? 4) If the individual is required to carry out work or perform services himself, and does not do so for the other party in the capacity of client or customer, is the claimant a “limb (b) worker” or an employee?[38]In Autoclenz the Supreme Court has also discussed the cases where the written documentation may not reflect the true reality of the relationship. The question to be asked is what was the true agreement between the parties? It is important to look at the reality of the obligations and the reality of the situation. Lord Clarke referred in paragraph 30 to the judgment of Smith LJ in paragraph 50 of Firthglow Ltd (t/a Protectacoat) v Szilagyi [2009] EWCA Civ 98, [2009] ICR 835: The kernel of all these dicta is that the court or tribunal has to consider whether or not the words of the written contract represent the true intentions or expectations of the parties, not only at the inception of the contract but, if appropriate, as time goes by.[39]In paragraph 35 he concluded: [S]o the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part. This may be described as a purposive approach to the problem. If so, I am content with that description.[40]The position of shareholders and/or directors has been considered in a number of cases. The traditional view, which has been reinforced more recently, 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 he was not deemed to have been an employee).[41]In Neufeld, 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, not that by virtue of the shareholding giving them control of it that they cannot be an employee. 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 just an investigation into the circumstances of the creation 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 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 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 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).[42]In Eaton v Robert Eaton Ltd and Secretary of State for Employment [1988] IRLR 83, it was ruled that a director of a company is normally a holder of an office and not an employee. Evidence is therefore required to establish that the director was in fact employed.[43]In Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 CS, 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. 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.[44]In Rajah v Secretary of State for Employment [1995] UKEAT 125, 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.
Conclusions
[45]Against this background my conclusions are as follows. Timing[46]The Company entered into voluntary liquidation on 29 November 2023 (the relevant date). Following this the Claimants applied to Secretary of State for payment of compensatory pay, notice pay, holiday pay, and statutory redundancy pay from the National Insurance Fund on 11 December 2023. On its face, the claim for a redundancy payment was made within 6 months and is within time. Mr Soni made submissions which accepted the same.[47]With regards to the claims for compensatory pay, notice pay, holiday pay under s.182 of the 1996 Act, that claim was rejected by the Secretary of State on 5 February 2024. Accordingly, any act or omission which took place before 4 May 2024 is potentially out of time. By bringing the complaint on 18 June 2024 it is out of time unless I conclude it was not reasonably practicable to bring the claim within time and, if so, it was brought within a reasonable period thereafter.[48]In this case the Claimants did try to bring a claim in time on 25 March 2024, when the Claimants filed a claim with the Employment Tribunal under claim number 1400676/2024. On 28 May 2024, the claim was rejected by the Employment Tribunal on the basis that the Claimants began the claim before they had been issued with an ACAS certificate, contrary to s.18A(8) of the Employment Tribunal Act 1996.[49]However, I note that a claim brought to the Employment Tribunal under section 166 and/or 188 of the 1996 Act are not ‘relevant proceedings’ within the definition of s.18 of the Employment Tribunals Act 1996. The effect of that is that there was no obligation on the Claimants under s.18A of the Employment Tribunals Act 1996 to seek an ACAs conciliation certificate before bringing a claim in the Tribunal. Thus, it appears to me, the Claimant’s original claim need not have been rejected.[50]Given my view above, I do not consider the fault for the delay in bringing this claim is the fault of the Claimants. Indeed, it appears to me that they did bring the initial claim within time. Accordingly, I consider the Claimants acted reasonably in accepting the determination and guidance of the Tribunal and their mistake was a reasonable one to make. I consider that their actions thereafter of obtaining an ACAs certificate and bringing a further claim expeditiously are evidence of bringing this claim in a reasonable time after the mistake. Accordingly, I find this claim is brought within time, pursuant to s.188(2)(b) of the 1996 Act.[51]I therefore conclude that the Tribunal does have jurisdiction to consider the complaints brought under both s.166 and s.188 of the 1996 Act. Employee Status[52]I do not find the Claimants to be employees of the Company.[53]In the first place, the fact that the Claimants were directors and shareholders does not preclude them from also being employees, but the fact that they were the only two directors and, further, they were both 50% shareholders at the time the Company went into liquidation (and for a significant period before it) is in my view indicative of the nature of the relationship between them and the Company. Indeed, it was Mr Brown who made other members of staff redundant, it was a decision of Mr Brown and Heald that they could not make their final member of staff redundant as her length of service meant the Company could not afford the redundancy payments, and it was a decision of the Claimants that the Company must enter administration. They reported to no one but themselves. Decisions about the other employees of the Company and the future of the Company were made by the Claimants, which is indicative of the level of control they had over the Company, rather than the other way round.[54]The Claimants’ respective contracts of employment (which are virtually identical) were clearly not documents which set out the contractual terms which either the Claimants or the Company were required to observe. Mr Brown was clear they were drawn up at the advice of their accountant to be ‘compliant’. The Claimants were entitled to and did vary the hours from the 30 hours per week in the written contract which they worked for the Company and could reduce their hours in order to work for other companies and businesses with which they were also involved. They were also entitled to and did vary the remuneration from the £650 per week set out in the written contract. During the last 3 years of their purported employment they paid themselves less than £10,000 per year, save for the last few months of the Company’s life when they began paying themselves £630 per week. The ability to vary your own hours and pay is not, in my, indicative of employee status.[55]Also relevant in my view, is that even whilst the Claimants had reduced their purported pay to less than £10,000 per year in 2022 and 2023, they continued to pay dividends in the sum of £44,000 in 2022 and £10,306 in 2023.[56]In conclusion I find that there was no genuine employment relationship in place at the time the Company was liquidated, which is the relevant time when the Secretary of State is potentially liable for payment. Accordingly, the Claimants’ claim to the effect that the Secretary of State has wrongly refused to make the necessary payments from the National Insurance Fund is not well-founded and it is hereby dismissed.