Mr K Lawrence and Mr D Lake v Dapper Collection Ltd (in CVL) and The Secretary of State for Business and Trade: 2301783/2024 and 2302159/2024
EMPLOYMENT TRIBUNALS
Case No 2301783/2024, 2302159/2024
Between
(1) Mr K LawrenceClaimantDapper Collection Ltd (in CVL) and The Secretary of State for Business and TradeRespondent
Before
Employment Judge Fredericks-BowyerIn person for claimantDate 23 February 2025
JUDGMENT
[1]The 1st claimant Mr Lawrence was not an employee of the 1st respondent. His claim is not well-founded and is dismissed.[2]The 2nd claimant Mr Lake was an employee of the 1st respondent from 21 January 2014 to 15 September 2023. His claim succeeds and he is entitled to compensation from the Redundancy Payment Service administered by the 2nd respondent.[3]Remedy is not yet able to be determined. A remedy hearing will be listed for remedy to be determined unless the 2nd respondent can calculate the remedy due and make payment in the meantime. 1 of 9
REASONS
[1]This is my reserved judgment following final hearing. The claimants were directors and shareholders of the 1st respondent. Upon its insolvency, both made claims to the Redundancy Payment Service (“RPS”) on the basis they were also employees of the 1st respondent. Those claims were rejected. The 2nd respondent considers that neither were employees and that the documents stating to the contrary were effectively a ‘sham’. If so, the claimants were not entitled to payment from the RPS.[2]This was the second hearing before me. The first attempt at the final hearing was postponed because the Tribunal had not given directions for the claimants to provide witness statements for the hearing. Witness statements were required to deal with such an important question as this. It would not have been fair to require the claimants to give oral evidence and rely on memory ‘by surprise’ in the hearing. Similarly, it would not be fair for Mr Sonal to hear evidence in chief in the hearing for the first time and be expected to immediately challenge it in cross examination without preparation.[3]I apologise for the time taken to get this judgment to the parties.
Relevant Law
[4]I start this judgment with a summary of the relevant legal principles in this area. The upshot is that it is extremely unlikely for every director and shareholder to be an employee of the company in a very small business such as this. There is almost always going to be a controlling mind who effectively runs the company with too much control over their own work to also be an employee. Where there are as few as two directors in a company, then it is also unlikely that either is also an employee, unless the Tribunal is satisfied as a matter of fact that one of the pair has obvious control over the company and the other is in practice obviously more junior and provides service to the company as an employee.[5]The starting point in relation to considering the employment status of an individual is to consider the wording of the relevant statute. Section 230(1) to Section 230(3) 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. (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. 2 of 9 (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;”[6]There is no single test concerning how to determine a person’s employment status. Each case falls to be determined on its own particular facts and often there are factors pointing in each direction which complicate the determination. The usual approach requires all aspects of the relationship to be considered and then I should ask the question whether the claimant was carrying on a business on their own account (O’Kelly v Trusthouse Forte plc [1983] IRLR 369 CA).[7]Naturally, this means that the wording in any document and the assumptions made by the parties will only be part of the matters to be considered when making a determination. The test is not ‘what was the claimant called’ or ‘what do the documents label the parties’ or ‘what did the claimant think they were’. I may be required to look behind the contractual documentation to consider how the relationship operated in reality to determine the employment status of the claimant (Autoclenz Ltd v Belcher [2011] UKSC 41; Uber BV v Aslam & others [2019] UKSC 29).[8]In relation to whether someone is an ‘employee’ for the purposes of s230(1)(a), case law has found that a person will not be an employee without the mutual contractual obligation for the employer to provide work and the employee to do that work which is provided (Carmichael v National Power Plc [1999] IRLR 43, HL). This is often referred to in cases as the ‘irreducible minimum of obligation’. Employees who have a contract of employment containing the irreducible minimum of obligation will also be ‘workers’ by operation of s230(3)(a). Such workers are often referred to in cases as ‘limb (a) workers’.[9]The same principles apply where a director and shareholder of a company asserts that they were also an employee (Secretary of State v Neufeld and Howe [2009] EWCA Civ 280). Importantly, the parties in such an arrangement may come to operate in a way which impliedly discharges any employment contract in place (Neufield para 83). The director and shareholder must be an employee at the date of the insolvency and it is not enough to show they were an employee at some earlier date (Rajah v Secretary of State EAT/125/95). Relevant Facts[10]These are the facts I find on the balance of probabilities, having read the witness statements, heard evidence, and read the documents I was shown within a bundle which ran to 384 pages. There are facts which are common to the claimants and facts which are different. 3 of 9[11]The claimants also supplied witness statements from those known to them which support the contention they were employees of the 1st respondent. I have read those statements, but did not hear evidence directly. Given the technical legal nature of the question about whether or not someone is employed, I do not consider these statements are very helpful or relevant. There is not enough detail to understand how the opinions contained are formed. Facts relating to the 1st respondent’s Companies House filings[12]The following facts are common to the claimants in respect of the 1st respondent:- 12.1. The 1st respondent was incorporated on 21 January 2014. Both claimants were directors on incorporation and held one share each. 12.2. Mr Lake’s directorship was terminated on 16 February 2016. 12.3. On 21 January 2017, Mr Lawrence was listed as the only person with significant control of the 1st respondent. 12.4. On 8 April 2017, it was confirmed that Mr Lake had transferred his share in the 1st respondent to Mr Lawrence. 12.5. On 8 February 2018, Mr Lake was reappointed as a director of the 1st respondent along with another director. There were then three directors, including Mr Lawrence. 12.6. On the same date, it was confirmed that there were now 100 shares in the 1st respondent – 30 held by Mr Lawrence, 40 held by Mr Lake, and 30 held by the third director. Mr Lawrence no longer had significant control. Mr Lake did, as the biggest shareholder. 12.7. Also on the same date, Mr Lawrence was appointed secretary of the 1st respondent. 12.8. On 5 May 2018, the third director’s appointment was terminated. 12.9. On 11 February 2019, it was confirmed that the 30 shares owned by the third director had been transferred to Mr Lake. He owned 70 shares whilst Mr Lawrence owned 30 shares. 12.10. On 12 October 2023, Mr Lawrence chaired the meeting which resulted in the resolution to wind up the 1st respondent and appoint a liquidator. 12.11. Mr Lawrence signed the 1st respondent’s accounts each year. Facts relating to Mr Lawrence[13]Mr Lawrence supplied a witness statement and answered questions. I accept all his evidence, which I find was thoughtfully and honestly given. I find the following relevant facts about Mr Lawrence and this claim:- 4 of 9 13.1. He supported Mr Lake’s creative vision in respect of running the business which came to be operated by the 1st respondent. 13.2. He was the only person to have been a statutory director throughout the 1st respondent’s operation. 13.3. He signed all of the documents for the Companies House filings before and after being appointed its secretary. 13.4. He operated as the director of the 1st respondent in fact as well as by appointment, taking sole responsibility for – 13.4.1. Managing compliance with legal obligations; 13.4.2. Managing the finances of the 1st respondent and dealing with the accountant; 13.4.3. Managing payroll of all staff and those involved with the respondent. 13.4.4. Managing stakeholder relationships and stock orders; 13.4.5. Managing training staff; 13.4.6. Promoting the success of the 1st respondent to ensure profit generation. 13.5. He was party to a service contract dated 21 January 2014, which was updated from time to time, which called him an employee, required full time hours, and which provided an initial salary of £10,000. 13.6. His PAYE salary increased in line with the personal allowance threshold and he was paid anything extra by way of dividends. 13.7. He relied on the accountant to work out how much he could be paid and how that pay was divided between salary and dividends. 13.8. When the 1st respondent could not meet salary requirements or expenses, he reduced his own pay to make headroom for those other payments. 13.9. There was no person with greater operational control over the 1st respondent than him. 13.10. He worked at least full-time for the 1st respondent but there were no consequences for him not fulfilling those hours other than the business may struggle without his level of input. Facts relating to Mr Lake[14]Mr Lake supplied a witness statement and answered questions. I accept all his evidence, which I find was thoughtfully and honestly given. I find the following relevant facts about Mr Lake and this claim:- 5 of 9 14.1. He held the creative vision for the business and ran it on his own account before it was run through the 1st respondent. 14.2. He worked full time in the retail unit of the 1st respondent throughout its operation, whether or not he was the statutory director and a shareholder (which he was not between 16 February 2016 and 8 February 2018). 14.3. He held the role of General Manager in the retail part of the 1st respondent’s business. 14.4. He was concerned with running the shop, and provided strategic vision for the stock and direction of the 1st respondent’s business. His level of control and influence on day-to-day running of the 1st respondent ended there. 14.5. He had no active participation in the operational running of the 1st respondent and did not manage compliance, governance, or any financial matters (including his own pay). His involvement in this when required by the law for directorship was inherently separate in nature to his role as General Manager. 14.6. He was party to a service contract dated 21 January 2014, which was updated from time to time, which called him an employee, required full time hours, and which provided an initial salary of £10,000. 14.7. He worked at least full-time hours. 14.8. His PAYE salary increased in line with the personal allowance threshold and he was paid anything extra by way of dividends. 14.9. He relied on Mr Lawrence to work out how much he could be paid and how that pay was divided between salary and dividends. He did not know how the accountants were directed or how the accountants worked out the advice given to Mr Lawrence about this. 14.10. He was required to fulfil his hours within the 1st respondent according to the rota which divided attendance for those required to work on site. Failure to do so would damage the business and lead to management intervention from Mr Lawrence. 14.11. When the 1st respondent could not meet salary requirements or expenses, he agreed for Mr Lawrence to reduce his own pay to make headroom for those other payments. The 1st respondent could not reduce Mr Lake’s hours of work without his agreement, which he did not give. Conclusions Mr Lawrence
Conclusions
[15]Mr Lawrence submits that he was an employee, based on his understanding that this is what the accountant advised and what he was called in the written contract he had entered into, as amended. 6 of 9[16]As is clear from the above, what is written on the documents is only part of the factual background I must take into account. The existence of the employment relationship is statute based, and the case law interpreting that make it clear that the question is about action and what is actually the reality rather than how labels are attributed on paper.[17]In my judgment, Mr Lawrence did not have the mutuality of obligation required to fulfil the definition of an employee. The division of tasks between Mr Lawrence and Mr Lake means that Mr Lawrence was in practice the controlling person of the 1st respondent, even though he did for the latter part of the operations own less shares than Mr Lake. His day to day management of the finances and governance of the 1st respondent meant that there was nobody above him to regulate his activity. I have found that he could do fewer hours or work less effectively at the 1st respondent without consequence to him. Fundamentally, that means that the 1st respondent was not required to provide him with certain hours and he was not under an obligation to do them.[18]This conclusion means that he does not fall into the definition of an employee under s230 Employment Rights Act 1996. Consequently, he is not eligible for payment from the Redundancy Payment Service and so his claim is dismissed. Mr Lake[19]In contrast, Mr Lake’s engagement with the 1st respondent does, in my view, demonstrate that the 1st respondent was required to provide work and that Mr Lake was then required to do it.[20]The 2nd respondent resists that conclusion because he was a director and, since 2018, was also the biggest shareholder in the 1st respondent. I agree that those features would, ordinarily, point against the conclusion that there was mutuality of obligation.[21]In this case, though, I have found that Mr Lake was the artistic mind behind the business. Indeed, he started it. However, on the facts I have found, he then handed over the operation of the 1st respondent to Mr Lawrence. Mr Lawrence ran the company in essentially every degree day to day, freeing Mr Lake to do what he loved and what he was good at – being the General Manager of the retail unit. I have found that, in doing so, Mr Lake submitted to the oversight and control of Mr Lawrence.[22]This oversight and control extended to Mr Lawrence running the payroll for the 1st respondent, and engaging with the financial management. It extended to the frank admission that Mr Lawrence would intervene if Mr Lake’s performance fell below standard, if he had a complaint made against him, or if he simply did not do the hours required of him.[23]Mr Lake obviously had a financial and emotional interest in the 1st respondent. He was not the same as any other employee. This meant that, when times were hard, he agreed for his pay to reduce to reflect what the 1st respondent could afford. His hours were not reduced and he was not made redundant because his role was integral to business performance. In my judgment, his willingness to work on a 7 of 9 reduced package should not be confused for conclusive indication that he was not an employee of the business.[24]These findings above also mean that Mr Lake and the 1st respondent also operated in consistency with the written employment contract between them. Whereas, in Mr Lawrence’s case, there were reasons to look beyond that paper to examine the relationship, I consider that with Mr Lake the contract does reflect the reality of the working relationship itself. In particular, when Mr Lake was not a director or shareholder of the 1st respondent, he remained working as the General Manager – and I conclude he did so as an employee, as he was throughout the 1st respondent’s solvent life.[25]Consequently, I conclude that Mr Lake was employed by the 1st respondent from its incorporation until his effective dismissal by reason of redundancy when the business closed. He is therefore entitled to redundancy pay and any amounts outstanding from the 1st respondent. Where those cannot be paid by the 1st respondent (and I understand they cannot be), then it falls to the Redundancy Payment Service to compensate to the extent the claims are covered by the terms of the scheme.[26]Mr Lake’s claim therefore is well-founded and succeeds. Next steps[27]Mr Lawrence’s claim ends with this judgment. Mr Lake’s succeeds.[28]I was not shown a schedule of loss for Mr Lake, but the amount claimed in redundancy should be capable of calculation. The 2nd respondent says that further investigation is required, including liaising with HMRC. I accept that the way in which Mr Lake was paid is not completely clear from the bank statements I have seen. .[29]I anticipate that the 2nd respondent will soon be in a position to make payment under the scheme, and will provide a calculation methodology when doing so which will make sense to Mr Lake.[30]I am not, though, content to end this case there with that anticipation. It is proper in the circumstances to list a remedy hearing so that I can determine any disputed amounts which would have been owed by the 1st respondent and which should therefore be covered by the 2nd respondent. That is what I will do. It seems appropriate to fix a date after a four month pause to allow the above steps to be done properly.[31]If the parties do not need that hearing, it is important to write in to the Tribunal as soon as possible so that it can be vacated and the time used to deploy resources into another case. 8 of 9 Approved by: