Mr J Hughes v Mr W Kinch and Others: 4100194/2025 and 8000311/2025
EMPLOYMENT TRIBUNALS (SCOTLAND)
Case No 4100194/2025, 8000311/2025
Between
Mr J HughesClaimantMr W Kinch and OthersRespondent
Before
Employment Judge M KearnsMr P Soni (instructed by Representative) for respondentDate 23 May 2025
JUDGMENT
The Judgment of the Employment Tribunal was to dismiss the claims.
REASONS
[1]The claimants were directors of the first respondent, which went into creditors’ voluntary liquidation on 17 October 2024. The second respondent administers the Redundancy Payments Service (“RPS”) in relation to claims made to the National Insurance Fund (“the Fund”) under sections 166 and/or 182 of the Employment Rights Act 1996. The claimants each applied to the RPS for the following payments out of the Fund: notice pay; one month’s arrears of pay; holiday pay and a redundancy payment. The RPS refused their applications, stating that the claimants were not employees of the first respondent. Having complied with the early conciliation requirements, the claimants brought claims to the Employment Tribunal. The second respondent resists their claims.
Issues
[2]The principal issue in dispute in this case is whether the claimants were employees of the first respondent or not. It is only if they were employees that they are entitled to payments by the second respondent under sections 166 and 182 Employment Rights Act 1996 (“ERA”). Evidence[3]The parties lodged a joint bundle of documents. The claimants gave evidence on their own behalf and were cross examined by Mr Soni on behalf of the second respondent. Findings in Fact[4]The following material facts were admitted or found to be proved:[5]The claimants are former directors of the first respondent. The first respondent went into creditors’ voluntary liquidation on 17 October 2024. Joseph Sadler and Andrew Gordon of CFS Restructuring LLP were appointed joint liquidators. The liquidators have informed the tribunal that they will not take part in these proceedings. The second respondent is the Secretary of State for Business and Trade and as such, responsible for administering the Redundancy Payment Service (“RPS”) and for overseeing payment from the National Insurance Fund under sections 166 and 182 ERA.[6]In or about September 2009, the second claimant’s father, Mr Gilbert Kinch purchased the Atrium Coffee Shop business in Glasgow’s West End and set up the first respondent, Kinch Limited (company number 07007708) to run it. In 2012, the first respondent acquired a second café nearby; Café Go-Go. The first respondent was a private company limited by shares. Its memorandum and articles of association as at 24 September 2013 (104 – 120) show that as at that date, the company had three directors, Mr Gilbert Kinch and the two claimants. The first claimant became a director on 3 September 2009. The second claimant became a director on 1 June 2012 (125). Both were still directors of the first respondent when it became insolvent in or around September 2024. Mr Gilbert Kinch had resigned as a director of the first respondent on 31 August 2022.[7]In terms of share capital, there were 100 ordinary shares, all of which were initially held by Mr Gilbert Kinch (120). This class of shares were described as “non-redeemable and rank equally in terms of voting rights – one vote for each share; rights to participate in all approved dividend distributions for that class of share; and rights to participate in any capital distribution on winding up.” In addition, there were 100 A ordinary shares, described as: “non-redeemable and rank equally in terms of right to participate in all approved dividend distributions for that class of share. They have no voting rights or rights to participate in any capital distribution on winding up.” At all relevant times, the claimants each held 50 A ordinary shares. At some point prior to the first respondent becoming insolvent, and probably in 2022, Mr Gilbert Kinch passed 30 of his ordinary shares to Janet Kinch and 40 of his ordinary shares to the second claimant (207).[8]The claimants each produced written contracts of employment (196) and (210) to the tribunal. Each contract was signed by the other claimant as a director on behalf of the first respondent beside the words: “Director’s name of acceptance of employment”. The contracts bear to have been signed by both parties on 16 October 2009 and state that 16.10.2009 is the ‘commencement of employment date’. (There is also a typed line under the ‘employee’s signature’ which states: “Employee’s Signature of acceptance of the employment contract conditions dated 1st July”). The contracts are in the same terms as those used by the first respondent for ordinary (non-director) members of staff. The contracts do not amount to express contracts by the first respondent or its board to employ the claimants as directors. The contracts do not set out their duties as directors or state what Mr Gilbert Kinch or the first respondent’s board expected of them. They were not signed by Mr Gilbert Kinch. They do not set out that the claimants would be paid remuneration in return for their service as directors. The claimants’ contracts do not state how many hours they were required to work (other than by reference to a rota, which they created themselves). In practice, the claimants decided their own hours and duties. The contracts contained provisions such as: “Any employee wishing to seek a change in the rota must contact the management of Kinch Ltd... the management will consider the request and their verdict will be final.” Such terms were not apposite for directors’ contracts given that the claimants were the management referred to.[9]Neither claimant ever took sick leave. When they took holidays they received their normal pay. The claimants worked the hours required to run the business. These amounted to around 35 hours per week each. The first respondent’s other staff had specified hours but the claimants did not have specified hours.[10]The claimants operated the two cafes, Atrium and Café Go-Go on a day to day basis. The first claimant was responsible for hiring and firing and also for the first respondent’s bank account. The claimants decided together what stock to order and the second claimant took care of the ordering from suppliers. At the end of each day of trading, the claimants would send the figures to Mr Gilbert Kinch, so that he would know how the business was doing. Decisions about the operational running of the first respondent were taken by the two claimants. Strategic decisions – such as the decision to sell the Café Go-Go business and the decision to cease trading on 1 September 2024 and to place the company into creditors’ voluntary liquidation - were taken by the two claimant directors along with Mr Gilbert Kinch (who was no longer a director at that point).[11]The claimants each received £1,050 gross from the first respondent monthly. Their pension contributions were £21.20. Their net pay after deduction of their pension contributions was £1,028.80. Their gross annual pay by this route was £12,600 each. As they each worked approximately 35 hours per week, this gives an hourly rate of just under £7 per hour, which is well below the National Minimum Wage. These monthly payments would have been subject to tax and National Insurance under the PAYE scheme except that they were almost wholly below the thresholds for reasons of tax efficiency (see 204 – 5). All the other members of the first respondent’s staff were paid at least the National Minimum Wage.[12]In addition to the gross monthly payments of £1,050, the claimants each received a dividend of £500 per month. The first respondent’s bank statements (274) indicate that on 28 June 2024, two monthly payments were made to the first claimant; one of £2,056.84, being the monthly pay net of pension contributions for both directors; and a second payment of £1,000 being the dividends for both directors. The first claimant received these payments and transferred half of each to the second claimant. The employees of the first respondent each received individual transfers of their wages at the National Minimum Wage (272). Observations on the
Evidence
[13]There were a few inconsistencies between the written records and the testimony of the claimants as set out below. Where this inconsistency occurred, I preferred the written records except where indicated below for the following reasons.[14]The first claimant’s testimony was at times a little confusing. For example, he testified that he was never a shareholder in the first respondent but this did not seem to be correct as Mr Soni explored with him. Not only did the company records as at September 2013 (at 120) clearly state that both claimants were shareholders, but the claimants’ own letter to the Employment Tribunal (93), which they referred to in evidence stated: “We both declined the directorship as it was pointless with just 50 A ordinary shares being issued for dividend purposes only with no voting rights for the company as no company shares were offered.” For what it’s worth, it appeared to me that the claimants were clearly both shareholders in respect of 50 A ordinary shares each. The A ordinary shares entitled them to receive dividends, albeit without voting rights. (In addition, at the date of insolvency, the second claimant also had 40 ordinary shares with voting rights.)[15]With regard to whether the first claimant was a director of the first respondent, Mr Soni asked him: “When the company was incorporated on 3 September 2009, you were one of the founding directors?” The first claimant replied: “I was not a director. We were the people who would help run the company. I had to be known as a director for the bank and suppliers.” Mr Soni referred the first claimant to the last page of the employment contract he had produced (199) and asked him: “You were more than that weren’t you? The name of the director who accepted employment on behalf of the company is Wayne Kinch. It’s the same with Wayne Kinch’s contract. You signed as a director. You were a director in more than name. You had authority to sign on behalf of the company?” The first claimant replied: “Again, it was because of the location. The owner was in Leicester. We were in Glasgow. We took to do with the hiring of staff.” According to the Companies House records (125), the first claimant was appointed as a director on 3 September 2009 and the second claimant on 1 June 2012. Thus, it is a matter of public record that at the point when the first respondent became insolvent, and for many years prior to that, the claimants were both directors of the first respondent.[16]With regard to the claimants’ employment contracts, they bear to have been signed on behalf of the first respondent as a director by each claimant for the other on 16 October 2009 and state that 16.10.2009 is the ‘commencement of employment date’. However, the second respondent did not become a director of the first respondent until June 2012.[17]In their applications to the RPS, both claimants stated that their hours of work were 50 per week (147) and (155). However, the claimants stated in evidence that this was more like 30 or 35 hours. Mr Soni referred the second claimant to the claimants’ joint letter to the Tribunal dated 23 March 2025 (93) in which they stated that they were “told to work a guaranteed 35 hours per week with any excess hours being taken as time off and not paid.” Giving the claimants the benefit of the doubt on this, I concluded that they worked 35 hours a week as they testified rather than 50 as they had stated to the RPS. Discussion and decision[18]The claimants are seeking payment from the National Insurance Fund under the provisions of sections 166 and/or 182 of the Employment Rights Act 1996 (“ERA”). They each seek redundancy pay, notice pay, holiday pay and one month’s arrears of pay for September 2024. Section 166 of ERA allows the second respondent to make redundancy payments from the Fund, subject to sections 167 & 168 of ERA. Section 182 allows the second respondent to make payments from the Fund in respect of notice pay, arrears of pay and holiday pay subject to sections 184, 185 & 186. To qualify for payments under both section 166 and section 182 of the Act, it is necessary for the claimants to have been employees as defined in section 230 ERA.[19]The second respondent accepts that the first respondent is insolvent within the meaning of sections 166 and 183 of ERA, having entered into Creditors Voluntary Liquidation on 17th October 2024. However, the second respondent disputes that the claimants were employees of the first respondent within the meaning of section 230 of the Act and submits that they did not have a contract of employment with the first respondent, either express or implied, for the purposes of section 230, at the relevant date (the date on which the first respondent became insolvent). The law on employee status[20]Section 230 ERA provides so far as relevant as follows: “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…”[21]As the second respondent submitted, there is no reason, in principle, why someone who is a director and shareholder of a company cannot also be an employee of the company under a contract of employment. In the case of Secretary of State v Neufeld and Howe [2009] EWCA Civ 280, the Court of Appeal stated that whether or not a shareholder/director is an employee of the company is ultimately a question of fact. The Court held that: “In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it, and the mere production of what purports to be a written service agreement may by itself be insufficient to prove the case sought to be made. If the putative employee’s assertion is challenged the court or tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship, for which purpose it will be relevant to know what the parties have done under it.”[22]In a case like the present, where shareholder/directors are claiming to have also been employees, then - per Neufeld - determination of this issue will be informed by two key considerations:(i) whether the putative contract of employment is a genuine contract or a sham; and(ii) whether, if it is a genuine contract, it amounts to a contract of employment (instead of a contract for services for example).[23]In Eaton v Robert Eaton Ltd & Another [1988] ICR 302, (another case about whether or not a director was an employee) the EAT stated that: “Over the years industrial tribunals, the Employment Appeal Tribunal and the Court of Appeal have approached the question whether or not there is a contract of service or an agreement to render services as a self-employed person by looking at various factors and assessing in which direction they point and coming to a conclusion on balance. If industrial tribunals carried out the same process with relation to alleged employment of a director by a company, there would be no grounds for appeal and many attempts to appeal would be stopped in their tracks. Without presuming or intending to lay down principles or guidelines because every case depends on its own facts we have over the years been able to identify some of the factors which crop up in these cases. In the first place industrial tribunals have to bear in mind that generally speaking, a director of a company is the holder of an office and is not in employment: see McMillan v. Guest [1942] A.C. 561 . Evidence is required to establish that a director is employed by a company. Any descriptive term such as managing director or technical director may provide the first indication of employment. Obviously the position of a properly appointed managing director or the so-called working director who draws a weekly wage is one which is more likely to present an arguable case for a contract of employment. In this context the most pertinent question is whether or not there was an agreement to employ a person as managing director which should either be an express contract or minuted at a board meeting or noted by memorandum in writing. This is not conclusive. It may then have to be ascertained whether remuneration is by way of salary or by way of director's fees. If the latter, it points away from employment. Then it might be appropriate to consider whether there was remuneration fixed in advance or merely made on an ad hoc basis. If the latter, this too points away from employment. In some cases remuneration may be identified as gratuitous and not by way of entitlement. Again this would point away from employment. Finally there is the important consideration of the functions actually performed by the director, Was he merely acting in a directorial capacity or was he under the control of the board of directors? An industrial tribunal may not find it necessary to pose all of these questions and they may identify other factors as relevant. It is entirely a matter for the tribunal to approach the problem as it thinks appropriate.”[24]As the second respondent submits, there is no single test for determining whether an individual is an employee within the meaning of section 230(1). Each case depends on its own facts. There is however, an “irreducible minimum without which there can be no contract of employment. The key test for determining whether a contract of service is in existence was set out in Ready-Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2QB 497. In that case it was held that a contract of service exists if three (actually four) 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. [personal service and mutuality of obligation] (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. [control] (iii) The other provisions of the contract are consistent with its being a contract of service.” [other factors] Other factors in a case of this nature may include how the parties themselves described the relationship or the tax treatment of pay. Applying the law to the facts[25]Taking the advice of the EAT In Eaton, I have started with the basic test of employment status and considered it alongside the factors that crop up in this case. Personal service[26]The claimants provided their services personally to the first respondent. This is a point in favour of employee status, though not sufficient on its own. Mutuality of obligation[27]Mutuality of obligation arises where a respondent is under an obligation to provide work and a claimant is under an obligation to do it in return for remuneration. I considered the issue of whether there was mutuality of obligation in this case consistent with a contract of service. Was the first respondent under an obligation to provide work to the claimants and were they under an obligation to do it in return for remuneration or were they holders of an office or principals in business on their own account? Were the payments made to the claimants remuneration for services rendered or payments to them as directors in respect of their office and in the case of the dividends, payments to them as shareholders?[28]As the EAT stated in Eaton: “In the first place industrial tribunals have to bear in mind that generally speaking, a director of a company is the holder of an office and is not in employment: see McMillan v. Guest [1942] A.C. 561 . Evidence is required to establish that a director is employed by a company.” They commented that the position of a properly appointed managing director or working director who draws a weekly wage is more likely to present an arguable case for a contract of employment. The claimants in this case were working directors who drew regular payments from the company and that is a point in favour of employee status. However, the most pertinent question in this context – per Eaton - is whether there was an agreement to employ them as directors which should either be an express contract or minuted at a board meeting or noted by memorandum in writing. No board minutes or memoranda were produced in this case. The claimants did produce written contracts. In Neufeld, the Court held that: “In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it, and the mere production of what purports to be a written service agreement may by itself be insufficient to prove the case sought to be made. If the putative employee’s assertion is challenged the court or tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship, for which purpose it will be relevant to know what the parties have done under it.”[29]With regard to the written contracts of employment produced by the claimants and the question of whether they were genuine (Neufeld) I did have some concerns. It appeared from the first claimant’s contract that the second claimant had signed it on behalf of the company as a director in 2009. However, the Companies House Register (125) states that the second claimant did not become a director until 2012.[30]In any event, whether the documents are what they purport to be or not, they did not (per Eaton) amount to express contracts to employ the claimants as directors. As the first claimant explained in his evidence, they had just used the generic staff contracts and signed them. These contracts were not ‘agreements to employ the claimants as directors’. They did not set out their duties or what was expected of them as directors and the remuneration they would be paid in return. The claimants’ contracts did not state how many hours they were required to work (other than by reference to a rota, which they created themselves). In practice, they decided their own hours and duties. The contracts contained provisions such as: “Any employee wishing to seek a change in the rota must contact the management of Kinch Ltd... the management will consider the request and their verdict will be final.” Such terms were not apposite given that the claimants were the management referred to. The contracts actually produced were not directors’ service agreements and (being generic staff contracts) they did not reflect what the claimants actually did. (I consider their functions below). Thus they did not significantly assist in showing that the claimants were in employment rather than holders of an office.[31]With regard to remuneration and whether it was by salary or directors’ fees (per Eaton), the claimants received a salary which was fixed in advance, rather than ad hoc, which points in favour of employment. However, although a monthly figure is handwritten on the front of each contract, the purported contracts of employment do not contain remuneration terms. Furthermore, the claimants’ pay was well below the National Minimum Wage for the hours they worked, whereas they were clear that the employees of the company were all paid the NMW. As the second respondent submits, under the National Minimum Wage Regulations, company directors, as office holders, are not entitled to receive the NMW for the work they do as an office holder. They are entitled to set their own rate of remuneration. However, if they are also an employee, or a worker (as defined by Section 230 of the Act), then they must be paid the NMW for the work they do as an employee. Finally, on the issue of remuneration, the claimants received monthly dividends as part of their remuneration, suggesting they were office holders. Both these facts point strongly away from the claimants being employees of the first respondent. Control[32]Control includes the power of deciding what should be done, the way in which it should be done, the means to be employed in doing it and the time and place where it should be done. The claimants accepted that they were responsible for the operational aspects of the first respondent’s business. However, the first claimant stated in evidence that Mr Gilbert Kinch was the decision-maker in relation to strategic matters such as the sale of Café GoGo. Paraphrasing Eaton, there is the important consideration of the functions actually performed by the directors, ‘were they merely acting in a directorial capacity or were they under the control of the board of directors?’ I concluded that there was no evidence apart from the claimants’ oral testimony that there was a controlling hand directing them. They stated that Mr Gilbert Kinch took the strategic decisions but Mr Gilbert Kinch resigned as a director in 2022 and at the relevant time (when the company became insolvent) Mr Gilbert Kinch had 30 ordinary shares with voting rights and the second respondent had 40. It is difficult to see how Mr Gilbert Kinch alone could have taken the strategic decision to sell Café Go-Go without involvement of the claimants as directors in the decision and in fairness to the second claimant he said ‘we’ in relation to the taking of this decision. The decision to cease trading was likely to have been required by law once the sale of Café Go-Go fell through, so that may not have been a strategic decision as such. On this point, I did not conclude from the evidence I accepted that the claimants were subject to control consistent with them being employees. I concluded that they were acting in a directorial capacity as masters of their own destiny rather than under the control of a former director or board of directors. Other factors[33]Other factors which may be relevant here are firstly the claimants’ status for tax and National Insurance purposes. They were enrolled under the PAYE system which is typically for employees. However, they also received dividends as shareholders. The claimants received a payment each month under PAYE. This was just on or below the threshold for tax and National Insurance with the result that they paid neither. As Mr Soni submitted, such a low sum does not reflect the legal wage to which an employee would be entitled from an employer. The claimants benefitted from the “optimum director’s salary”, or a threshold near it, in order to take advantage of the most tax-efficient salary for a director to pay themselves. As Mr Soni stated, this is a benefit not afforded to a bona-fide employee of a company, who would not ordinarily have this privilege.[34]With regard to the description attached to the relationship by the claimants, the contracts they provided suggested they were describing themselves as directors from the outset and had the authority to sign contracts on behalf of the company.
Conclusion
[35]The following factors supported the claimants having employee status:(i) they gave personal service to the first respondent;(ii) they were working directors who drew regular payments from the company;(iii) they received a salary which was fixed in advance rather than ad hoc;(iv) part of their remuneration was subject to the PAYE tax system.[36]On the other hand, the following aspects of the relationship between each of the claimants and the first respondent were inconsistent with the claimants being employees under contracts of service for the purposes of section 230 ERA: (v) Per Eaton: “generally speaking, a director of a company is the holder of an office and is not in employment….Evidence is required to establish that a director is employed by a company.” The written agreements the claimants produced were not directors’ service agreements nor were they a true reflection of the claimed employment relationship. They were simply generic pro forma staff contracts containing a number of irrelevant terms. (vi) A factor that weighed strongly against the claimants being employees was their very low rate of pay, which would not have been a legal wage for an employee. As Mr Soni submitted, under the National Minimum Wage Regulations, company directors, as office holders, are not entitled to the NMW for the work they do as an office holder. They are entitled to set their own rate of remuneration. However, if they are also an employee, or a worker (as defined by Section 230 of the Act), then they must be paid the NMW for the work they do as an employee. The claimants’ pay was very substantially below the NMW at the relevant time. Thus it was more akin to payments to directors in respect of their office than remuneration for services rendered. (vii) The claimants received monthly dividends as part of their remuneration. (viii) With regard to control, I concluded for the reasons given above that the claimants were masters of their own destiny rather than under the control of a board of directors or a former director. (ix) Finally, although part of the claimants’ remuneration was under the PAYE system, it was at the “optimum director’s salary”, which is a benefit not normally available to an actual employee of a company.[37]Weighing and balancing the above factors, I concluded on balance that the claimants were holders of an office and in business on their own account. The payments made to them were payments to them as directors in respect of their office and in the case of the dividends, payments to them as shareholders.[38]I have therefore concluded on balance that the claimants were not employees at the date of the first respondent’s insolvency. It follows that the claims are dismissed.