Mr S N Eardley v Waterloo Quay Properties Ltd (In Administration) and Secretary of State for Business and Trade: 4105410/2023 Mr S N Eardley v Waterloo Quay Properties Ltd (In Administration) and Secretary of State for Business and Trade: 4105410/2023
EMPLOYMENT TRIBUNALS (SCOTLAND)
Case No 4105410/2023Venue AberdeenHearing 9 April 2024
Between
Mr Shaun Nigel EardleyClaimantWaterloo Quay Properties Ltd (In Administration) and Secretary of State for Business and TradeRespondent
Before
Employment Judge HendryDate 24 April 2024
JUDGMENT
The Employment Tribunal finds as follows: 1, That the claimant has failed to demonstrate that he was an employee of the limited company, Waterloo Quay Properties Limited at the time of his dismissal 1 August 2023. E.T. Z4 (WR)[2]The claims for arrears of wages and pay in lieu of notice not being well founded are dismissed.
REASONS
[1]The claimant sought a declaration that he was an employee and entitled to a redundancy payment, notice pay and arrears of wages. The claimant had applied to the Redundancy Fund for payment which had been refused. The respondent company is in administration and did not defend the proceedings. However, the Secretary for State was represented at the hearing and opposed the claims.
Evidence
[2]The Tribunal heard evidence from the claimant and from the company’s former HR and Business Operations Manager Mrs Debra Wilson. It had regard to the Joint Bundle of Productions and List of Authorities lodged.
Issues
[3]The principal issue for the Tribunal was whether the claimant, who was a Director of the company and a major shareholder was in reality an employee of the business and entitled to make the claims he has. Facts
Background
[4]The claimant’s background is in the shipping industry which he joined after school. Following a period working for a company who acted as ship’s agents in Norfolk he founded his own company there in 1988 to carry out business as a shipping agent. At that point he became a Director and had 35% of the share capital in this company.[5]The claimant found that he was getting involved in oil related work from the North Sea and on the suggestion of his clients he decided to set up a new company to carry on business from Aberdeen. He ultimately relocated there. This company was called Seletar Shipping (Scotland) Ltd. It was incorporated on 22 November 1993. The claimant had a 40% share in the company. His then wife had 40% of the shares and 10% of them was held by a long serving employee and business associate called Brian Lewis.[6]The claimant’s business in Aberdeen prospered. The company took over a recruitment business (Genisis Recruitment Ltd) in 1998 which it later sold. In also bought property at Aberdeen harbour situated at Waterloo Quay. These were historic (mostly listed) buildings which the company began to refurbish and let out.[7]The claimant was divorced from his wife in about 2009 but she continued to work with him in the business and to be Director of the company. Profits from the sale of the recruitment business and other interests were ploughed into the property at Waterloo Quay. Waterloo Quay Properties Limited[8]The company Seletar Shipping (Scotland) Ltd changed it’s name to Waterloo Properties Limited (“WQPL”) in 2008 to reflect the focus of the business was to be the holding of the properties at Waterloo Quay their renovation, development and leasing.[9]Throughout the period from the company's incorporation 1993 until it went into administration the claimant was a Director of the company. The Managing Director throughout was his former wife Anna Eardley. The claimant continued to hold 40% of the issued shares. His former wife held 40% of the issued shares and Mr Lewis 10%. The claimant worked long hours in the business. He was “hands on”. He regarded himself as an employee. The claimant[10]The claimant gave evidence that an employment contract had been issued to him from outset of him starting work in the company and that it had been agreed that both Directors would be employees. Throughout the course of the period the claimant worked for Seletar (Scotland) Limited latterly WQPL he was says he was entitled to a salary of £75,600 per annum. The claimant regarded himself as an employee subject to the control by the Managing Director and Board. Board meetings were not usually contentious and the three shareholders operated generally by consensus The claimant gave evidence that in relation to a particular project he was outvoted by the other two shareholders on the Board in relation to a particular business project involving the possible development of a film studio.[11]The claimant worked regular hours. These were initially 40 hours per week but latterly it was agreed that he would work the same hours for a shorter period to allow him one day off every fortnight.[12]The claimant had a generous leave entitlement which by 2022 amounted to 74 days per annum.[13]In 2019 the company employed Mrs Debra Wilson who is an HR professional. She was employed in a dual capacity of HR Manager and Business Operations Manager. One of her first tasks was to bring the company’s suite of HR Policies and procedures up-to-date. This included ‘'refreshing” the employment contracts of staff. The employees duly received updated employment contracts shortly after she started. However, the claimant and Mrs Anna Eardley received did not receive statements of their main terms and conditions until August 2022.[14]In preparing the written terms Mrs Wilson obtained information from the Managing Director, Mrs Anna Eardley about the claimant’s continuity of employment, hours, leave and salary and checked this information with him before issuing the terms on or about 3 August 2022 (JBp.127-136). The claimant also received a job description at the same time (JBp. 137-139). Mrs Wilson regarded the claimant as being an employee of the company.[15]The business had been hit by various severe trading difficulties from 2015 onwards that ultimately led to it going into administration. In 2015 there was a dramatic fall in the price of oil. This led to widespread business disruption, a marked slowdown in oil related work, cancellation of projects, retrenchment and numerous redundancies in Aberdeen. WQPL who had been leasing out their portfolio of office premises had made a profit of £795,000 in the financial year to 30 November 2014 but by the following year profit was cut to £9,000. In the year 2016 the company made a loss of £1,725,000. Vigorous attempts were made to stem the losses. The company still had a healthy capital position at that point although the value of the properties began to erode.[16]As a result of the company’s financial position both the claimant and his former wife put money into the business by way of director’s loans. At one point these stood at approximately £600,000 each.[17]In 2018 the company's financial position still remained difficult. The value of properties they owned had markedly decreased. They owed significant monies to their lenders and rental income was drying up. On the advice of their accountants they were told to cut costs as much as they could. The claimant and his former wife agreed not to take their full salaries and latterly to pay themselves £12,000 per year as a Director’s salary. This salary would be subject to PAYE and Income. It was agreed that the balance making up their remuneration to £75,600 would be satisfied by payment of a balancing sum (repayment) from the director’s lean account. The claimant and Mrs Eardley received other benefits such as healthcare insurance and death in service cover. The claimant did not receive any such repayment for the months of May and June 2023.[18]WQPL went into administration on the 20 July 2023, The claimant was dismissed on the grounds of redundancy on the 1 August 2023.[19]The claimant’s P60, for the tax year to 5 April 2021 shows a taxable income of £8,628. For the following year 5 April 2022 the sum of £12,592.50 is shown and for the following year to 5 April 2023 the sum of £12,600. The claimant received a payslip on 31 May 2023 (p.144) having a salary rate of £1050, on 30 June (p.145) his payslip showed a salary of £1050 and in July a monthly salary of £6,300. The final payslip was issued by the Administrators based on the salary of £75,600.[20]Bank transactions with the company bankers, the Royal Bank of Scotland throughout July 2022 show the claimant receiving payments as a Director of £5,250. Mrs Eardley received a director’s payment of £5,050. The claimant prepared a table (p.220) for the RPS showing what he described as basic contractual salary paid on 2080 hours worked per annum and corresponding payments paid from Director’s loan accounts for those years. He did this to demonstrate that he had been paid in excess of the minimum wage.
Evidence
[21]I found Mrs Wilson generally a credible and reliable witness who gave her evidence in a straightforward manner. I had some doubts, however, about her explanation as to why it took a couple of years to put in place new contracts for the Managing Director and the claimant. She joined in 2019 and had as one of her first tasks to issue “refreshed” contracts. She said that she was very busy and that after the employee contracts were done the various elements of the claimant’s and MD’s contracts had to be checked with them. The implication I took from this was that there were no readily available recorded contract information available to her with for example the claimant’s salary, holidays etc. This cast some doubt on the claimant’s evidence which I understood to be that he had a written contract in place throughout his period as a Director.[22]If the exercise was just to make sure the employment contracts reflected current good practice then it should have been a simple and speedy exercise to bring them up to date. It seems a little odd if the claimant had been working under the same terms and conditions for many years that the exercise was not completed very quickly.[23]Much of the claimants evidence about the business background I accepted as wholly reliable and truthful. He was at pains to indicate that he regarded himself as an employee and that he worked long hours building up his business and trying unsuccessfully to save it in the face of repeated economic travails. However, as noted above he had indicated that he had always had an employment contract but no earlier iteration of such a contract was produced. Neither were any Board Minutes produced which recorded agreement about changes to remuneration practice. I am not convinced that the claimant’s evidence can be relied on in respect to this matter. Submissions[24]Mr Eardley’s position was that I should accept his evidence and that of Ms Wilson, who also regarded him as an employee, and that he should be entitled as an employee to apply to the Redundancy Fund for relief. He conceded that the claim for Notice should be withdrawn having accepted that following the administration he had carried out work for the Administrators and been paid for this and that the consequence was that any payment in lieu would have been satisfied through these payments. He also conceded that an agreement had been reached in 2018 to forego his full salary and in these circumstances it was unclear the basis he had for reverting to a full salary for May and June other than in expectation that it might be paid by the Redundancy Fund.[25]Mr Soni referred back to the grounds of resistance and to Section 182 of the Employment Rights Act 1996 (“ERA”). He accepted that the company was insolvent. He accepted that there was no legal bar to a Director also being an employee. The respondent did not accept that the claimant was in reality an employee. The arrangements under which he was paid was unusual and not the sort of arrangements that were normal in an employer/employee relationship. He referred to the claimant’s application for relief (pl 02/103) and the unpaid wages being claimed for the two months before the administration in May and June. The payments made to the claimant were inconsistent with the written contract that had been produced. There was no evidence of what would happen to the unpaid elements of the salary and when the arrears would be paid. It seemed that the claimant and the MD accepted that these sums were irrecoverable. If the Tribunal held that the claimant was an employee then Mr Soni’s position was that the salary must be what was “put though the books” and that was below the minimum wage.[26]The issue is whether the claimant had a contract of employment with the respondent company. The fact that he was a major shareholder and Director does not mean that he could not be an employee.[27]The starting point is Section 230(1) of the Employment Rights Act 1996 which gives the statutory definition of employee. The section defines an employee as an individual who has entered into or works under a contract of employment. However, there is no definitive definition of what a contract of employment is and various tests for what constitutes a contract of employment have been proposed though the years by higher courts.[28]The definition of a contract of employment set out in the case of Ready Mixed Concrete case is as follows (MacKenna J at page 555): "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. (Hi) The other provisions of the contract are consistent with its being a contract of service."[29]The second part of the definition makes reference to what has become known as the “control test’. This is elaborated upon later in the case: ", . . Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted...”[30]In the Court of Appeal case of Neufeldv Secretary ofState for BERR (2009) EWCA Civ 280 it was said that: “80. There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee of the company under a contract of employment. There is also no reason in principle why someone whose shareholding in the company gives him control of it - even total control (as in Lee's case) - cannot be an employee. In short, a person whose economic interest in a company and its busi- ness means that he is in practice properly to be regarded as their 'owner' can also be an employee of the company. It will, in particular, be no answer to his claim to be such an employee to argue that:(i) the extent of his control of the company means that the control con- dition of a contract of employment cannot be satisfied; or(ii) that the practical control he has over his own destiny - including that he can- not be dismissed from his employment except with his consent - has the effect in law that he cannot be an employee at all. Point (i) is answered by Lee's case, which decided that the relevant control is in the company; point (ii) is answered by this court's rejection in Bottrill of the reasoning in Buchan ”[31]In principle therefore there could be a contract of employment between claimant and WQPL. It does not, however, follow that such a contract existed. Whether there was a contract between a shareholder/director and the company, and if so whether it was a contract of employment, is to be decided by the application of ordinary legal principles. In Neufeld Rimer LJ said at paragraph 85: "85. In deciding whether a valid contract of employment was in existence, consideration will have to be given to the requisite conditions for the cre- ation 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."[32]The difficulty is in applying the legal principles to the factual position that is before me and I have not found that a straightforward task. I was referred by Mr Soni to the case of Dugdale v DDE Law Limited (UKEAT/0169/16/LA). In that case the two Directors did not enter into any express written or oral employment contracts. They would take money from the business as and when it could support them doing so. They also received a small sum each month described as Director’s remuneration which was set just at the threshold for tax. It was held that this was not compatible with employee status.[33]In relation to WQPL the earliest documentation showing the arrangement seems to be the P&L Account for the year ended 31 November 2021 which was lodged showing “Director’s remuneration” of £22537. If this refers, as I understood it, to the two Directors, the claimant and Mrs Anna Eardley this is possibly consistent with each getting paid up to the tax threshold at that time.[34]I appreciate that in this case the claimant says there was an agreement regarding his employment contract and a written document was prepared in 2022 but the arrangements he had with WQPL appear similar to those discussed in Dugdale.[35]The claimant gave evidence that an employment contract had been issued to him from outset of him starting work in 1993 and that it had been agreed that both Directors would be employees. This contract was not produced. The MD’s contract was not produced. No Board Minutes recording such arrangement or acknowledging that the claimant was an employee were produced. I heard no explanation as to how the sums that were paid under the arrangement proposed by the accountant in 2018 were arrived at or what was to happen, if anything, to the salary that was foregone. It had been suggested by the accountants that this arrangement would both save money and make the ‘books” look better, no doubt, because expenditure on wages would fall and by repaying some of the Directors loans the indebtedness of the business would be improved. The sums chosen are set at about the tax threshold for income tax.[36]In passing ! would observe that other possibly corroborative documents were not lodged (pay slips or accounts) evidencing what the position was before 2018 when I assume the claimant was getting paid his full salary and when the company was in less difficulty.[37]Returning to the case of Dugdale the Employment Judge in that case examined the issue of the claimants remuneration. Remuneration being a crucial part of an employee’s contract. As reported he said this: "39. Looking at the way in which the claimant was remunerated, reference is made above to the "notional” salary "paid” in one month only for tax purposes, seemingly without the knowledge of the claimant, and the fact that she took regular monthly loans from the company which were later converted into dividends as far as the level of profit allowed. I have no reason to believe that the claimant was treated differently from the other directors with regard to remuneration but in my judgment this is not the way that an employee would be paid particularly with no PAYE tax being deducted and when it was at a rate less than the National Minimum Wage. I am aware that the NMW regulations do not apply to company directors. It seems to me that the way in which the claimant received payment from the respondent was similar to the way in which a partner in a firm would receive money with monthly drawings pending the determination of profit at the end of the year although in this case there was a fixed payment, like a director's fee, coupled with the monthly loan.[40]The fact that a payslip was prepared in the name of the claimant in only one month and that she did not know about it does not seem to me to be sufficient to make the claimant an employee, when there is evidence to the effect that that was merely a device to use up the personal allowances of the directors during each tax year.[41]Mr Pinder's submission that variations to pay were by agreement between the directors does not seem to me to be consistent with the claimant working under a contract of employment. If she and the other directors were employees and paid a regular salary then they would normally have been entitled to their monthly salary in full. There would have been certainty of monthly income for an employee not a variable amount dependent on available cash flow."38. The way the claimant was paid and whether it was consistent with him being an employee was a crucial issue in this case. As I noted earlier the claimant did not produce payslips covering earlier periods other than those in the Joint Bundle which cover May, June and July 2023. What is produced is the P60 (page 141) for 2021 showing earnings of £8628 and no deductions for tax. The next P60 for the year to 5 April 2022 shows taxable income of £12592.50 and the next P60 covering the period to 5 April 2023 the sum of £12600. The final Payslip before Administration (page 145) shows gross pay to the end of June being £3150 which is consistent with a notional salary of about £12000 per annum just below the tax threshold. To be fair to the claimant he also produced a Payslip from the Administrators (page 146) and this seems to suggest that they had accepted that he should be paid on the basis of a salary of £6000 per month broadly £75,600 per year. I do not place much weight on this. No one gave evidence from the Administrators as to where this sum came from but I accept the claimant’s evidence that they accepted he should be paid in accordance with the salary of £75,600 set out in the stament of terms and conditions he produced. The claimant had mentioned in evidence that he had worked on at their request at an agreed day rate reflective of this salary.39. The position taken by Mr Soni was that the sums that were shown were below the Minimum Wage requirements. The claimant disputed this pointing to the hours he worked and referencing all the benefits he received. Focussing on these payments alone it seems clear that if as claimed the claimant worked 2080 hours per year that falls below the Minimum Wage requirements which on the same hours would generate a salary in excess of £20,000. The benefits set out in the ET1 (Medical Insurance etc) would not alter this.40. Mr Soni had also pointed to the apparent inconsistencies between the Accounts (page 88) showing Director’s remuneration of £22,000 (the claimant’s share being £11,000) and the apparent agreement to put a salary of £12,000 down as income. If this was the only apparent inconsistency I might not place too much weight on alone but it is part of a picture where the agreed remuneration seems somewhat vague. There was, he submitted, no Board Minute acknowledging the claimant’s employment status or recording the agreement to only pay certain sums as salary. The 2009 accounts seem to record Director’s remuneration as £33752 for the year ended 2009 as £33,752 and then £204,592 for the previous year. This is difficult to reconcile with the claimant’s evidence that he was on a salary of £75,500 and an employee throughout the whole of his employment. 41. It is clear from the bank records that both Directors regularly took about £1000 a month in ’wages’ and about £5000 in repayment of Director’s loan to reflect an overall remuneration of about £75,600. These are arrangement that simply do not sit well with the assertion that they were employees.[42]Looking at all the evidence produced I am just not satisfied that the claimant has demonstrated that he was an employee at the relevant time. I am also conscious that someone’s status/relationship in a company can change such was the situation that occurred in the case of Mr Rajah (Rajah v Secretary for State (1995) EAT/125/95) where the Tribunal found that towards the end of the company’s existence he could not be said to be an employee. The timing of the written statement of terms and conditions in 2022 seems odd and it does not fit in with the revision of contracts in 2019. in addition the salary of £75,600 was not being paid and at that point it makes no reference to this or to any arrangement of being repaid Director’s loans to make up the difference. As noted earlier there was no recorded arrangement as to how the balance of the salary would be paid if ever perhaps when things improved. These arrangements are not in my view consistent with there being an employment contract in place and the claim must fail.[43]As the claimant is not an employee he is not entitled to payment of notice and even if he was he accepted that there was no loss given his engagement by the Administrators. The claim for arrears of pay also falls as the claimant was not an employee nor in any event has he demonstrated that he was entitled to any sum above the salary he was actually paid.