Mr N Gill v Secretary of State for Business and Trade and Zenlo Ltd: 6003343/2024
EMPLOYMENT TRIBUNALS
Case No 6003343/2024
Between
Mr N GillClaimantSecretary of State for Business and Trade and Zenlo LtdRespondent
Before
Employment Judge A BealeIn person for claimantDate 13 May 2025
JUDGMENT
The First Respondent is ordered to pay to the Claimant the following gross sums:[1]The sum of £2,572 in respect of arrears of wages (from which income tax and national insurance will fall to be deducted).[2]The sum of £11,574 as a statutory redundancy payment.[3]The sum of £7,716 in respect of notice pay (from which income tax and national insurance will fall to be deducted).[4]The sum of £2,015.16 in respect of accrued holiday pay (from which income tax and national insurance will fall to be deducted).
REASONS
[1]The Claimant pursues claims for payment from the National Insurance Fund under the provisions of sections 166 and/or 182 of the Employment Rights Act 1996, specifically, redundancy pay, arrears of wages, holiday pay and notice pay.[2]There is no dispute that the company by whom the Claimant contends he was employed, Zenlo Limited (R2) is insolvent within the meaning of the relevant sections of the 1996 Act. R2 has played no part in these proceedings. However, the Secretary of State, hereafter referred to as the Respondent, disputes that the Claimant was an employee of R2 within the meaning of s. 230 ERA 1996. Further, there is a dispute as to the sums payable in the event that the Claimant is found to have been an employee.[3]In order to determine these questions, I was provided with a bundle in two parts, which together totalled 265 pages and included a statement from the Claimant and a bundle of authorities from the Respondent. I heard evidence on oath from the Claimant and submissions from both parties. Factual Background[4]R2 was a company established by the Claimant and his fellow director (in later years) Malcolm McIlhagga. Initially, it was a partnership. The Claimant became a partner, with Mr McIlhagga, on 1 July 2008.[5]Perhaps understandably, as it was a long time ago, there was very little information before me about how the business operated when it was a partnership. The Claimant said that the partnership had employees and did similar work to when it became a limited company. When specifically asked how he and Mr McIlhagga were paid, he said he thought it was the same way as always, a mix of PAYE and dividend. However, he later accepted that he could not remember, as he had not been in charge of finances at that point.[6]On 1 April 2011, R2 was incorporated as a limited company. The Claimant became a director of the company along with Mr McIlhagga. Both of them had a 50% shareholding and they comprised the Board of the company. This remained the position throughout the lifetime of R2.[7]R2 was primarily a retail organisation, buying and selling goods through a variety of points of sale over the internet, both in the UK and in Europe. Mr McIlhagga also had software expertise and this was deployed both in developing R2’s platforms, and in developing products which were sold by R2. At the point of liquidation, the company had around 18 employees.[8]The Claimant explained in cross-examination that he always worked a 40 hour, 5 day week. Although there is information to the contrary in one of the questionnaires provided to the Respondent, there is also an email from the liquidators, Parker Andrews, confirming that the figure given on that questionnaire of 35 hours per week was included in error as the default number on their system. I accept the Claimant’s evidence as to his working hours.[9]The Claimant performed a number of roles for R2. According to information on the company intranet, this included acting as Operations Director, Purchasing Manager, Customer Service Manager and operative, Operations Manager, Sales Manager, Account Relationship Manager, Financial Director, Finance Officer, Compliance Officer and Company Secretary. The Claimant’s evidence was that, as well as carrying out a strategic leadership role in the company (including Board meetings with Mr McIlhagga), he also carried out the day-to-day running of the retail side of the enterprise. This included, from time to time, helping to fulfil the orders himself. He painted a picture whereby he would “muck in” alongside all the other employees to ensure the orders were fulfilled.[10]The Claimant was part of R2’s holiday rota. He had a 28 day holiday entitlement. He could not take holiday at the same time as anyone else in the management team. There are several emails demonstrating that he asked Mr McIlhagga whether he could take holiday on particular dates before booking it (see e.g. bundle p. 248).[11]On 25 February 2022, along with all other individuals working for R2, the Claimant was issued with a document stating it set out the fundamentals of his employment relationship with R2. The Claimant had not previously had any written terms and conditions of employment. His date of commencement of employment was said to be 1 July 2008. His rate of pay was described as £757 PAYE plus £2380.94 dividend per month as of the date of the letter. His notice period was 3 months, his hours of work 8 hours per day Monday – Friday. His holiday entitlement was 28 days including bank holidays. The contract set out training he was required to undergo, and referred to a sickness policy, a disciplinary and grievance policy and automatic enrolment in the statutory pension scheme.[12]I have been supplied with P60 certificates which show the following amounts: 5/4/21 - £8784 (no income tax or national insurance payable) 5/4/22 - £8853 (as above) 5/4/23 - £9084 5/4/24 - £20,372.49, on which tax of £1951 and NI of £897.29 were payable.[13]The accounts for R2 show that, in March 2023, the Claimant was paid £757 in PAYE and £5,130.94 from the Directors’ Loan Account. In April, the payments were £2,630.94 and £1,031.10 respectively. In May 2023, £1030.90 and £2880.94 respectively. In June, PAYE was £1031.10 and the Directors’ Loan amount the same as in May. These amounts then remained broadly consistent throughout the year, with variations of a few pounds. In August and September, the PAYE was around £1010, although the Directors’ Loan amount remained the same. In November and December 2023, the PAYE remained £1010, but the Directors’ Loan amount fell to £2380.94. In January 2024, the Claimant’s payslip shows salary of £6,007.36 gross, with a net figure of £4,522.74. In February 2024, the salary was £4,937.63, but £1,306 was recorded as already paid. The net figure was £2,122.37.[14]The Claimant explained in his statement and in cross-examination that the arrangement throughout R2’s existence had been that, on the advice of the company’s accountants, he and Mr McIlhagga would be paid a relatively small salary (below the tax threshold) as PAYE, and then a fixed amount in dividends. Sometimes dividends would be paid over and above the “salary” amount. This is largely borne out by the bank statements referred to above, although the amounts paid in dividends do seem to have fluctuated somewhat. Dividends were declared on profits, and then paid into the Directors’ Loan account, and the appropriate sum would then be paid out to the Claimant and Mr McIlhagga each month.[15]By January 2024, however, the last declared dividends had all been paid out, and there were no profits on which a dividend could be declared. From that point onwards, as shown in the payslips, the full amount of the Claimant’s “salary” was paid as PAYE and he was taxed on it accordingly.[16]The Claimant’s evidence was that he was not paid anything for the month of March 2024. At the time his employment ended he had 15.67 days of holiday remaining. He was not cross-examined on this evidence.[17]There is no dispute that R2 entered into Creditors’ Voluntary Liquidation on 28 March 2024. The appointed liquidator was Ms Grace Jones of Parker Andrews Ltd.[18]The Claimant’s date of birth is 30 June 1963 and he was therefore aged 60 as at 28 March 2024, the date of liquidation and (if he was an employee) termination.[19]The Claimant submitted a claim to the Insolvency Service for a redundancy payment, unpaid wages, notice pay and holiday pay on 9 April 2024. This claim was rejected on 25 April 2024, on the basis that the Claimant was not an employee. The Claimant subsequently made the present claim to the ET on 5 June 2024.
The Issues
[20]The issues for determination are:20.1 whether the Claimant was an employee within the meaning of s. 230 ERA 1996;20.2 if so, whether the Claimant is entitled to:20.2.1 a redundancy payment;20.2.2 unpaid wages;20.2.3 holiday pay; and/or20.2.4 notice pay, and if so, in what sum.[21]Section 166 of the Employment Rights Act 1996 (“ERA 1996”) provides: “(1) Where an employee claims that his employer is liable to pay him an employer’s payment and either…(b) that the employer is insolvent and the whole or part of the payment remains unpaid, the employee may apply to the Secretary of State for a payment under this section.(2) In this Part “employer’s payment” in relation to an employee, means- (a) a redundancy payment which his employer is liable to pay to him under this Part,[22]Section 182 ERA 1996 provides If on an application made to him in writing by an employee, the Secretary of State is satisfied that(a) the employee’s employer has become insolvent,(b) the employee’s employment has been terminated, and(c) on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies, the Secretary of State shall, subject to section 186, pay the Employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt.[23]Section 184 ERA 1996 applies section 182 to arrears of pay; accrued holiday pay and statutory notice pay, subject to maximum amounts.[24]Section 230 ERA 1996 provides:(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… (4) In this Act “employer”, in relation to an employee or a worker, means the person by whom the employee or worker is (or where the employment has ceased, was) employed. (5) In this Act “employment” – (a) in relation to an employee, means (except for the purposes of section 171) employment under a contract of employment…”[25]Sections 170 and 188 ERA 1996 give the Employment Tribunal the power to determine any question of liability regarding the payments referred to in sections 166 and 182.[26]The Working Time Regulations 1998 (“WTR 1998”) provide for the entitlement to annual leave in regulations 13 and 13A and for payment for any accrued but untaken annual leave on termination of employment under regulation 14.[27]Regulation 13(16) WTR 1998 provides (inter alia) that, where in any leave year an employer fails to (c) inform the worker that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost, subparagraph 17 will apply. Reg 13(17) provides that, where that sub-paragraph applies, the worker is entitled to carry forward any leave to which they are entitled under this regulation which is untaken in that leave year or has been taken but not paid in accordance with regulation 16. Regulation 13A(7) provides that a relevant agreement may provide for any leave to which a worker is entitled under this regulation (i.e. additional annual leave under reg 13A(1) and (2)) to be carried forward into the leave year immediately following the leave year in respect of which it is due. Regulation 14(6) provides that, where a worker’s employment is terminated, and on the termination date the worker remains entitled to leave in respect of any previous leave year which carried forward under regulation 13(17) or regulation 13A(7), the employer shall make the worker a payment in lieu of leave equal to the sum due under regulation 16 for the period of untaken leave.[28]To be entitled to claim under sections 166 and 182 ERA 1996, it must be established that the claimant was an “employee” as defined under the ERA. This means that there must be a contract of employment in place. As set out above, this was the central issue in the present case.[29]Guidance on the factors to be considered in determining whether or not there is a contract of employment in place was set out in Ready Mixed Concrete v Minister of Pensions and National Insurance [1968] 2 QB 497. This is a threefold test. Firstly, there must be mutuality of obligation whereby an individual agrees to provide their own work and skill in exchange for remuneration. Secondly, the individual must have agreed expressly or impliedly to be subject to a sufficient degree of control for the relationship to be one of master and servant. Thirdly, the other terms of the contract must be consistent with it being a contract of employment.[30]The issue of control is more problematic in circumstances where the employer is a limited company subject to the control of the “employee” as a shareholder and director – as applies in this case.[31]That issue arose in Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] IRLR 475, where directors of two separate companies who also held a controlling shareholding sought payments from the Insolvency Service when their businesses went into liquidation. The Court of Appeal held that there was no reason in principle why someone whose shareholding in the company gives him control, even total control, cannot be an employee. In arriving at its decision, the Court of Appeal reviewed a number of earlier authorities on this issue, including the guidance provided by Elias J in Clark -v- Clark Construction Initiatives Ltd 2008 IRLR 364, which was as follows (see paragraph 78): “How should a tribunal approach the task of determining whether the contract of employment should be given effect or not? We would suggest that a consideration of the following factors, whilst not exhaustive, may be of assistance:(1) Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee: he has on the face of it earned the right to take advantage of the benefits which employees may derive from such payments.(2) The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising. Nor does the fact that he is [in] practice able to exercise real or sole control over what the company does (Lee).(3) Similarly, the fact that he is an entrepreneur, or has built the company up, or will profit from its success, will not be factors militating against a finding that there is a contract in place. Indeed, any controlling shareholder will inevitably benefit from the company’s success, as will many employees with share options schemes (Connolly).(4) If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding. For example, this would be so if the individual works the hours stipulated or does not take more than the stipulated holidays.(5) Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described in para 96) or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.(6) In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing (Fleming). This will be powerful evidence that the contract was not really intended to regulate the relationship in any way.(7) The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight. There is nothing intrinsically inconsistent in a person who is an employee doing these things. Indeed, in many small companies, it will be necessary for the controlling shareholder personally to give bank guarantees precisely because the company assets are small and no funding will be forthcoming without them. It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contract of employment.(8) Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that that fact alone will ever justify a tribunal in finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected. The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee but of itself that fact alone does not resolve these doubts one way or another.[32]The Court of Appeal in Neufeld endorsed this guidance and also added some observations of its own (see 79 - 90). In particular, it made the following relevant comments at paragraphs 84 – 6 of the judgment:84. In a case where no allegation of sham is raised, or in which the claimant proves that no question of sham arises, the question for the court or tribunal will be whether the claimed contract amounts to a true contract of employment. As we have indicated, given that the critical question in cases such as those under appeal is as to whether the putative employee was an employee at the time of the company’s insolvency, it will or may be necessary to inquire into what has been done under the claimed contract: there will or may therefore need to be the like inquiry as in cases in which an allegation of sham is made. In order for the employee to make good his case, it may well be insufficient merely to place reliance on a written contract made, say, five years earlier. The tribunal will want to know that the claimed contract, perhaps as subsequently varied, was still in place at the time of the insolvency.85. In deciding whether a valid contract of employment was in existence, consideration will have to be given to the requisite conditions for the creation of such a contract and the court or tribunal will want to be satisfied that the contract meets them. In Lee's case the position was ostensibly clear on the documents, with the only contentious issue being in relation to the control condition of a contract of employment. In some cases there will be a formal service agreement. Failing that, there may be a minute of a board meeting or a memorandum dealing with the matter. But in many cases involving small companies, with their control being in the hands of perhaps just one or two director/shareholders, the handling of such matters may have been dealt with informally and it may be a difficult question as to whether or not the correct inference from the facts is that the putative employee was, as claimed, truly an employee. In particular, a director of a company is the holder of an office and will not, merely by virtue of such office, be an employee: the putative employee will have to prove more than his appointment as a director. It will be relevant to consider how he has been paid. Has he been paid a salary, which points towards employment? Or merely by way of director's fees, which points away from it? In considering what the putative employee was actually doing, it will also be relevant to consider whether he was acting merely in his capacity as a director of the company; or whether he was acting as an employee. 86 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.[33]As well as the cases cited above, I was referred to Autoclenz Ltd v Belcher and Rainford v Dorset Aquatics Ltd EA-2020-00123-BA. I have reviewed and had regard to the principles in each of those cases. Conclusions Was the Claimant an Employee?
Conclusions
[34]I did not understand Mr Soni to be contending that the contract of employment in this case was a “sham” (although he did make the point that there were no written terms and conditions or particulars of employment prior to February 2022); rather that the contract was not one of employment. His principal argument on this point was that in reality, both the Claimant and Mr McIlhagga were paid as directors, in dividends, and not as employees. Their salaries as employees did not meet the national minimum wage, which indicated they were not being paid as employees.[35]Considering then the three factors identified in Ready Mixed Concrete, and starting with mutuality of obligation, I am satisfied that the requisite mutuality existed in this case. The Claimant worked a regular 40 hour, 5 day week for R2. This included not only leadership duties, but also mucking in with the day-to-day work of the company. There was no question that he had to provide these services personally; he was effectively the leader of the retail side of the company. The Claimant was not permitted to take holiday whenever he wished and was part of the company rota as demonstrated in the documents before me; he also asked Mr McIlhagga to be permitted to take holiday.[36]In exchange for this he was paid a regular amount in PAYE salary and “dividends” (as set out in the written employment particulars, with a set amount for each), albeit that this structure seems to have been to ensure tax efficiency, not only for the Claimant but also for the company. It is clear from Neufeld that the decision to structure his affairs in this way does not necessarily negate the existence of mutuality or an employment relationship, although it may be a relevant factor to take into account. I accept that other dividends were from time to time paid on top of this regular amount, perhaps more in line with a pure director arrangement, but that does not in itself undermine the existence of an employer/employee relationship. Having heard the Claimant’s explanation of how the company worked, I am satisfied that, had he simply not turned up to work one day, he would have been subjected to questioning and potential disciplinary action from Mr McIlhagga. The Claimant was paid for doing the work that he did as an employee, rather than merely taking a share of profits as a director. The factual set-up was in this respect similar to the circumstances found to amount to employment in the case of Morgan discussed by the EAT in Dugdale v DDE Law Ltd UKEAT/0169/16/LA, 4 July 2017, at paragraphs 44 – 45.[37]Moving to the issue of control, it is clear from Neufeld that even a one-man company can “control” that single man; as the question is whether the company exercises the requisite control over the putative employee. As the CA said in Neufeld, if the control necessary for the claimed contract of service is exercisable by the company, it makes no difference that in practice control will be exercised by the claimant as the company’s agent. The present case is in any event not one of a one-man company and it is clear that control of the Claimant was exercised by the company to a limited extent; e.g. in relation to holiday as set out above.[38]As a sense-check, I have compared this case to the Rainford case, which Mr Soni argued was similar. I do not agree that the cases are similar on their facts. As is apparent on a review of the facts in Rainford, the arrangement there was much looser; there was no written contract, the putative “employee” was able to vary the amount of time he devoted to the business and was not controlled in the same way with regard to holidays. The remuneration arrangements also appear to have been significantly looser.[39]Turning finally to whether there are other factors pointing away from employment, I note that there was no written contract prior to 25 February 2022, but I consider that this contract genuinely reflected the position from 1 April 2011 onwards (but not before; see further below). I accept that the Claimant was paid under the tax threshold via “PAYE” and the rest via dividends but as set out above, that is not determinative of employee status – further, this arrangement changed in the last few months of his employment so he was paid entirely on a PAYE basis. The general set-up under which the Claimant worked was entirely consistent with an employment relationship.[40]I therefore conclude that, as at the date of insolvency, the Claimant was an employee. I conclude also that this reflected the relationship going back to 1 April 2011 when R2 was incorporated. However, I do not have sufficient evidence to find that the Claimant was an employee before that date. His evidence in relation to the financial arrangements prior to incorporation was, understandably, very vague. There are no contractual documents from that period and it is entirely unclear to me whether any monies paid to the Claimant were as a partner or as an employee. The burden of proof lies on the Claimant in relation to that period, and he has not satisfied me that, at that time, he was operating as an employee. Amount of payments[41]The principal issue between the parties on this point is whether the Claimant should be paid(a) in accordance with the PAYE salary amounts recorded in his P60s;(b) in accordance with such sums as he was paid in the final months of his employment; or(c) in accordance with the national minimum wage. I believe the latter was the argument advanced by Mr Soni (in the event that his primary submission that the Claimant was not an employee failed), taking into account the fact that the figures paid to the Claimant in his P60 forms prior to 2024 did not meet the national minimum wage.[42]I first considered Mr Soni’s argument in relation to the national minimum wage. I understood him to be saying, in oral argument, that if I were to find that the Claimant was an employee, payments under s. 166 and 182 ERA 1996 would have to be calculated on the basis of the minimum wage, as an employee has to be paid the minimum wage. I do not accept that argument. It is not in line with the decisions cited in Dugdale, particularly Morgan, which make it clear that remuneration may be paid to an employee director in part by way of dividend. As the Claimant pointed out in his submissions, although an employee must be paid the national minimum wage, there is no provision in the National Minimum Wage Act 1998 that this must be paid via PAYE. Mr Soni raises the point that, if the Claimant was receiving dividends as part of his employee salary, there may be tax implications. That is not a matter for me to determine.[43]Having dismissed that argument, I have had regard to the provisions of s. 221 ERA 1996 in trying to determine the appropriate weekly figure, which has not been an easy task. In particular, I have had regard to s. 221(2), which provides that: “Subject to section 222, if the employee’s remuneration for employment in normal working hours (whether by the hour or week or other period) does not vary with the amount of work done in the period, the amount of a week’s pay is the amount which is payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week.”[44]The Claimant argues that the figure should be based on the final 12 weeks of his employment, and has included hypothetical full pay for March at the average rate paid in February 2024 in making that calculation, which results in a figure of £1221.74 per week. I do not accept that this is right. The Claimant was paid varying figures in January and February (including what appears to have been an advance in one of the two months), but his written particulars of employment entitled him to a fixed amount in “salary” and “dividends” each month. In 2022, those figures were set out above; by December 2023 (the last normally paid month) they totalled £3,390.94. That equates to weekly pay of £782.52. I consider that this is the correct amount that should have been paid for January, February and March 2024, when the Claimant was being paid entirely through salary for the reasons given above.[45]That figure is above the statutory maximum for claims under s. 166 and s. 182 ERA 1996, which was at the relevant time, £643.[46]I therefore conclude that the Claimant should be paid the following gross amounts:(a) Arrears of pay from 1 – 28 March, which I award as 4 weeks’ pay. I do not accept the Claimant’s argument that “parts of weeks” should be counted as a full week and thus that he should be paid for 5 weeks (the page linked to by the Claimant does not support this argument), and in any event, the period comprises 4 full weeks. The appropriate sum is 4 x £643 = £2,572.(b) Redundancy pay: based on my finding that he was not an employee before 1 April 2011, the Claimant was employed for 12 full years. As he was 60 at the date of termination, those years fall to be paid at 1.5 x the maximum per week. The sum payable is therefore 1.5 x £643 x 12 = £11,574.(c) Notice pay: 12 weeks is the statutory maximum, so the calculation is £643 x 12 = £7,716.(d) Holiday pay: the unchallenged figure of 15.67 days equates to 3.134 weeks, so the calculation is £643 x 3.134 =£2015.16. Although the number of outstanding days was not challenged by Mr Soni, I note for completeness that it includes days rolled over from the previous holiday year, which the Claimant was entitled to include in his accrued holiday on the basis of the provisions set out at paragraph 27 above.[47]I therefore make a total award of £23,877.16 gross, from which any income tax of national insurance (in respect of items (a), (c) and (d) above) falls to be deducted.