MR T SMITH v SECRETARY OF STATE FOR TRADE & INDUSTRY [1999] UKEAT 741_97_1110

EMPLOYMENT APPEAL TRIBUNAL
BAILII case number: [1999] UKEAT 741_97_1110Case No Appeal No. EAT/741/97Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS
Between
MR T SMITHAPPELLANTSECRETARY OF STATE FOR TRADE & INDUSTRYRESPONDENT
Before
Mr Justice MorisonDate 11 October 1999
[1]APPEARANCES For the Appellant MR M KALLIPETIS QC Instructed by: Mr H Duggan (Solicitor) For the Respondent MS J EADY (of Counsel) Instructed by: Miss L Nicholl (Solicitor) The Treasury Solicitor Queen Anne's Chambers 28 The Broadway London SW1H 9JS MR R ALLEN QC (Amicus Curiae) Assisted by: Mr D Squires MR JUSTICE MORISON: This is an appeal against a decision of an Employment Tribunal which determined that the applicant, Mr Smith, was not entitled to recover from the Secretary of State [for Trade and Industry] a redundancy payment under section 166 of the Employment Rights Act 1996 ['the Act']. An employee of a company which becomes insolvent has statutory rights to recover specified unpaid debts from a fund administered by the Secretary of State. In this case, Mr Smith was the sole director and controlling shareholder of his company. Largely for that reason, and, in reliance upon the decision of the EAT in Buchan & Ivey v Secretary of State for Employment [1997] IRLR 80 , the Secretary of State contended that Mr Smith was not an employee. That contention was upheld by the Employment Tribunal. Mr Smith appealed.[2]Meanwhile, following a decision of the Court of Session, the EAT re-considered the position of director/shareholders in the case of Bottrill v Secretary of State . An application by the Secretary of State for leave to appeal to the Court of Appeal was granted, if not encouraged, because it had become clear that there were two distinct lines of authority which could not readily, if at all, be reconciled. By their decision, the Court of Appeal supported the Scottish approach, and dismissed the Secretary of State's appeal [Secretary of State for Trade & Industry v Bottrill [1999] IRLR 326 ]. Pending the determination of the appeal, the EAT received a number of appeals on the point at issue from both the Secretary of State and from directors/controlling shareholders. These appeals, including Mr Smith's present appeal, were held back to await the Court of Appeal's judgment.[3]By the time his appeal had been listed for hearing, Mr Smith had become bankrupt. The Official Receiver became his trustee in bankruptcy. The Official Receiver 's office and function is within the Insolvency Service of the Department of Trade and Industry. Thus, at first sight it might appear that one part of the DTI was suing DTI's Secretary of State. At the request of the Official Receiver the case was adjourned. The President directed that consideration be given to instructing an independent person to 'keep an eye' on Mr Smith's interests, since there was a risk of an appearance that 'punches were pulled' on his appeal, there being no suggestion nor grounds for suggesting that the official receiver would so act. One of the problems was that technically, on his bankruptcy, Mr Smith had no 'justiciable interest' in relation to the outcome of the appeal, since all his rights were vested in the trustee. The position was further complicated by Mr Smith's contention that the Official Receiver was not legally entitled to any sums recovered and did not accept that the Official Receiver had any rights in relation to the appeal.[4]In due course, with the co-operation of all the parties, the potential difficulties were overcome. The Official Receiver was formally joined as a party but took no part in the appeal; Mr Smith was represented through the Bar's pro bono unit [Mr Michael Kallipetis QC leading Mr Michael Duggan]; and the Secretary of State was represented by Ms Eady. The position of the Insolvency Service and the Secretary of State led the President to wonder whether, in any event, an Employment Tribunal [or possibly the EAT itself] could adjudicate on such a case, having regard to Article 6 of the European Convention on Human Rights. Mr Robin Allen QC, at the EAT's invitation, made submissions about the Convention and its application to the matters in issue.[5]Ms Eady accepted that the Article 6 question could be relevant to the EAT's disposal of the case, since the question of remission might arise. She also said that it might affect any question of leave to appeal. She indicated that she would not wish to make any submissions on the point, at this stage. It was common ground that it would not, in any event, be appropriate for the Court to give any ruling before the Attorney General had been notified and given an opportunity to make representations. Furthermore, the relevant parts of the Human Rights Act 1998 have not been brought into force and the EAT may not be a court falling within section 4(5)(e). Finally, the EAT itself may be partially tarred with the same brush as the Employment Tribunals since the Lay Members, albeit appointed by the Crown, are paid out of monies provided by the DTI and their remuneration and allowances are determined by the Secretary of State.[6]We will, therefore, not make any formal ruling upon the Article 6 question but we do express our disquiet about the appearance of a lack of impartiality of the Employment Tribunals when adjudicating upon claims against the secretary of State.[7]At the outset, we would wish to pay particular tribute to Mr Allen for the preparation and presentation of arguments which were made with great clarity. We would also like to thank the Bar's pro bone unit for taking on this case and to both counsel for giving their time and services so generously.[8]We shall first deal with the substance of the appeal, without reference to the Convention point.[9]The Employment tribunal found that Mr Smith and his wife set up a company called French Tarts Patisserie Limited ['the company'] which retailed patisserie products made from dough imported from France. Mr Smith was the sole director and controlling shareholder: his wife was company secretary and a shareholder. The company owned a shop which opened in 1989, and, apart from the appellant and his wife, there were two employees. In 1990 contracts of employment were formalised in relation to the two employees and, following an appropriate Board resolution, Mr Smith and his wife each entered into a contract. The Tribunal, in a passage which, with respect, is less than clear, found as follows:
"(c) Prior to 1990 neither he [the applicant] nor his wife had drawn regular fixed wages, they took money from the company as they needed it. He told us that from April 1990 pay slips were issued, though we have not seen them. The pay drawn was no0t at that stage subject to deduction for PAYE or National Insurance Contributions. Mr Smith being concerned that he did not have sufficient information about possible allowances and deductions."
[10]The Tribunal recorded that the Smiths did not take fixed holidays on an annual basis but took occasional days "and Mr Smith thought that indeed he might have exceeded the total of six weeks' provided for under the contract". They observed that "inevitably" the name of the person with whom Mr Smith should raise a grievance was left blank in his contract. The company ceased trading in January 1992 "although he told us that he and his wife did draw some sums depending upon what the company could afford. He did not work fixed hours though he worked as was necessary in the interests of the company. When the company ceased trading he and his wife wrote to each other on company paper terminating the "employment".[11]The Tribunal referred to the headnote in the IRLR report of the EAT's decision in Buchan & Ivey [which somewhat overstates the ratio decidendi of the case]; they concluded that Mr Smith's case was "largely indistinguishable from the facts of Buchan & Ivey particularly in the situation of Mr Ivey who did have a written contract. We think this is a classic case where the applicant was in fact simply running his own business through the medium of a limited company."[12]The Tribunal said that it applied the principle of considering all relevant factors to divine the true nature of the relationship between the company and Mr Smith. In weighing the factors they indicated that the factors which militated against an employment relationship included: the tax and national insurance arrangements; the fact that there was no person identified in the contract to whom Mr Smith could complain; the holiday arrangements; that the Smiths drew no salary from July 1991 until the company ceased to trade in January 1992 that he did not work fixed hours the way their contracts were terminated in January 1992.[13]Mr Kallipetis QC submitted that the Tribunal had misunderstood some of the evidence they received. It was improbable that Mr Smith explained that the number of single days' holiday exceeded the six weeks' entitlement. He said that Mr Smith had told the tribunal that in addition to the six weeks holiday there were odd days [such as bank holidays] which they took on top. Further, the Tribunal should have observed from the IT3 filed on the Respondents' behalf, that the Secretary of State stated:
"in the applicant's favour is the fact that he paid schedule E income tax and class 1 national insurance contributions."
[14]The Secretary of State did not, as is quite usual in these cases, appear before the Employment Tribunal. They relied upon their written submission and accompanying documents. Thus, Mr Kallipetis highlights the difference between the position of the parties and the position adopted by the Employment Tribunal which, for some reason, appeared to have regarded the tax and national insurance arrangements as a contra indication of an employment contract. He further submitted that none of the factors relied upon by the tribunal carried much if any weight: for example the absence of a name in Mr Smith's contract or the holiday arrangements or the hours of work.[15]For the Secretary of State it was submitted that the tribunal had correctly stated that they had to consider all the relevant factors; it was for the Employment Tribunal to weigh them; the decision whether a person is or is not employee is largely if not entirely a question of fact; but in any event this was a decision with which we could not and should not interfere.[16]It seems to us that, through no fault of their own, the Employment Tribunal have erred in law. Part of the written submission before the Employment Tribunal was as follows:
"The Secretary of State draws the Tribunal's attention to the case of Buchan & Ivey ...where the Employment Appeal Tribunal focussed on the specific question whether a tribunal can ever [our emphasis] be legally justified in concluding that a majority shareholder of a company is an employee of the company"
[17]Had the Employment Tribunal had the benefit of seeing the Bottrill decision, either of the EAT or the Court of Appeal, they would have known that the submission went too far, as did the headnote of the report to which the Tribunal referred. In the light of the decision of the Court of Appeal, it can be seen that the fact that tax and national insurance are paid on an employed basis is an important indicator of an employment relationship; contrary to the way it was viewed by the Employment Tribunal. Had Mr Smith included within his written contract the name of a person to whom he could complain it would have been a pure fiction. In other words, the absence of a name was consistent with the contract being genuine, rather than the converse. Had the Employment Tribunal not followed Buchan & Ivey and drawn a direct comparison between Mr Smith's case and that of Mr Ivey, we are of the view that the outcome of the complaint might well have been different. This is not a case where we feel that we can substitute a different decision. There is some doubt about the true facts, as Mr Kallipetis explained. There are some matters which could be further investigated: for example, it would be relevant to know whether any monies that were received by Mr Smith from the business between July 1991 and January 1992 were treated as 'earnings' to which PAYE and NIC were applied or whether they were taken in another form. It is also pertinent for the new tribunal to know that the Secretary of State accepted Mrs Smith's claim and they will wish to see whether there is any material difference between his case and hers. It may be that the reason why her claim was accepted and his was not was because she was a minority shareholder whereas he held the majority. In the light of Bottrill such a difference should not be regarded as a justification in itself for the difference in result.[18]Accordingly, despite the passage of time, we are of the view that the only course now open to this court is to allow the appeal and remit the case back to a freshly constituted tribunal. We stress that this is the sort of case which should be considered by a full tribunal rather than by a Chairman sitting alone.[19]It is at this stage that the Article 6 point may come into play.[20]As we understand the position, the fact that the Human Rights Act has been enacted but the relevant provisions have yet to come into force [and will not do so until October 2000] cannot raise any justiciable 'legitimate expectation'. However, where proceedings yet to be determined are unlikely to be concluded before the implementation date, then the Court may intervene: see R v DPP ex parte Kebillene & Others . Whether this discretion is confined to cases where the Court is acting in its supervisory jurisdiction as a divisional court is unclear. It was not submitted to us that we should not hear submissions about Article 6 on the grounds that the relevant provisions have yet to be brought into force. We think Ms Eady was right to say that the point could arise when the EAT was considering whether to remit the case to an Employment Tribunal or when granting leave to appeal.[21]We turn to Mr Allen's submissions to which we shall not do full justice.[22]The relevant part of Article 6(1) of the Convention reads:
"In the determination of his civil rights an obligations … everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law."
The question at issue is whether the Employment Tribunal is an 'independent and impartial' tribunal in relation to a determination of claims brought by complainants against the Secretary of State for the DTI. We wish to make it quite clear that no suggestion is being made nor could be made that this particular employment tribunal has acted in any way improperly or incorrectly.[23]The Lay Members of Employment Tribunals are appointed by the Secretary of State for the DTI and are paid for by him out of funds made available to the DTI from the Treasury. The DTI, in turn, provide funds to the Employment Tribunal Service, the agency which provides the administration services for Employment Tribunals [the Agency]. Lay Members hold their appointment through an Instrument of Appointment, the terms of which may be varied by the Secretary of State. The remuneration, fees and allowances for the Lay Members are determined by the Secretary of State [see section 5 Employment Tribunals Act 1996]. They hold office for the duration specified in their letter of appointment. Under the Instrument, their appointment may be terminated by the Secretary of State, with the consent of the Lord Chancellor, on one months' notice, or summarily for misconduct.[24]Employment Tribunal Chairmen are appointed by the Lord Chancellor but their remuneration and allowances are determined by the Secretary of State. They receive their pay from the Agency from funds made available to them by the DTI.[25]The Rules of Procedure of the Employment Tribunals are made by the Secretary of State. Under them, he has wide powers to intervene in cases to which he is not a party. It was Mr Allen's submission, made without sight of the Instrument of the Lay Members' appointment, that on the face of the legislative provisions setting up the Employment Tribunals and controlling their composition there is a lack of transparent objective independence from the Secretary of State. Cases involving the infringement of rights not to be discriminated against are heard by tribunals which are paid for by the Secretary of State, subject to rules made by the Secretary of State, and the majority of whose members are appointed by the Secretary of State on terms which may not be extended after three years. Mr Smith could be forgiven for thinking that the principle of fair justice was infringed when this tribunal was required to adjudicate upon his claim against the Secretary of State.[26]Article 6 applies only to the determination of an individual's 'civil rights'. These words have an autonomous Convention meaning. Mr Allen submits, and we agree, that Mr Smith's right to receive monies on the insolvency of his employer is likely to be classified as a civil right. Dr Darnell's right to complain of unfair dismissal was accepted by the Commission to be a civil right within Article 6 in a case brought by him against the British Government.[27]Thus, Mr Smith has a right under the Convention to have his complaint against the Secretary of State adjudicated upon by an independent and impartial tribunal.[28]The approach of the Strasbourg Court is pragmatic. There is a requirement both that Mr Smith should have had a fair hearing and that the Employment tribunal should be and appear to be fair and independent. The nature of the tribunal itself and the right to challenge its decisions are factors which must be taken into account. In the case of Bryan v United Kingdom the Court accepted that planning inspectors are charged with a duty to uphold the principles of openness, fairness and impartiality and that if there were errors in this respect the High Court, through the Crown Office List, could correct them. But the case was concerned with planning issues which the Court noted were typical administrative decisions of a specialist type which were, in turn, the subject of judicial control. "Indeed, in the instant case, the subject matter of the contested decision by the inspector was a typical example of the exercise of discretionary judgment in the regulation of citizens' conduct in the sphere of town and country planning. The scope of review of the High Court was therefore sufficient to comply with Article 6(1)."[29]Here, Tribunals are established to try important issues affecting citizen's fundamental rights. Unlike planning inspectors, Tribunals make judicial and not administrative decisions and they do not form part of the administrative structure of the State. As the Court itself put it, what is at stake under Article 6(1) is the confidence which the courts must inspire in the public in a democratic society.[30]In Langborger v Sweden the tribunal in question was the Swedish 'Housing & Tenancy Court' which comprised 2 lay assessors, one from a landlords' association and one from a tenants' association. These assessors had been nominated by their respective association, as are the Lay Members in an Employment Tribunal nominated by either side of industry. Each was appointed by the Government for a term of three years which was renewable; as with Lay Members of the Employment Tribunal. There was, as the Court accepted, and as must be presently accepted, no reason to doubt the personal integrity or impartiality of the tribunal. However, the Court noted the possibility that both assessors might be perceived to have a common interest contrary to the applicant's. The applicant was in dispute about the incorporation of a clause in the lease which required the parties to the lease to be bound by the current agreement made between the two associations. The Court held that there was an infringement of Article 6(1) because of this factor and stated that the fact that the court also included two professional judges made no difference.[31]If it were possible to refer a case of this sort to the Court at Strasbourg, we would have made a reference in this case. There are other tribunals within the court structure which are administered by an agency of the Lord Chancellor. It is something of an anomaly that the Employment tribunals should have such close links with an executive arm of Government. They are paid for, largely appointed and administered by a DTI Agency. The right of appeal to this court, the members of which are partly paid for by the Secretary of State and which is administered by the same agency, is limited to correcting errors of law. Even if the EAT is properly to be regarded, objectively, as meeting the criteria of independence stipulated in Article 6, its opportunity to correct important factual errors is essentially non-existent. It is our view that there is a real and troubling question as to whether Employment tribunals may properly and lawfully adjudicate on claims made against the Secretary of State, having regard to Article 6 of the Convention. For that reason we consider this case is an appropriate one for us to grant leave to appeal, despite the fact that the Convention is not part of our domestic law. It would be as well for the issue to be clarified before 1 October next year, so that, if necessary, adjustments can be made.[32]The result of this appeal, therefore, is that the appeal is allowed and the matter must be remitted back to a full Employment Tribunal for a re-hearing of Mr Smith's complaint against the Secretary of State. We grant Mr Smith leave to appeal against this order. He should be given the opportunity to argue that an Employment tribunal cannot adjudicate upon his complaint in accordance with the European Convention on Human Rights.