MR P G NESBITT & MRS A E NESBITT v SECRETARY OF STATE FOR TRADE & INDUSTRY [2007] UKEAT 0091_07_1008

EMPLOYMENT APPEAL TRIBUNAL
BAILII case number: [2007] UKEAT 0091_07_1008Case No Appeal No. UKEAT/0091/07Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS
Between
MR P G NESBITT & MRS A E NESBITTAPPELLANTSECRETARY OF STATE FOR TRADE & INDUSTRYRESPONDENT
Before
Mr Justice UnderhillDate 10 August 2007
[1]APPEARANCES For the Appellants ANDREW HILLIER Q.C. (One of Her Majesty's Counsel) Instructed by: The Bar Pro Bono Unit For the Respondent JOHN O'FLAHERTY (of Counsel) Instructed by: The Treasury Solicitor One Kemble Street London WC2B 4TS SUMMARY Contract of Employment – definition of employee Insolvency The Appellants were a husband and wife who entered into contracts of employment with a company which they managed and which they between them owned 99.99% of the shares (the wife having just 51.99% and the husband 48%). When the company became insolvent they claimed against the Secretary of State under the insolvency provisions of the Employment Rights Act 1996. The Employment Tribunal held that by reason of their joint control of the company they could not be employees. Appeal allowed: the fact of their control was not sufficient to deprive them of employment status if they otherwise satisfied all the criteria for employment. Secretary of State for Trade and Industry v Bottrill [1999] ICR 592 , Fleming v Secretary of State for Trade and Industry [1997] IRLR 682, Connolly v Sellers Arenascene Ltd [2001] ICR 760 and Gladwell v Secretary of State for Trade and Industry [2007] ICR 264 considered. THE HONOURABLE MR JUSTICE UNDERHILL INTRODUCTION This appeal raises again the vexed question of the circumstances in which a party who has entered into what appears to be a contract of employment with a company of which he or she is a director and/or a substantial shareholder may claim under the employment protection legislation as an employee. The Court of Appeal sought to give guidance on this question in Secretary of State for Trade and Industry v Bottrill [1999] ICR 592 ; but it continues to give rise to difficulty. I have had the advantage of submissions from Mr. Andrew Hillier QC for the Appellants and from Mr. John O'Flaherty for the Respondent.[2]The facts and procedural history giving rise to the appeal can be briefly summarised as follows:(1) In February 1985 Mrs. Nesbitt incorporated a company called APAC Computer Training Ltd. ("the company") to be the vehicle for a new business. In March 1986 she was joined in the business by her husband. As its name implies, the business of the company was in the provision of IT training to businesses and public authorities.(2) From March 1986 onwards the share capital of the company consisted of 1,000 issued shares, of which 529 were held by Mrs. Nesbitt, 470 by Mr. Nesbitt and one by Mrs. Nesbitt's mother, Mrs. Franklyn. All three were members of the Board. Mrs. Franklyn's membership was more than nominal: she had considerable business experience.(3) The business grew. At its height the company had some twenty employees, working from four offices. (It also had two subsidiary companies, but these did not employ any of the employees.)(4) From the start Mr. and Mrs. Nesbitt had written contracts of employment with the company. These were in the same form as those entered into with its first employees. In about 1995 the form of contract was altered for new recruits so as to offer less generous sick pay provisions and so as no longer to offer members of the company pension scheme. Mr. and Mrs. Nesbitt were paid salaries commensurate with their roles as the senior managers of the business. They did not receive directors' fees or dividends.(5) The business of the company was managed on a day-to-day basis largely by Mr. and Mrs. Nesbitt, though it also came to employ a Project Manager who had a substantial role. As one would expect with a small private company, management decisions were taken fairly informally. Nevertheless, formal Board meetings occurred every six months or so, with additional meetings on an ad hoc basis if required.(6) The company unfortunately became insolvent in the course of 2006. On 3 July 2006 the remaining employees, including Mr. and Mrs. Nesbitt, were made redundant by the Liquidator. Mr. and Mrs. Nesbitt applied to the Insolvency Service for redundancy payments and other arrears owed to them pursuant to ss. 166-168 and 182-186 of the Employment Rights Act 1996 ("the insolvency provisions"). The details of those provisions are not material for present purposes, but the rights in question are accorded only to "employees". "Employee" is defined in s. 230 (1) of the Act as "an individual who has entered into or worked under a contract of employment". By s-s. (2) "contract of employment" is defined as "a contract of service or apprenticeship, whether express or implied and (if it is express) whether oral or in writing". Their claims were rejected by the Insolvency Service on the basis that they were not employees within the meaning of the Act.(7) By virtue of ss. 170 and 188 of the 1996 Act an Employment Tribunal has jurisdiction to determine any issue as to liability under the insolvency provisions. Mr. and Mrs. Nesbitt applied accordingly. By a decision of a Chairman sitting in Manchester sent to the parties on 20 December 2006 their complaints were dismissed. This appeal is against that decision. The Law[3]On the face of it Mr. and Mrs. Nesbitt appear plainly to have been employees of the company. They had contracts of employment, and (subject to the points which I shall have to consider below) their relationship with the company had been conducted on a basis entirely consistent with the existence of an employment relationship. It is common ground that this is not a case where the contracts were entered into by way of a sham, that is to say with no intention on the part of the parties to create an employment relationship. At common law, there is no reason why a person may not be an employee of a company of which he is the controlling shareholder and a director (or indeed the only director). This was authoritatively confirmed by the decision of the Privy Council in Lee v Lee's Air Farming Ltd [1961] AC 12 . In that case the deceased husband of the plaintiff was held to be a "worker" within the meaning of the New Zealand workmen's compensation legislation – the definition of which required him to be working under a contract of service – notwithstanding that he was the sole shareholder (save for a single share held by a solicitor) and the "governing director" of the company by which he was employed (and was indeed the only employee). In delivering the opinion of the Board Lord Morris of Borth-y-Gest said (at pp. 25-27):
"It was never suggested (nor in their Lordships' view could it reasonably have been suggested) that the company was a sham or a mere simulacrum. It is well established that the mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company. If, then, it be accepted that the respondent company was a legal entity their Lordships see no reason to challenge the validity of any contractual obligations which were created between the company and the deceased. In this connection reference may be made to a passage in the speech of Lord Halsbury L.C. in Salomon v. Salomon & Co. [1897] AC 22 , 33: "
My Lords, the learned judges appear to me not to have been absolutely certain in their own minds whether to treat the company as a real thing or not. If it was a real thing; if it had a legal existence, and if consequently the law attributed to it certain rights and liabilities in its constitution as a company, it appears to me to follow as a consequence that it is impossible to deny the validity of the transactions into which it has entered." A similar approach was evidenced in the speech of Lord MacNaghten when he said (at p. 53):
"It has become the fashion to call companies of this class 'one man companies.' That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading: if it merely means that there is a predominant partner possessing an overwhelming influence and entitled practically to the whole of the profits, there is nothing in that that I can see contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors."
Nor in their Lordships' view were any contractual obligations invalidated by the circumstance that the deceased was sole governing director in whom was vested the full government and control of the company. Always assuming that the company was not a sham then the capacity of the company to make a contract with the deceased could not be impugned merely because the deceased was the agent of the company in its negotiation. The deceased might have made a firm contract to serve the company for a fixed period of years. If within such period he had retired from the office of governing director and other directors had been appointed his contract would not have been affected. The circumstance that in his capacity as a shareholder he could control the course of events would not in itself affect the validity of his contractual relationship with the company. When, therefore, it is said that "one of his first acts was to appoint himself the only pilot of the company," it must be recognised that the appointment was made by the company, and that it was none the less a valid appointment because it was the deceased himself who acted as the agent of the company in arranging it. In their Lordships' view it is a logical consequence of the decision in Salomon's case that one person may function in dual capacities. There is no reason, therefore, to deny the possibility of a contractual relationship being created as between the deceased and the company. If this stage is reached then their lordships see no reason why the range of possible contractual relationships should not include a contract for services, and if the deceased as agent for the company could negotiate a contract for services as between the company and himself there is no reason why a contract of service could not also be negotiated. It is said that therein lies the difficulty, because it is said that the deceased could not both be under the duty of giving orders and also be under the duty of obeying them. But this approach does not give effect to the circumstance that it would be the company and not the deceased that would be giving the orders. Control would remain with the company whoever might be the agent of the company to exercise it. The fact that so long as the deceased continued to be governing director, with amplitude of powers, it would be for him to act as the agent of the company to give the orders does not alter the fact that the company and the deceased were two separate and distinct legal persons. If the deceased had a contract of service with the company then the company had a right of control. The manner of its exercise would not affect or diminish the right to its exercise. But the existence of a right to control cannot be denied if once the reality of the legal existence of the company is recognised. Just as the company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the deceased."[4]So the position at common law is clear. As the Privy Council pointed out, it follows from the separate legal personality of even a "one-man company", clearly recognised ever since Salomon v. Salomon & Co . [1897] AC 22 , that the proprietor and "controller" of such a company can in principle be an employee of the company which he controls: the fact that he, qua director, controls the company which controls him qua employee is neither here nor there. However, there has been a string of cases in the context of claims under the 1996 Act and its statutory predecessors in which it has been argued – and sometimes held – that a claimant who has entered into what is on its face a contract of employment with a company of which he is a shareholder and/or director is not entitled to claim as an employee. It is necessary to consider the effect of these authorities with some care. The reported cases to which I was referred were as follows. Buchan and Ivey[5]In Buchan and Ivey v Secretary of State for Employment [1997] IRLR 80 the Employment Appeal Tribunal considered conjoined appeals in separate cases involving applicants claiming under the equivalent insolvency provisions of the Employment Protection (Consolidation) Act 1978 . Mr. Buchan was employed by a company in which he had a 50% shareholding and of which he was a director. Mr. Ivey was employed by a company of which he owned 99% of the shares and of which he was the managing director. Both were held by employment tribunals not to be employees. Mummery P. set out in para. 8 of his judgment the position at common law, referring in particular to the decision in Lee's case (above); but he continued, under the heading "The Controlling Shareholder":
"9. The application of the legal propositions summarised above to the facts of a particular case may produce a different legal result according to whether or not the claimant has a controlling shareholding in the company. If the claimant is able, by reason of a beneficial interest in the shares of the company, to prevent his dismissal from his position in the company, he is outside the class of persons intended to be protected by the provisions of the 1978 Act and is not an employee within the meaning of that Act. The critical provisions of the 1978 Act give legal protection to a person against being dismissed unfairly, including dismissal for redundancy on the insolvency of an employer, and for guaranteed State payments for employees in that event. A controlling shareholder can prevent the company from dismissing him from his position. It would be inconsistent with the purposes of the 1978 Act to extend protection to a person who cannot be dismissed from his position in a company without his agreement. This result conforms both to common sense and to the industrial or commercial realities of the situation. It is, however, common for submissions to be made on behalf of a controlling shareholder in support of the proposition that he is an employee of a company. Those submissions are most frequently based on the decision of the Judicial Committee of the Privy Council in Lee v Lee's Air Farming Ltd [1961] AC 12 . That case is relied on for the proposition that a shareholder, with full and unrestricted control over all the operations of the company, is employed under a contract of service with the company if he works for it full time. 10. In our judgment, that argument ignores the context in which Lee 's case was decided. Reliance upon that case is misplaced optimism in the context of employment protection. In the Lee case a claim was made by a widow for compensation under the New Zealand Workers' Compensation Act 1992 arising out of the death of her husband as a result of an accident in the course of his employment by the company of which he was governing director and controlling shareholder. The company was insured against the payment of compensation in the case of an accident to him in the course of employment. The judicial committee held that Mr. Lee was a `worker' employed by the company with whom he had entered into, and who worked under, a contract of service. The judicial committee rejected the proposition that this was a legal impossibility because he controlled the company. The reasoning of the judicial committee was that the company, though under Mr. Lee's control, was a separate and distinct legal entity with which he could enter into a valid contract of service, that the company could give orders to him, and that he could function in a dual capacity, acting in one capacity as the person who gave orders to himself in another capacity. 11. The decision does not mean that there will always be a contract of service in such circumstances. It all depends on the context. That was a case of a claim for compensation. The purpose of the insurance arrangements covering employees of the company was to provide compensation for a dependant, such as a widow, in the event of an accident to an employee. That purpose would be defeated if it were held that Mr. Lee was not a worker under a contract of service. The liability to pay compensation could not be avoided by an attack on the validity of the contractual relations between Mr. Lee and the company (which was not suggested to be a sham) His position as a controlling shareholder did not make it impossible in those circumstances for his wife to satisfy the conditions for the payment of compensation under the insurance arrangement. 12. The issue in this case arises in the context of employment protection legislation. Taking the facts of Mr. Lee's case it is difficult in an employment protection context to conceive of circumstances in which Mr. Lee could have been regarded as an employee of the company for the purposes of making a claim against the company for a redundancy payment or for unfair or wrongful dismissal. None of those events could give rise to any remedy by him against the company, because the wrong of which he would complain could not occur without his concurrence. That feature would also affect the position of a guarantor of a liability of the company, such as the Secretary of State in relation to redundancy and other payments. The liability of the Secretary of State is to make a payment which the insolvent employer is liable to make, but cannot make because of lack of funds. If a person has no remedy against the company over which he exercises control, he cannot have any claim against the guarantor of the company's liability."
[6]He then went on to apply that principle to the facts of the particular cases. In both cases he held that the tribunal was entitled to conclude that the applicant was not an employee. In the case of Mr. Buchan he said, at para. 34:
"The tribunal were entitled, on the material before them, to conclude that Mr. Buchan was not an employee of the company but was, through the company, running his own business enterprise. As beneficial owner of 50% of shares in the company he was able to block any decision by the Board or of the company at a general meeting with which he did not agree, including a decision as to his own dismissal or terms of service. In other words, Mr. Buchan's agreement was necessary before he could be dismissed summarily or on notice. If he did agree to a decision to dismiss him, then that would not be a "dismissal" within the meaning of [the Employment Protection (Consolidation) Act 1978]. It would be a case of what is some times called "self-dismissal"."
In the case of Mr. Ivey, he said:
"35. In our judgment, there is no error of law in the decision of the industrial tribunal that Mr. Ivey was not an employee of the company. As in the case of Mr. Buchan, the industrial tribunal were entitled, on the material before them, to conclude that Mr. Ivey was not an employee. In reaching that conclusion the tribunal did not apply the wrong legal test or adopt the wrong legal approach. On the legal principles summarised above, we have reached the conclusion that Mr. Ivey's case is a fortiori that of Mr. Buchan. (1) There is a distinction, properly recognised by the industrial tribunal, between an individual running his own business through the medium of a limited company and an individual employee of a limited company who is subject to the control of the board of directors of that company. 36. (2) The context in which the issue of employee or non-employee arises under the 1978 Act is protection of employment. More particularly, the purpose of s.106 and s.122 of the 1978 Act is to provide for State-funded compensation to be available for employees employed by those whose businesses have failed financially. It is not the purpose of those provisions to provide compensation to an individual businessman or entrepreneur whose own incorporated business ventures have been unsuccessful. 37. (3) The industrial tribunal did not err, as argued by Mr. Prichard, in regarding the role of a managing director and an employee to be mutually exclusive. They recognised, in their reference to the authorities, that a director may be an employee. They were dealing with a different case – the case of a person who was a director and controlling shareholder of the company claiming to be employed by the company which he controlled and by which he could not, unless he concurred, be dismissed or made redundant. 38. (4) The industrial tribunal did not err in confusing control of the company with control over the manner of doing the job. They recognised, however, the reality of the situation at work, namely that an individual who, through his beneficial shareholding, controls the running of the company, would at the same time control, or be in a position to assert control over, the way in which he works within the company. 39. (5) The 'control' exercised by Alfa Romeo as franchisor was rightly regarded as irrelevant to the existence of a contract of service between Mr. Ivey and his company. A franchisor exercises control to protect the use of his name in, and the commercial association with, the business of another. Such control as Alfa Romeo exercised did not, on any view of the matter, lead to Mr. Ivey being employed by Alfa Romeo. If Mr. Ivey was not an employee of the company before the franchise agreement with Alfa Romeo, it is difficult to see how he became one as a result of the company entering into that agreement. 40. (6) The tribunal were not bound to reach a conclusion that Mr. Ivey was an employee by virtue of the written contract. The written contract was only one factor to be considered. The label which the parties put on their relationships in the context of work is no more conclusive of the legal relationship than the label which the parties put on a relationship in the context of the occupation of property (eg licensee or tenant). 41. (7) The industrial tribunal did not err in law in deciding the issue solely by reference to control as an indicator of employment status of Mr. Ivey. The tribunal examined all aspects of the company's business and Mr. Ivey's part in it and concluded that the true nature of the relationship was that he was a man running his own business. He was not at the same time employed as an employee in the business which he was running and it is difficult to conceive of circumstances in which that could be the case."
Fleming[7]In Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 the Inner House of the Court of Session was concerned with a claim by an applicant who held 65% of the shares of the company of which he was employed and was its managing director. An industrial tribunal chairman had concluded that he was not an employee. He gave his reasons as follows:
"Given that the applicant was the majority shareholder and had in fact personally guaranteed obligations of the company to the two main suppliers, I came to the conclusion that the applicant was not an employee within the meaning of the relevant legislation. There was no suggestion that the applicant was under the control of anyone within the company. He may have had another director with whom he discussed matters but at the end of the day in the event of conflict it was clear because of the nature of the applicant's shareholding that he could overrule the other director. The argument that is advanced by the applicant in his IT1 that he was under the control of other creditors did not seem to me to be an argument that helped his case at all. The key issue is the relationship between the applicant and the limited company – not the relationship between the applicant's limited company and outside bodies. The situation clearly would have been different had the outside bodies been shareholders in the company, but that was not the case. I came to the conclusion that the applicant was operating more like a partnership running with the protection and limitations of a company and, that being so, I could not hold that the applicant was in the employ of the company and must therefore dismiss the application."
The Employment Appeal Tribunal had dismissed his appeal.[8]Lord Coulsfield, giving the judgment of the Inner House, recorded that the Secretary of State relied on three submissions –(1) that the question of whether the applicant was employed under a contract of service was a question of fact for the industrial tribunal which could only be challenged on the basis that it was perverse;(2) that that was not so on the facts of the instant case; and(3) that in any event the decision in Buchan and Ivey had established what was tantamount to a rule of law that a majority shareholder could not be treated as an employee for the purposes of the employment legislation. He accepted the first two submissions but not the third. As regards the two submissions which he accepted he said this:
"9. … We agree that it is well-established that the question whether or not a person is an employee is a question of fact to be decided by the industrial tribunal and that neither the Employment Appeal Tribunal nor this court is entitled to interfere unless the industrial tribunal has in some way misdirected itself or arrived at a conclusion which cannot reasonably be supported. In the present case, it seems to us that, taking all the factors together, there was ample material to entitle the industrial tribunal to reach the conclusion that the appellant was not an employee for the purposes of the employment protection legislation. There were, as counsel for the respondent recognised, factors on which the appellant could rely on as pointing towards an employment relationship, such as the fact that the appellant worked alongside other employees of the company, with the same hours of work, and had no other employment. On the other hand, the fact that he was able to decide to draw no salary during the last month of the company's existence, the fact that he personally guaranteed its obligations and the fact that he held a substantial majority shareholding are all factors which point in the opposite direction, as is the fact that there was no written record of his terms of employment. The fact that the salary which the appellant received was paid through the PAYE system is, in our view, neutral. In all the circumstances, therefore, we have no doubt that there was ample material on which the industrial tribunal was entitled to reach the conclusion that the appellant was not an employee. 10. In reaching the above conclusion, we have treated the fact that the appellant held a majority shareholding in the company as a relevant factor. We do not see how it could, in common sense, be doubted that the fact that a person is a shareholder is a relevant factor. The significance of that factor will depend on the circumstances, and the weight to be given to it may vary with the size of the shareholding. It is true that, as the appellant pointed out, a change in the size of a shareholding might, on that view, lead to a change in the view taken of the status of a particular person. The decision as to whether a person is or is not an employee must, however, be taken on all the relevant factors at the material time. The shareholding position at the material time must, in our view, be a relevant factor. It will, however, usually only be one of a number of such factors, and it is not impossible that regard might be had to the way in which the person in question comes to be a shareholder, or to be a majority shareholder. As in any such decision, all the circumstances have to be considered."
[9]As regards the Secretary of State's argument based on the effect of Buchan and Ivey Lord Coulsfield said this:
"12. As we have indicated, the argument which we have heard in the present case is limited and we did not have the assistance of submissions from a legal representative on behalf of the appellant. In these circumstances we would not wish to go too far in expressing any opinion. Nevertheless, we can say that in view of the long-standing rule to which we have referred, that the question whether or not a person is an employee is a question of fact, we would be reluctant to see the introduction of any purported rule of law into this area of decision. We note in particular that in Buchan some reliance is placed on the proposition that a controlling shareholder can prevent the company from dismissing him. We are uncertain how that factor would apply in a case like the present, where it was the liquidator who dismissed the appellant. We did not hear argument on that matter, however, and we need express no view on it. It can easily be seen, as we have said, that the fact that the claimant is a majority shareholder is always a relevant factor. Normally it will be an important factor and there may well be cases in which it is decisive. We are not, however, convinced that it would be proper to lay down any rule of law to the effect that the fact that a person is a majority shareholder necessarily and in all circumstances implies that that person cannot be regarded as an employee, for the purposes of the employment protection legislation."
The Inner House was, therefore, cautiously critical of the approach in Buchan and Ivey . I note in particular that it expressed some concern about how any test based on the apparent power of a majority shareholder to prevent his own dismissal could apply where the company had gone into liquidation prior to the dismissal. Bottrill[10]The decision of the Court of Appeal in Secretary of State for Trade and Industry v Bottrill (above) is generally regarded as the principal authority in this field. The facts can conveniently be taken from the judgment of Morison P. in the Employment Appeal Tribunal [1998] ICR 564 (at pp. 565 -6):
"Mr. Bottrill , the respondent to the appeal ("the applicant"), was encouraged, through his local training and enterprise council, to set up a new business. He was put in touch with an organisation in the United States of America called Magnatech Inc., which supplied certain products for use in the area of magnetic field technology. The applicant, with others, bought a company off the shelf. It was named Magnatech U.K. Ltd. One share was issued and transferred to the applicant. There was one other director, and two others who were employees. The industrial tribunal held that the shareholding was "only intended to be a temporary matter."
The ultimate intention was that the Magnatech group of companies in the United States would invest in the United Kingdom company and acquire some 80 per cent. of the equity. A draft agreement giving effect to this arrangement was prepared, but it was never executed. The applicant entered into a contract of employment with the United Kingdom company as from August 1994, under which he was paid a salary from which tax and national insurance contributions were deducted in the normal way. He was not paid any director's fees. He rendered his services to the United Kingdom company and to no other person or corporation." The company became insolvent and Mr. Bottrill was dismissed by the receiver.[11]The Industrial Tribunal held that Mr. Bottrill was an employee. It was aware of the decision in Buchan and Ivey but it believed that the facts of the case before it were distinguishable because Mr. Bottrill's 100% shareholding was temporary and "theoretical rather than actual". The Employment Appeal Tribunal upheld that decision, but it did so on the wider ground that the reasoning in Buchan and Ivey should not be followed. Morison P. said this (at pp. 571-2):
"In Buchan v. Secretary of State for Employment the essential reason (see, for example, para. 12) why the appeal tribunal distinguished Lee v. Lee's Air Farming Ltd. was because it seemed to them that in the context of employment legislation it would be impossible to conceive of circumstances in which events giving rise to a claim for compensation could not have occurred without the individual claimant's concurrence. How could it be thought that Parliament conferred on an individual a right to bring proceedings to claim compensation for an act which could not have happened without his consent? We can all see the force of this point. On the other hand, it is to be noted that in very many cases where a company has gone into liquidation, the directors could be said to have mismanaged the company and to have brought about the very event which triggered their entitlement to a claim against the Secretary of State. It cannot be suggested that any such person who can be identified as being the author of his own misfortune loses his statutory rights. An industrial tribunal is not required to assess fault. Further, as we understand the decision in Buchan v. Secretary of State for Employment , and as was accepted in argument, the applicant's status as an employee would depend upon him continuing to hold the majority of the issued share capital. In other words, if he had transferred his share to Mr. Wilson, who had hitherto been an employee director, the applicant would become an employee and Mr. Wilson would cease to be one. It seems to us unlikely that the status of a contractual relationship should change in this way. Again, if the applicant entered into an agreement to vote his share in accordance with the directions of a third party, such as a creditor of the company, it might appear that he no longer had control over his own destiny, and, presumably, would then become an employee. If industrial tribunals are to apply the Buchan decision they will, presumably, need to inquire into the claimant's rights to the shares to ascertain who is the true beneficial owner of them, or it, as the case might be. Furthermore, the scheme of the legislation, and the obligations upon the Secretary of State might not be thought to give rise to the potential absurdity which the appeal tribunal, in that case, were trying to avoid. … ."
He went on to amplify that last point in some detail, which I need not reproduce, leading to the conclusion (at p. 573) that:
"It follows, therefore, that none of us is convinced by the proposition that Lee v. Lee's Air Farming Ltd. should be distinguished because that was not a case concerned with the application of a statutory employment rights regime. It seems to us that, apart from the context, Lee is indistinguishable. We are not persuaded that the difference in context justifies the difference in result."
He then said that, reluctant as he was to differ from the decision in Buchan and Ivey , he was encouraged to do so by the observations of the Inner House in Fleming which I have quoted above.[12]Towards the end of his judgment Morison P. sought to summarise what, on the approach which he took, was the relevance of the fact that a putative employee held a controlling shareholding in the company which was his apparent employer. At p. 574 G-H, he said this:
"The shareholding of a person in the company by which he alleges he was employed is a factor to be taken into account, because it might tend to establish either that the company was a mere simulacrum or that the contract under scrutiny was a sham. In our judgment it would be wrong to say that a controlling shareholder who, as such, ultimately had the power to prevent his own dismissal by voting his shares to replace the Board, was outside the class of persons given right under the Act of 1996 on an insolvency."
The immediate source of the term "mere simulacrum" is the judgment of Lord Morris in Lee's case. Lord Morris seems to have taken it from Commissioners of Inland Revenue v. Sansom [1921] 2 KB 492: see at pp. 504 and 514. "Simulacrum" is defined in the Oxford English Dictionary as "something having merely the form or appearance of a certain thing, without possessing its substance or proper qualities". Given that the Privy Council in Lee's case recognised that a one-man company could nevertheless be treated as having real substance, presumably "simulacrum" cases should be confined to those where it appears that there is no real intention to vest the business in the company in question or, therefore, to distinguish between the two roles of director and employee – in which case, as Morison P's formulation acknowledges, the contract of employment would necessarily also be a sham. But, at the risk of repetition, Lee's case establishes that no such conclusion can be drawn simply from the fact that director and employee are the same person so that "really" the employee is his own boss. No doubt the distinction between the claimant qua employee and the claimant qua director may appear artificial, but companies are artificial things. A "simulacrum" case must therefore, on Morison P's approach, be one where there were grounds for believing not simply that the distinction was (in that sense) artificial but that it was not intended to be observed at all.[13]The Court of Appeal, in a judgment delivered by Lord Woolf MR, upheld the decision of the Employment Appeal Tribunal and disapproved Mummery P.'s approach in Buchan and Ivey . It said in terms (at p. 602 C-D):
" Of the two approaches, we have no hesitation in preferring the approach of the appeal tribunal in this case and that of the Inner House in Fleming ."
Lord Woolf set out the judgment of Morison P. at length: see pp.600-602 (though by a slip his reference to the decision in Lee v. Lee's Air Farming is said to be a reference to Lee v Chung Chi-Kung - a wholly different authority, though on a related point). He then said, at p. 602-3:
"As we understand the reasoning in Buchan , it is the ability of the shareholder to prevent his dismissal which is crucial and that in turn depends on his ability to use his voting rights to that end. Whilst reference is made by Mummery J. to a "controlling shareholding"
(p. 82), it would appear from the facts of Mr. Buchan's case that a 50 per cent. shareholding would be sufficient to constitute what otherwise would be a contract of employment a contract of some other character. Why this should be so is not immediately apparent. Shareholders in general do not have the right to interfere with management decisions save pursuant to resolutions passed in general meeting. But by then the dismissal may have occurred. If Mr. Buchan's fellow director had been the chairman at a board meeting with a casting vote, he could have dismissed Mr. Buchan, and, even if Mr. Buchan sought at a general meeting to procure his reinstatement, his 50 per cent. shareholding would not give him the ability to achieve that result. Even Mr. Bottrill with the only issued share could in certain circumstances have been dismissed by Magnatech acting by its other director. Miss Eady, when pressed with this, changed the test to being whether the shareholder employee, if dismissed, could procure reinstatement. We mention this simply as an example of the difficulties which arise if the court seeks to imply into the definition of "employee" tests which Parliament has not seen fit to express. Further, as Mummery J. accepted through his attempted distinguishing of Lee v. Lee's Air Farming Ltd. , the term "employee" would be given a special meaning for the employment protection legislation which it does not have in other contexts or indeed under the general law. For the reasons given by Morison J. which we find cogent the difference in context between Lee's case and a case under the Act of 1996 does not justify the difference in result. The gloss sought to be given by Mummery J. to "employee" in the Act, based as it is on the ability of the controlling shareholder to prevent his dismissal, is all the more surprising when applied to a case such as the present when Mr. Bottrill was powerless to prevent his actual dismissal which triggered his claim. We recognise the attractions of having in relation to the ERA a simple and clear test which will determine whether a shareholder or director is an employee for the purposes of the Act or not. However, the Act does not provide such a test and it is far from obvious what Parliament would have intended the test to be. We do not find any justification for departing from the well-established position in the law of employment generally. That is whether or not an employer or employee relationship exists can only be decided by having regard to all the relevant facts. If an individual has a controlling shareholding, that is certainly a fact which is likely to be significant in all situations, and in some cases it may prove to be decisive. However, it is only one of the factors which are relevant and certainly not to be taken as determinative without considering all the relevant circumstances. Even if it had been possible to come to a different conclusion, we are far from satisfied that could be provided by the simple test which the appeal tribunal in Buchan was looking for. The facts of the present case illustrate that whether or not there is a controlling shareholder may not, by any means, be clear cut. We recognise the force of the contention by Mr. Barklem on behalf of Mr. Bottrill that in any event, on the special facts of this case, it may be possible to regard Mr. Bottrill as not having a beneficial controlling shareholding. There are also the logical problems to which Morison J. referred in taking a controlling shareholding as the test. During the life of a contract, such control of a company can change and it would indeed be extraordinary if this should affect the employment status of an individual during the same contract for the purpose of making claims against the Secretary of State under the Act of 1996. Finally there is the irony that, if control were to be the decisive test, it would probably only "bite" for the purposes of claims against the Secretary of State when the individual was no longer in control because of the insolvency of the company." It seems clear that the Court of Appeal was approving the reasoning of Morison P. and holding that the common law approach stated in Lee's case applied equally to the definition of "employee" in the 1996 Act. I note from the final paragraph of the passage quoted that Lord Woolf, like Lord Coulsfield in Fleming , found it odd that a claimant who had in fact been unable to prevent his own dismissal should nevertheless be treated as not being an employee because he had been "his own boss". I agree: liability to be dismissed by a liquidator is a good illustration that even in a "one-man company" the majority shareholder employee does not have absolute control of his destiny.[14]Lord Woolf recorded that the Court had been asked by counsel for the Secretary of State to provide some guidance on the correct approach to take in case of this character, which were occurring with some frequency. He said this (at pp. 603-4):
"We are anxious not to lay down rigid guidelines for the factual enquiry which the tribunal of fact must undertake the particular circumstances of each case, but we hope that the following comments may be of assistance. The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context how and for what reasons the contract came into existence (for example, whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations. If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship. In this context, of the various factors usually regarded as relevant (see, for example, Chitty on Contracts , 27th ed. (1994), vol. 2, pp. 703-704, para. 37-008), the degree of control exercised by the company over the shareholder employee is always important. This is not the same question as that relating to whether there is a controlling shareholding. The tribunal may think it appropriate to consider whether there are directors other than or in addition to the shareholder employee and whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed. If he is a director, it may be relevant to consider whether he is able under the articles of association to vote on matters in which he is personally interested, such as the termination of his contract of employment. Again, the actual conduct of the parties pursuant to the terms of the contract is likely to be relevant. It is for the tribunal as an industrial jury to take all relevant factors into account in reaching its conclusion, giving such weight to them as it considers appropriate."
For present purposes, it is the final paragraph which is of importance, since in the present appeal no question of sham arises.[15]Counsel differed about the effect of the final paragraph of the guidance in Bottrill , and I confess that I do not find it entirely straightforward. The Court of Appeal recommends that tribunals should ask themselves a number of questions directed at the question of "control" – to be precise, "the degree of control exercised by the company over the shareholder employee". That is said to be "always important". But the question is why it is important. Lord Woolf refers to a paragraph in Chitty on Contracts (corresponding to para. 39-010 in the 29 th edition). The paragraph in question is concerned with the general question of the existence of an employment relationship, which typically arises in the form of whether a given contract is a contract of service or a contract for services, rather than with the particular issue of the majority shareholder employee. Mr. Hillier submits that it is not particularly helpful in cases of the present kind, where typically all the ordinary indicia of a contract of service, including the right of the company to control the activities of the putative employee, will be present: the question, rather, is whether it makes a difference that the company in whom that control is vested is itself controlled (in a different sense) by the employee. I agree. I do not believe that the Court was intending tribunals to carry out a conventional "service or services ?" analysis: no doubt that issue could in principle arise in the context of a contract between a director/shareholder and the company which he controls, but it is not peculiarly likely to do so - if anything, rather the reverse.[16]Mr. O'Flaherty submitted to me that the effect of the Court of Appeal's guidance can be seen from the precise terms of the questions which Lord Woolf recommends to tribunals - specifically, whether there are other directors; whether the putative employee "is in reality answerable only to himself and incapable of being dismissed"; and whether he is entitled to vote on matters in which he is personally interested "such as the termination of his contract of employment". The thrust of those questions appears to be to get tribunals to focus on the distinction between the theoretical (albeit indirect) control over whether he is dismissed which the employee who is a majority shareholder enjoys simply by being a shareholder, and the "reality" of the situation, having regard in particular to the make-up of the Board and the drafting of the memorandum and articles. The plain implication is that where an employee/shareholder has "real" as well as theoretical control over whether he can be dismissed that is, at least, a strong pointer against him being an employee. I agree that that does appear to be the tendency of the Court of Appeal's questions. Mr. O'Flaherty in fact went further and submitted that the question of "real" control was decisive: I do not think that that can be literally correct, because Lord Woolf made it clear that the tribunal must take into account all relevant factors. Nevertheless, it is fair to observe that no other type of factor is identified, and it is not clear what the ultimate test is if it is not whether the putative employee can control his own fate. If Mr. O'Flaherty is right, the retreat from Buchan and Ivey is quite limited: the Court of Appeal meant only to disapprove the proposition that the mere fact of a majority shareholding was by itself incompatible with employee status. Provided that the shareholding gives "real" control, it remains a crucial, if not decisive, factor. If that is indeed the correct interpretation, I am concerned whether it is really consistent with the reasoning of Morison P. which the Court of Appeal had earlier appeared to endorse, and in particular the passage quoted at para. 12 above, which Lord Woolf reproduced in full without any adverse comment.[17]Mr. Hillier essentially adopted the "Morison approach". He submitted that the relevance of control was only to the question of whether the company was a "simulacrum" or, as he preferred to put it (presumably finding that term not Latin enough for his tastes), that the company was the alter ego of the putative employee. I find that approach attractive, and consistent with the reasoning of the Court of Appeal in the main body of the judgment in Bottrill . But I do not find it easy to reconcile with the terms of the final paragraph of the judgment. And if the Court of Appeal was in fact adopting the "Morison approach", the questions which it recommends would appear to be redundant, because they would already have been disposed of at the prior stage of deciding whether the contract was a sham: although the questions whether the company is a simulacrum and whether the contract is a sham are logically distinct, in practice it is hard to see how they could receive different answers. Connolly[18]The facts of Connolly v Sellers Arenascene Ltd [2001] ICR 760 can be taken from the headnote, which reads as follows:
"In 1987 the applicant entered into a service contract with EGP Sports Group Ltd. ["
EGP"], of which he owned a controlling shareholding. Following the acquisition of EGP and its 99% subsidiary Arenascene Ltd by IRH plc in April 1992, the applicant entered into a contract of service with IRH under which he was employed as director and chief executive of EGP and Arenascene. When, in June 1992, EGP and Arenascene went into receivership the receivers sold the business of Arenascene to the respondent company and terminated the applicant's employment. The applicant complained that he had been unfairly dismissed by the respondent company. The industrial tribunal concluded that the applicant was not an employee within the meaning of section 230 (1) of the Employment Rights Act 1996 until he entered the agreement with IRH in April 1992, that, accordingly, he was not entitled to bring a complaint as he had not been continuously employed for two years, but that, had he been so employed, he would have established that he had been unfairly dismissed and that he had been employed in an undertaking which had been transferred to the respondent company. The applicant appealed, and the company cross-appealed against the finding that there had been a relevant transfer of an undertaking. The Employment Appeal Tribunal allowed the applicant's appeal and dismissed the cross-appeal."[19]Pill LJ gave the leading judgment. Having held at para. 15 that the tribunal had been right to find that the contract between Mr. Connolly and EGP was genuine and not a sham, he said this (at pp. 769-770):
" 16. The question is whether the service agreement actually gave rise to an employer/employee relationship. In my judgment, the reasoning and conclusion of the industrial tribunal on this issue cannot stand. While I have accepted that they did not purport to apply Buchan v Secretary of State for Trade and Industry, they did not, as the appeal tribunal recognised, have the advantage of the reasoning of the Court of Appeal in Bottrill . I acknowledge that the fact that the applicant has a controlling shareholding is a significant factor in deciding whether he is an employee but, in considering whether the agreement gave rise to an employer/employee relationship, the tribunal have attached to that factor a significance which excludes a proper consideration of other relevant factors. They refer to the applicant being at pains to "retain overall absolute control" and to his retention of "ultimate control"
. That they have misunderstood the relevance of the shareholding appears from their reliance upon the applicant's "interest as shareholder over and above that of employee and [that he] stood to gain if the company prospered". There are many situations in which people who are undoubtedly employees of a company stand to gain if the company prospers. Moreover, they appear to regard the skills contributed by the applicant as being inconsistent with a position as employee. They state that he was "an accomplished and expert entrepreneur operating a number of businesses", that he had built up businesses "from scratch", that the businesses "represented his personal ingenuity and success" and that he was a "key individual". In the circumstances of this case, I do not consider that the presence of those skills and the achievement of that success by the applicant militate against his being an employee. 17. Moreover, the fact that a third party, the company's bankers, required the applicant to remain with the group as controlling shareholder as a condition of their support does not bear upon the present issue unless a position as controlling shareholder is incompatible with the status of employee, which it is not. If a person with the skills and success attributed by the tribunal to the applicant were qualities which prevented a person in his position from enjoying the status of employee, it would be a severe and unwarranted deterrent to business enterprise. The tribunal's reliance on these factors nullifies first their own finding that the service agreement was not a sham and the companies could not be considered as "mere simulacra of the applicant" and, secondly, their finding that "he behaved as an employee". 18. This court has the benefit of those findings and an opportunity to consider the terms of the service agreement and to consider them in context. The court in Bottrill acknowledged that the actual conduct of the parties pursuant to the terms of the contract is likely to be relevant but no evidence was called, when the members of the tribunal themselves took the point on jurisdiction, to demonstrate that the service agreement was not what it purported to be or that the applicant behaved other than as an employee. The decision of the tribunal could be upheld only on the basis that the controlling shareholding was a decisive factor which, in the circumstances and on the evidence, in my view, it was not. In my judgment, the only legitimate conclusion was that the applicant was an employee. In those circumstances, the court should uphold the finding of the appeal tribunal."[20]Those paragraphs are primarily directed to the facts of the particular case and the details of the tribunal's reasoning, and they contain no direct statement of general principle. Nevertheless, they seem to me to be clear authority that the fact that a putative employee has a controlling shareholding and is very clearly the "prime mover" of the business (and has indeed been "at pains to retain overall absolute control") is not sufficient by itself to establish that he is not an employee if he otherwise satisfies the criteria for employment status. The tendency of the judgment – though I accept that there is no express statement to this effect – is to accept that the contract of employment should be taken at face value unless the putative employee did not "behave as an employee" or his companies were "mere simulacra" of himself. In other words, it is much closer to the "Morison approach" in Bottrill than to the interpretation which Mr. O'Flaherty invites me to put on the final paragraph of Lord Woolf's judgment. Gladwell[21]In Gladwell v Secretary of State for Trade and Industry [2007] ICR 264 the appellant was a director of, and 50% shareholder in, the company by which he was apparently employed. The company became insolvent and he sought payments from the Secretary of State. An employment tribunal chairman held that he was not an employee. The chairman's reasons were as follows:
"24. I consider this to be a borderline case and there are a number of factors which indicate that the claimant may be regarded as an employee. 25. Among those are that he worked full-time within the company, he was paid on a PAYE basis and he appears to have had set holidays. 26. On the other side of the coin, there is the substantial injection of capital when the business was in difficulties and the self-imposed reduction in salary. 27. I noted that there was a contract of employment produced to me. However, I did not give that document a great deal of weight in view of the fact that it was neither dated nor signed. Indeed, it appeared to me to be incomplete. 28. At the end of the day, I considered the question of control. It seemed to me that the claimant was one of two joint controllers of the company and his statement that he was both employer and employee indicated to me his perception of his position. A person cannot be both employer and employee. 29. In all the circumstances, I consider that the claimant was a director and officeholder of the company and I am not satisfied, from the evidence that I have received, that he was an employee, as defined in the Employment Rights Act 1996."
[22]Elias P. reviewed the authorities which I have set out above. He held that the Chairman had misdirected himself. He said (at p. 272):
"28. I have come to the conclusion that para 27 does strongly suggest that the tribunal saw the question of control as being effectively decisive. I am not satisfied that it was seen merely as a significant, even a very significant, factor weighing the scales firmly in one direction. The statement that a person cannot be both employer and employee suggests that the tribunal did in fact treat the question of control (or in this case joint control) as likely to be inconsistent with the status as an employee. That is inconsistent with the authorities and effectively reinstates, or at least comes close to reinstating, Buchan v Secretary of State for Employment which the Court of Appeal chose not to follow. A majority shareholder will in practice act as the employer, making decisions on behalf of the company in which he has shares, but that does not prevent him being an employee, as Secretary of State for Trade and Industry v Bottrill and subsequent cases show. 29. Particularly material here is Connolly v Sellers Arenascene Ltd in which the Court of Appeal concluded that the employment tribunal had given the fact that the employee had a controlling shareholding "a significance which excludes a proper consideration of other relevant factors": para 16. In essence I think that accurately summarises the error which the tribunal made here, notwithstanding that certain passages in the judgment would suggest otherwise."
Because there were on any view some factors identified by the tribunal which arguably pointed away from employment status (apart from the question of control), the case was remitted to the employment tribunal for reconsideration.[23]Elias P's reasoning does not directly analyse the effect of Lord Woolf's guidance in Bottrill . But the sentence at the end of his para. 28 supports the view that it is not the law that the fact that a majority shareholder "will in practice act as the employer" prevents him being an employee. Other Authorities[24]The foregoing are the only reported cases to which I was taken. There are however some other cases in this area, both reported and unreported. I should mention Eaton v Robert Eaton Ltd [1988] ICR 302 (a decision of this Tribunal chaired by Sir Ralph Kilner Brown) because, as will appear, it was expressly referred to by the Tribunal in the present case. It does not however contain any discussion of principle, beyond adverting to the fact that there were at least at that time a large number of claims of this character and emphasising that the decision in each case is one of fact.[25]I was also shown a decision of this Tribunal (Judge McMullen QC) in Interlink Express Parcels Ltd v Wild [EAT/242/03], which itself refers to another unreported decision of the Employment Appeal Tribunal (chaired by Wall J.), Hauxwell v Secretary of State for Trade and Industry [EAT/386/01]. It is perhaps a little surprising that Mr. O'Flaherty did not seek to rely directly on Hauxwell since it is the closest on its facts to the present case of any which I have seen. The facts, as summarised by the industrial tribunal, were as follows:
"2 The facts upon which the Tribunal bases its decision are as follows. We heard evidence from both Mr. and Mrs. Hauxwell, who informed us that each of them own 50% of the shares in the second respondent [Industrial Woodworking Services Ltd]. They were both Directors of the company. They both hired and fired employees. The company employed about 12-13 employees depending on workload. Mr. and Mrs. Hauxwell were paid through the PAYE system a fixed salary. On occasions in the past they have been paid Director's fees and dividends. Terms and conditions of employment were issued to them. These were the same as were issued to other employees. Mr. and Mrs. Hauxwell accepted that any decision in regard to the company and how it was to progress was made as a joint decision between them. They had, and they accept they had complete control of the company. Each of them had different roles in the company but they were not able to dismiss each other. Any decision in regard to finance, etc was to be made jointly. Mr. and Mrs. Hauxwell acted as joint guarantors of loans made to the second respondents [company]. 3 Unfortunately, the company got into some financial difficulties and eventually a liquidator was called in at the suggestion of the Bank. The liquidator dismissed all of the employees."
The tribunal held that Mr. and Mrs. Hauxwell were not employees of the company. It said:
"Having taken the law into account and taken the facts we have found, we find that the control of the company was in the hands of Mr. & Mrs. Hauxwell. They decided whether they were paid a wage, they decided how much that wage was, they made decisions in regard to all aspects of the company, they hired and fired. We accept they had terms and conditions of employment. We also take into account that they each had their separate functions within the company. But it was ultimately their company and they made the decisions. They have been paid dividends and Director's fees when the company was in profit. In those circumstances, we cannot find that they are employees within section 230(1) of the Employment Rights Act 1996. Mr. and Mrs. Hauxwell were the company, they were not employees of it ."
The Employment Appeal Tribunal expressed sympathy with Mr. and Mrs. Hauxwell. Wall J. said, at para. 27:
"We think there is considerable moral force in the proposition that they have, for years, each contributed to the State by way of National Insurance contributions and PAYE. If one were to apply the test of justice to the question, it would undoubtedly, in our view, be just for Mr. and Mrs. Hauxwell to receive redundancy payments from the Secretary of State. There is, in this case no suggestion that Mr. and Mrs. Hauxwell are anything other than entirely honest people who have had the misfortune to see their business go into liquidation. All the other employees of the company have received payments from the Secretary of State and Mr. and Mrs. Hauxwell, understandably, regard it as illogical that they have been excluded."
Nevertheless, it held that the tribunal had (despite, somewhat misleadingly, referring to Buchan and Ivey as if it were still good law) directed itself in accordance with Bottrill and reached a decision which could not be said to be wrong in law. Overview[26]I do not find it easy to reach a firm conclusion as to the approach to be derived from these authorities. Read in isolation, the final paragraph of the judgment of the Court of Appeal in Bottrill strongly suggests that the most important, if not the decisive, factor is whether the putative employee has "real" control of the company. That reflects how the test appears to have been applied in Hauxwell . It also seems to me more consistent with Fleming : although the Inner House expressed doubts about Buchan and Ivey , those doubts only extended to whether there should be any rule of law in this area, and it upheld the decision of the industrial tribunal on the basis that it was a legitimate factual assessment. But I find that approach hard to reconcile with the reasoning of the Appeal Tribunal in Bottrill (based on Lee's case), which the Court of Appeal elsewhere in its judgment appeared to approve, and with the subsequent decisions of the Court of Appeal in Connolly and of this Tribunal in Gladwell .[27]For reasons which will appear, I do not ultimately need to decide which approach is correct. I should however say that I believe that the law is that the fact that a claimant under the employment protection legislation is a majority shareholder and a director of the company which employs him does not affect his status as employee unless the tribunal finds that the company is a "mere simulacrum" in the sense discussed at para. 12 above (and thus, by the same token, that the contract between it and the putative employee is a sham). That seems to me the right approach in principle. It reflects the reality that in the event of an insolvency (or indeed a share sale) control of the company would pass out of his hands and leave him to be treated like all other employees. It is also in my view likely to be more workable in practice. It should not in most cases be difficult to decide whether the business in which the claimant is apparently employed is genuinely being run through the company. The same cannot be said of the alternative approach, where it is far from clear what the indicia of "real" control are and tribunals will have to make subjective judgments of a kind which will only conduce to uncertainty and dissatisfaction. It is true that (as Lord Woolf acknowledged in Bottrill , at p. 603 A-B) the definition of "employee" in the 1996 Act makes a degree of uncertainty inevitable, particularly in the notoriously difficult area of the service/services distinction; but that is no reason for importing a further uncertainty. Finally, I would add that an approach which means that shareholder employees will generally be able to claim under the insolvency provisions would avoid the perception of injustice of which Wall J. in Hauxwell (and indeed, as will be seen, the Chairman in the present case) acknowledged the force. THE DECISION OF THE TRIBUNAL[28]The Chairman heard submissions from Mr. Nesbitt on behalf of himself and his wife and from a Mr. Quinn, who is described as a "representative", for the Secretary of State. In his Reasons he sets out the facts and recites that he had been referred to the decision in Bottrill . He continues (at para.5):
"… There is no doubt that this appears in both cases [sc. the cases of Mr. and Mrs.. Nesbitt] on the face of it to be proper and correctly executed contracts of employment which establish a relationship, in writing at least, of employer and employee between the Company and the respective claimants. It was not entered into at a time when insolvency was foreseeable and so its genuineness is not really challenged. The Court of Appeal requires me to look also at whether there was a degree of control exercised over the shareholder/employee and Mr. Nesbitt's answer to that is that both of the claimants were answerable to the Board. The Company's constitution did not give the shareholder rights making him – them in this case – answerable only to themselves and Mr. Nesbitt urges on me that both claimants conducted themselves in their daily work in line with the contract of employment. That then, Mr. Nesbitt argues, means that the fact that they were controlling shareholders did not negate the possibility of their also being employees as defined in Section 230 of the Employment Rights Act 1996. Mr. Quinn relies on the authorities of McLean in 1991 and Eaton in 1998. He says that in effect what happened here was that the two claimants were running three companies of which the one that I am concerned with was the main one. They operated from two offices. Mrs. Nesbitt controlled the Company, owning in excess of fifty two percent of the shares. She could have dismissed the Board but Mr. Quinn argues that that would have been highly unlikely and that the contracts of employment enjoyed by the claimants were not the same as all other employees, at least certainly not since 1996. The Secretary of State's case is that this was a partnership running under the guise of a limited company. 6. I am not unsympathetic to persons who start a limited company, go through proper processes of issuing contracts of employments to themselves as employees, receive remuneration only as employees and pay National Insurance contributions with a view, as Mr. Nesbitt has properly put it, to enjoying the benefits thereof, only to find those benefits plucked away in circumstances where the company fails, on the argument that they were not strictly employees. That is the test for me [ sic ] and in these cases it is always a difficult one. I rule out, however, any sympathies that I may have one way or the other. I look at the way in which this company operated on the basis that I am given to understanding from the evidence which I have received. I conclude, on the balance of probabilities that this amounted to a partnership operated under the name of a limited company but at no time, realistically, were the affairs of the Company, from minor matters up to the most important ones, in the hands of anybody other than the two claimants. It was inconceivable that either one of them might be dismissed by the other or by the Company and in those circumstances I regret that I have to reject their appeals." (I should say that I was not shown the authority of McLean to which the Chairman was apparently referred by Mr. Quinn, and I have not been able to identify it. "
Eaton " is no doubt Eaton v Robert Eaton Ltd : see para. 24 above) THE APPEAL[29]If the law is as I suggest in para. 27 above, then the Chairman's decision was plainly wrong. On the facts as found in the present case there is no question of the company being a "mere simulacrum". It was a properly functioning company in which the business of APAC Computer Training was plainly vested and which employed Mr. and Mrs. Nesbitt in that business.[30]If, however, the Tribunal was obliged to consider whether Mr. and/or Mrs. Nesbitt "in reality" controlled the power of the company to dismiss them, the position is less straightforward. The primary submission made by Mr. Hillier is that the Chairman made an error of law by failing to address the positions of Mr. and Mrs. Nesbitt separately. What, Mr. Hillier submits, he should have done was to ask in relation to each of them individually whether he or she was an employee, whereas, he says, he simply asked whether, jointly, they controlled the business of the company. Mr. Hillier points out that Mr. Nesbitt had only a minority shareholding (some 48%) and that there is no reported case in which a claimant has been held not to enjoy the status of employee by reason of a shareholding of less than 50%.[31]I agree that as a matter of principle the Chairman was obliged to consider the employment status of Mr. and Mrs. Nesbitt separately. I do not however, accept, if this is what Mr. Hillier's submission entails, that in doing so he was obliged to ignore that fact that each of them was married to the other and that, together, they held a 99.99% shareholding. Assuming, as I must at this stage of the argument, that the question of who "in reality" has control of the company is relevant to, albeit not determinative of, the question of employee status, it seems to me artificial to regard that question as simply a matter of the voting rights vested in each individual. On this interpretation of the guidance given by the Court of Appeal in Bottrill , what has to be established is the character of the relationship between the putative employee and the company, which in principle depends on a number of factors. In that context, it seems to me that a de facto control deriving from a relationship with another person, albeit that the particular individual may hold less than 50%, is a matter which requires to be taken into account. This appears to have been the approach taken by Wall J. in Hauxwell .[32]Mr. Hillier sought to frighten me by saying that if this approach were right a whole variety of relationships would be capable of creating circumstances in which claimants who were related not simply by marriage (or civil partnership) but by, for example, "common law marriage" (or its homosexual equivalent) or blood (parents and children, siblings) or simple friendship or business association could be held not to be employees. I readily accept that deciding in any given case whether the relationship in question was such that the claimant could not be regarded as an employee might involve difficult judgments, and that the resulting uncertainty may be undesirable. But I cannot see that such a result is unacceptable in principle. Difficult multifactorial judgments are inevitable on this approach (cf. para. 27 above). Mr. Hillier also asked, rhetorically, what would happen if Mr. and Mrs. Nesbitt fell out or divorced. But the answer would seem to be that since the character of the relationship must be established at its inception, the fact that an individual's shared control might be lost as a result of supervening events would not be enough to change the character of the relationship once established (absent some clear redefinition of the relationship).[33]The question therefore remains whether the Chairman was entitled to find that, having regard to all the relevant circumstances, Mr. and/or Mrs. Nesbitt was not in an employment relationship with the company. I do not believe that he was. As appears from the final sentences of the Reasons, the only fact on which he relied was the fact that the two of them were in practice in total overall control of the company and thus able to prevent their own dismissals. But that is precisely the reasoning which the Court of Appeal in Connolly and Elias P. in Gladwell held to be insufficient. That fact apart, all the indicia were that both Mr. and Mrs. Nesbitt were employees. They had proper employment contracts (equivalent to those issued to other employees before 1996); they received all their remuneration by way of salary; they (as it was put in Connolly ) "behaved like employees". There were no other factors pointing away from employee status of the kind apparent in Fleming and Gladwell . In those circumstances I believe that the only conclusion open to the Tribunal in law, on the facts found, was that Mr. and Mrs. Nesbitt were employees.[34]Accordingly I allow this appeal and remit the claim to the Tribunal for a determination of the sums due.