MR I C MORRISON v 1) ODS BUSINESS SERVICES LTD 2) THAMESDOWN SDC (IN ADMINISTRATION) 3) DTI INSOLVENCY [2007] UKEAT 0618_06_2106

EMPLOYMENT APPEAL TRIBUNAL

BAILII case number: [2007] UKEAT 0618_06_2106

Case No Appeal No. UKEAT/0618/06

Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

Between

MR I C MORRISONAPPELLANT

1) ODS BUSINESS SERVICES LTD 2) THAMESDOWN SDC (IN ADMINISTRATION) 3) DTI INSOLVENCYRESPONDENT

Before

His Honour Judge Reid

Date 21 June 2007

[1]APPEARANCES For the Appellant Mr A Korn (of Counsel) Instructed by: Messrs Morrison & Masters Solicitors 17-20 Commercial Road Swindon Wilts SN1 5NS For the Respondents First Respondent Mr A Blake (of Counsel) Instructed by: Messrs Kirkpatrick & Lockhart Preston Gates Ellis LLP 110 Cannon Street London EC4N 6AR Second Respondent Debarred Third Respondent Mr D Squires (of Counsel) Instructed by: The Treasury Solicitor Litigation & Employment Group One Kemble Street London WC2B 4TS SUMMARY Contract of Employment – Definition of employee A was the majority shareholder and a director of a company which went into administration. The issue was whether he was employed under a contract of service. The ET held he was not. Held: this was a conclusion to which the ET was entitled to come. HIS HONOUR JUDGE REID QC The Appellant appeals against the judgment of an Employment Tribunal in Bristol on a pre-hearing review sent to the parties on 25 September 2006. The Tribunal held that the Appellant was not an employee of Thamesdown SDC Ltd (in administration) ("TSDC") the Second Respondent. The Appellant had commenced Employment Tribunal proceedings (the first Employment Tribunal proceedings) against ODS Business Services Ltd ("ODS"), the First Respondents on 7 June 2006. Permission was given to amend the Claim to join the Third Respondent ("DTI") on 12 June 2006. The Appellant then commenced further proceedings (the second Employment Tribunal proceedings) against the First Respondent alone on 26 July 2006. It was a prerequisite of both claims that the Appellant was an employee (as defined by section 230 of the Employment Rights Act 1996 ) of TSDC.

[2]The Appellant's principal claim was against ODS and arose under the Transfer of Undertakings (Protection of Employment) Regulations 1981 . The alternative claim against the DTI was for sums due pursuant to sections 166, 167 and 182 of the Employment Rights Act 1996 arising out of the insolvency of TSDC on 8 March 2006 when the TSDC went into administration. At that date the Claimant had a shareholding of 50.1% in Thamesdown SDC Group Limited, the holding company which held 100% of the shares in TSDC. 25% of the shares in the holding company were owned by a Danish company, SDC Dan Disc AS, 14.4% were held by Mr Watkins the Sales Director, 7.19% by Mr Neve the Financial and Operations Director and the remaining 3.31% were owned by a trust fund for employees.

[3]The Administrators concluded a sale of the assets of TSDC to ODS and its subsidiaries, on 9 March 2006.

[4]Before going into administration TSDC employed approximately 160 people. It had been founded by the Appellant, who was employed by TSDC under the terms of a contract dated 2 December 2002, although he agreed to a reduction in pay until 8 March 2006. The contracts of the other Directors (Mr Watkins and Mr Neve) were in similar terms as the Appellant save that their remuneration package was not as generous and other terms were less favourable.

[5]The Tribunal found that the material terms of the contracts of employment were:(a) Notice periods - the Appellant was entitled to 24 months notice, his fellow directors 12 months.

(b) Salary - the Appellant's salary was £128,000 per annum, Mr Watkins' salary was £87,000 per annum and Mr Neve's salary was £72,000. Their pay was subject to deduction of income tax under the PAYE system and subject to deduction of national insurance contributions. There was no evidence that any of these sums were received by way of dividend or as a fee for services.

(c) Pension - the Appellant was entitled to an annual lump sum payment of £32,000 into his personal pension scheme, together with a further payment of 10% of his annual salary and was eligible to receive an additional £10,000 subject to TSDC attaining a particular profit level. His fellow directors were entitled to participate in various pension arrangements to which the company contributed 10% of their annual salary only.

(d) Holiday - the Appellant was entitled to 60 days and his fellow directors 30 days paid leave.

(e) Sick pay - the Appellant was entitled to 12 months full pay and 12 months half pay thereafter, his fellow directors 6 months full pay and 6 months half pay thereafter.

(f) Disciplinary arrangements - any disciplinary matters in respect of the Appellant were to be dealt with by David Bond of Morris Owen the company's accountants "or otherwise the company's accountant from time to time". Any disciplinary matters in respect of his fellow directors were to be dealt with by the Appellant.

(g) The contract contained restrictions on the manner in which the Appellant could work following termination of the contract of employment and required that the Appellant resign the directorship or office in the company immediately upon the request of his employer.

[6]The Appellant agreed in evidence that he set his own salary though he said that Mr Neve "led discussions" on the salary level. The Tribunal appears to have accepted the Appellant's evidence that he ran the business together with his fellow directors although operationally he took the lead. His fellow directors were not challenged on their evidence that formal board meetings hardly ever took place. The Tribunal found that as far as any decisions that were required to be made the Appellant had the final say and ultimately made all the decisions although there was never any formal vote.

[7]The Tribunal stated the law as follows:

"I was directed by all parties to Secretary of State for Trade and Industry v Bottrill [19991ICR 592. I draw from that case the Employment Rights Act 1996 does not provide a simple clear test for determining whether a shareholder or director of a company was an employee within the meaning of section 230(1) of the Act and it was far from clear what Parliament would have intended any such test to be. Therefore whether such a person was an employee could only be determined in accordance with the law of employment generally and having regard for the relevant facts. Whilst a controlling shareholding in a company is significant it is not on its own determinative of the issue as to whether a shareholder or director of a company is an employee. In determining whether there was a genuine contract of employment relevant considerations would include the reasons for the contract, whether it was made when insolvency loomed and what each party actually did pursuant to the contract. The degree of control exercised by the company over the shareholder employee is always important. As well as considering whether there, are directors other than or in addition to the shareholder employee the Tribunal should consider whether the majority shareholder has rights such that he is in reality answerable only to himself."

[8]The Tribunal then expressed its conclusions with brevity:

"In this case there a number of factors which are indicative of a contract of service such that the contract has many of the hallmarks of such a contract as indicated above including the deduction of tax and national insurance. However considering the important factor of control the preferential terms enjoyed by the Claimant and in particular the extent of such preferential treatment is in my view indicative of lack of control. In reality this would not appear to be a negotiated package but the Claimant negotiating his own terms and conditions. Further in respect of the disciplinary procedure the Tribunal finds that the effect of that decision being taken by an auditor from a company appointed by the Managing Director was that effectively the Claimant was answerable to himself and himself only. In all the circumstances the Tribunal finds that the Claimant was not employed under a contract of service."

[9]The Appellant attacked this conclusion on the grounds that(a) it misapplied the "law of employment generally" to the circumstances of the case;

(b) it misapplied the " Bottrill " test; and

(c) it reached a perverse decision. In the course of argument it appeared that in substance the first two of these grounds were different sides of the same coin and the third was a makeweight.

[10]The Appellant accepted that the Court of Appeal's ruling in the Bottrill case was the starting point in considering the circumstances in which a controlling shareholder could be an employee of a company. He referred to paragraph 28 of the judgment:

"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"

. He submitted that although the Employment Tribunal referred to the contract as a "factor" in paragraph 7 of its judgment it made no finding on this point. It was not suggested that the contract was anything other than genuine. It had been drawn up by solicitors (who also drew up the contracts of the other directors) and was signed on 2 December 2002, well before there was any suggestion of possible insolvency loomed. The Appellant had worked under that contract for well over three years before TSDC went into receivership on 8 March 2006.

[11]He submitted that the failure to make a specific findings on this point amounted to a fundamental error of law because the existence of the contract was fundamental to the nature of the relationship and the Tribunal failed to follow the first and most critical step in the Court's judgment. Reference was made to paragraph 22 of the EAT' s ruling in Gladwell v Secretary of State for Trade and Industry (

UKEAT/0337/06/ZT

) and Connolly v Sellars Arenascene Ltd

[2001] ICR 760

where it was pointed out that being a controlling shareholder was not inconsistent with being an employee. The submission continued by suggesting that where there is a genuine (i.e. not a sham) contract of employment there is a strong presumption that the relationship between the controlling shareholder and the company is one of employment and that it will be an unusual or exceptional case such as Hauxwell v Secretary of State for Trade and Industry (

EAT/386/01

) (where the appellants were husband and wife who each held 50% of the shares and were subject to the guidance and control of each other rather than the company) in which a contrary conclusion will be reached .

[12]The Appellant also sought to challenge the second part of the "guidance" given by the Court of Appeal in paragraph 29 of Bottrill , asserting that this "guidance" was somewhat inconsistent and self contradictory as it appeared that a Tribunal having found the contract not to be a sham applying the guidance in paragraph 28 was then required to consider whether or not it is a sham in accordance with the guidance in paragraph 29. He submitted that having concluded that the agreement was not a sham, the Employment Tribunal was not under an obligation to revisit this issue.

[13]The Appellant contended that the findings made by the Tribunal in paragraph 8 of its judgment were inadequate to support the conclusion that the "label" used by the parties was in fact incorrect. For example, there was no finding on the voting position under the Articles of Association and no finding regarding dismissal. There was no finding on the "actual conduct of the parties pursuant to the terms of the contract" and in particular how the Appellant performed his role, for example, whether he came into work every day and acted as if he was an employee. The only findings made in paragraph 6 of the judgment related to the conduct of Board meetings. With the exception of the issue of tax and national insurance, the Employment Tribunal, having made findings on the terms of the contract, failed weigh these properly in paragraph 8 of its judgment. The Employment Tribunal failed to consider "all the relevant circumstances" in making its judgment as required by the Court of Appeal in paragraph 23 of Bottrill .

[14]The Appellant contended that in having regard to the law of employment generally, the Employment Tribunal attached too much importance to what it described as the "important factor of control". The Appellant contended that this factor is unhelpful in considering the position of a controlling shareholder and by overemphasising its importance without more, the Employment Tribunal in effect equated the Appellant's position as a controlling shareholder with the issue of control in an employment context. He further contended that in concluding that the Appellant "controlled" TSDC, the Employment Tribunal made insufficient findings to reach that conclusion and did not carry out a proper analysis of the facts in the context of the present circumstances. It was said, relying on Cotswold Developments Construction Ltd v Williams

[2006] IRLR 181

, that the Employment Tribunal erred in failing to consider whether there was a contract between the parties and, if so, failed to properly consider the nature of the contract. Reference was made to paragraph 48 where Langstaff J said: "It cannot simply be control that determines whether a contract is a contract of employment or not. The contract must also necessarily relate to mutual obligations to work and to pay for (or provide ) it; to what is known in labour economics as the 'wage-work bargain'".

[15]The Appellant submitted there was clear evidence of a wage-work bargain which the Employment Tribunal failed to take into account. He went through the various factors which are set out above in this judgment, noting in particular there was no evidence (and no finding) that the Appellant's remuneration package was excessive, that the Appellant agreed to a cut in his pension and salary before TSCD went into liquidation and that it is not unusual or inconsistent with an employment relationship that a managing director of a private company can set his salary (and other terms) without Board approval if this is not excessive.

[16]As to the Employment Tribunal's conclusion in paragraph 8 of its judgment that "effectively the Claimant was answerable to himself and himself only" the Appellant repeated his submission that(a) the fact that the Appellant was in "ultimate control" did not preclude him from being an employee and

(b) there are insufficient findings to support this conclusion. The Appellant's contract included grounds for which he may be summarily dismissed and there is a procedure for dismissal for gross misconduct. In Hauxwell , not only did the Hauxwells have complete control of the Company as shareholders but the evidence of both Hauxwells was that they could not dismiss each other, that the grievance procedures did not apply to them and that each was subject to the control and guidance of the other and not the Company. Mr Bond, the Company Accountant, would have been under a professional duty to investigate matters of dishonesty or a breach of the Appellant's Companies Act responsibilities. There was no finding (and no evidence) that Mr Bond would not have acted independently in such circumstances. The manner of Mr Bond's appointment is insufficient to justify such an inference. There was no evidence that the power of dismissal was a "sham" or that the process was a sham, no finding to that effect and no basis to draw such an inference. The Employment Tribunal, it was said, erred because in effect it equated the Appellant's control as a controlling shareholder with his control over his terms and conditions and in effect made the same error as the Employment Tribunal did in the Gladwell and also the Connolly case.

[17]The Appellant submitted that the "control" test is unhelpful in determining this question and the Employment Tribunal erred in law in its over-reliance on that test and hence the Employment Tribunal further erred because it failed to consider any of the other tests for determining the nature of the relationship and in so doing failed to make findings on relevant factors (for example the restrictive covenants and other intellectual property provisions of the contract) which it should have considered in reaching its conclusions on the issue. Had it considered the other tests, it would have inevitably concluded that the Appellant was a fully integrated member of the Company and that the "economic reality" on a proper application of the "multiple test" was that he was an employee.

[18]As to perversity the Appellant acknowledged the difficulty of the task before him in the light of Yeboah v Crofton

[2002] IRLR 634

but reiterated the points already made and submitted that the conclusion was one that could not properly have been reached.

[19]By contrast the submissions on behalf of the Respondents were brief. They submitted that the Tribunal had come to a conclusion on the facts and in the light of the evidence to which it was entitled to come. It had applied the correct test as a matter of law and had made no error of law in reaching its conclusion. The conclusion was thus unimpeachable.

[20]In my judgment the Tribunal made primary findings of fact which were open to it. It had in mind the Appellant's position as founder member of TSDC and his controlling shareholding. It identified that he held the barest of control in that he had 50.1 per cent of the shares. It identified the other shareholders and their holdings. It noted the existence of the contract of employment, its date and the terms (and the terms of the contracts of the other two directors), including reference to the restrictive covenant and intellectual property provisions. It referred to his agreement to reduce his pay, and also his agreement that "he set his own salary". The Tribunal noted and apparently accepted the Appellant's own evidence found that he ran the business with his fellow directors but "operationally he took the lead". It noted the fellow directors unchallenged evidence that formal board meetings hardly ever took place and accepted their evidence that the Appellant had the final say and ultimately made all the decisions although there was never any formal vote. As to the question of discipline, the issue was not whether there were on paper disciplinary procedures applicable to the Appellant or as to whether Mr Bond would have properly carried out his functions in that respect if required to do so. The question was whether Mr Bond could be removed from his post at the instance of the Appellant (which he could) and whether the Appellant could then cause some stooge of his own to appointed (which he could). Hence the Employment Tribunal found that "effectively the [Appellant] was answerable to himself and himself only."

[21]In my judgment in making these findings of fact the Tribunal made the findings of fact necessary for its conclusions. Although there was criticism of the Tribunal for not making other findings (e.g. as to the terms of the Memorandum and Articles of TSDC) nothing was put before me which demonstrated that there were other facts which should have been found and were necessary to the proper disposal of the case.

[22]As to the law, the Tribunal did attach importance to the issue of control but only in the context of the entire relationship. It rightly looked at Bottrill and correctly identified that control was a significant factor but "not on its own determinative of the issue as to whether a shareholder or director of a company is an employee." It rightly did not perceive the difficulty that the Appellant saw in reconciling paragraphs 28 and 29 in the judgment in Bottrill . There is no inconsistency in determining whether or not a contract is genuine and considering the effect of the "actual conduct of the parties pursuant to the terms of the contract". In my judgment the Tribunal correctly stated that "whether such a person [as a director or shareholder] was an employee could only be determined in accordance with the law of employment generally and having regard to the relevant facts".

[23]That leaves the question whether the conclusion reached on the facts was perverse. I was reminded of the well known passage in Stewart v Cleveland Guest (Engineering) Ltd

[1994] IRLR 440

at paragraph 33:

"Whenever an appeal is based on the perversity ground, this Tribunal must be extremely cautious not to conclude that the decision of the Industrial Tribunal is flawed because the Appeal Tribunal would have reached a different conclusion on the evidence or thinks that another Industrial Tribunal would have reached a different conclusion on the evidence. An appeal should not be allowed on this ground simply because the Employment Appeal Tribunal disagrees with the Industrial Tribunal as to the justice of the result, the merits of the case or the interpretation of the facts. This Tribunal should only interfere with the decision of the Industrial Tribunal where the conclusion of that Tribunal on the evidence before it is 'irrational', 'offends reason', 'is certainly wrong' or 'is very clearly wrong' or 'must be wrong' or 'is plainly wrong' or 'is not a permissible option' or 'is fundamentally wrong' or 'is outrageous' or 'makes absolutely no sense' or 'flies in the face of properly informed logic'."

In my judgment, whilst other tribunals might have come to a different conclusion on the evidence, it cannot properly be asserted that this decision was perverse.

[24]It follows that the appeal fails and will be dismissed.