MRS V ASHBY v MONTERRY DESIGNS LTD [2009] UKEAT 0226_08_1812

EMPLOYMENT APPEAL TRIBUNAL

BAILII case number: [2009] UKEAT 0226_08_1812

Case No Appeal No. UKEAT/0226/08

Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

Between

MRS V ASHBYAPPELLANT

MONTERRY DESIGNS LTDRESPONDENT

Before

Mrs Justice Cox Mrs D M Palmer Ms V Branney

Date 18 December 2009

[1]APPEARANCES For the Appellant MR T BROWN (of Counsel) Instructed by: BrookStreet Des Roche LLP 25 Milton Park Abingdon Oxfordshire OX14 4SH For the Respondent MR E MALLETT (of Counsel) Curwens Solicitors Crossfield House Gladbeck Way Enfield Middlesex EN2 7HT SUMMARY JURISDICTIONAL POINTS: Worker, employee or neither Was the Claimant an employee? ET judgment, holding that she was not, pre-dated the decision in Neufeld. EAT held that the ET misdirected themselves on the relevance of her directorship and shareholding in the Respondent company and allowed the appeal. To be remitted for re-determination. THE HONOURABLE MRS JUSTICE COX The Claimant, Vicki Ashby, is appealing from a judgment of the Reading Employment Tribunal, promulgated with reasons on 4 February 2008, in which the Tribunal decided that she did not have the necessary qualifying period of 12 months employment at the time of her alleged constructive dismissal in August 2007; and that there was, therefore, no jurisdiction to determine her claim of unfair dismissal.

[2]The question on appeal is whether the Tribunal applied the correct legal test in deciding that the Claimant was not an employee of the Respondent company, as defined by Section 230 Employment Rights Act 1996 , during the time that she held a 50 per cent shareholding in the company. That time ended on 16 April 2007, when the Claimant sold the company to a Mr and Mrs Grant. Thereafter the Claimant continued to work for the company. There was no dispute that, at the time she presented her claim, she had been an employee of the company from 16 April to the date in August when she resigned. However, the effect of the Tribunal's decision, that no contract of employment existed before April 2007, meant that she did not have the relevant qualifying period to pursue her claim of constructive unfair dismissal.

[3]Section 230 Employment Rights Act 1996 provides as follows:

"230 Employees, Workers etc. (1) In this Act 'employee' means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment. (2) In this Act 'contract of employment' means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing."

[4]The reason for the delay in hearing this appeal is that the decision of the Court of Appeal was awaited in the case of Secretary of State for Business Enterprise and Regulatory Reform v Neufeld and Howe

[2009] EWCA Civ 280

. That judgment was handed down on 2 April 2009 and this appeal has therefore now resumed. The Facts

[5]The pleadings did not raise directly any question as to the Claimant's employment status. In her form ET1 the Claimant described herself as an embroidery machinist and stated that her employment had started in December 1985. The Respondent admitted that the Claimant "is or was" an employee before the claim was brought, but stated, at paragraph 3.2, that they did not hold any records confirming the date upon which she commenced employment.

[6]The parties, both represented by counsel, arrived at the Tribunal for the full hearing on 10 January 2008, but the Tribunal themselves raised at the outset a preliminary issue for determination, namely whether the Claimant was an employee of the company within the definition contained in Section 230.

[7]In order to determine that issue the Tribunal heard evidence solely from the Claimant, whom they found to be a "very direct and honest witness", who "answered clearly and directly all the questions that were put to her". On the basis of that evidence they found the following facts.

[8]In 1985 the Respondent company was set up as a company by three shareholders, namely Janet Westman, Graham Kew and the Claimant. The company offers products and services in relation to embroidery, green or hot press printing and vinyl signs and graphics. The three named persons all had equal shareholdings in the business and they were all directors. Janet Westman and the Claimant worked in the business. Graham Kew had some involvement in it in relation to the taking of orders, but he spent the majority of his time running his own framing business.

[9]The position changed in the early 1990s, when the company hit a financial crisis and had substantial debts. In 1992 Janet Westman left the company and her shareholding was purchased and split equally between the Claimant and Mr Kew. They each paid her £500 for the part of her shareholding that they acquired, leaving them each holding an equal shareholding in the company of 63 shares. They both remained as directors.

[10]From that day onwards the Claimant ran the company in order to get it out of debt. The Tribunal found that she succeeded in that endeavour in that, when the company was sold by way of share sale in April 2007, there were no longer any debts.

[11]Following the change in shareholding and directorship in 1992 the Tribunal found that, initially, Mr Kew would call in fairly frequently to check on progress and the Claimant would report to him as to what was happening with the business. However, the Claimant took on all day-to-day management duties. All employees, both full and part-time, reported directly to her. Board meetings were held monthly and at those meetings agreement was reached jointly between the Claimant and Mr Kew with regard to any major decisions on spending, such as the purchase of new equipment or the hiring of additional staff.

[12]Following negotiations on 16 April 2007 the company was sold by way of share sale to Mr and Mrs Grant. The sale proceeds of £30,000 were split equally between the Claimant and Mr Kew. There was an initial payment of £4,000 each, with the balance to be paid by equal monthly instalments over 24 months. It was part of the sale agreement that each provided a letter of resignation and confirmed that they had no claims against the company for loss of office or for any other payments whatsoever. That term was complied with.

[13]Immediately after this share sale the Claimant recommenced working in the business as an embroidery machinist which, aside from her management role, was the same work that she had performed throughout, whilst being a director of the company. She now did that on a part-time basis, three days a week at an agreed hourly rate. The Tribunal's Decision

[14]The issue identified for determination was whether at the point of sale the Claimant was an employee, or whether the reality of her working relationship with the company was one of self-employment. At paragraph 12 the Tribunal held that:

"On the evidence heard there was clearly a possibility that whilst there were three directors and a three way equal shareholding, it was quite possible that she was an employee in that any two directors and shareholders could exercise control over the other."

[15]They found, however, that that ceased in the early 1990s and that thereafter there were two equal directors and shareholders, stating at paragraph 13:

"Whilst the Tribunal accept Mrs Ashby's evidence that Mr Kew did initially check on a fairly regular basis what was happening in the business, that is entirely consistent with him taking an interest in the investment he had equally with her. No contract of employment was produced at the hearing. The Tribunal have to consider the question of control on the basis of Mrs Ashby and Mr Kew's respective shareholding entitlements and positions as directors. Mrs Ashby accepted that if she was unhappy with how Mr Kew was performing his duties as a director that she could have taken action against him and indeed she could have applied under the relevant company law to have him dismissed as a director if he was in breach of his fiduciary duties and other obligations to the company, just as he could in relation to her."

[16]At paragraph 14, the Tribunal set out what they considered to be the necessary elements that must subsist in order to establish a contract of employment, applying the test in Carmichael v National Power Plc

[2000] IRLR 43

, namely control, mutuality of obligation and personal performance. Their conclusions then followed:

"14. Clearly Mrs Ashby performed her duties personally for the company both in terms of the work she did as a machinist and in terms of her management duties. However, in terms of mutuality of obligation, she was effectively on both sides of that relationship in that she was directing the work and was also carrying out some of the work. The key area where in the Tribunal's view she has failed to establish that the three irreducible minima exist is with regard to control. She clearly ran the company. She clearly took on that role to reduce and ultimately completely eliminate the company's debt which to her credit she clearly did successfully. She was left to her own devices as to day-to-day management and had equal control over the company with her fellow director and shareholder with regard to any major financial decisions. 15. There are two further points to raise. It is correct that PAYE was paid by the company on her behalf throughout. That is indicative of employment although not determinative. A personal pension contribution which was made through the company has also been mentioned, but in the Tribunal's view this is neutral as to whether it indicates employment or self-employment. An indicator of self-employment is the fact that she made a financial investment in the business in the early 1990s when she purchased one half of the shares of Janet Westman when she left the business. That is indicative of self-employment. Clearly the sale agreement itself and the equal benefits she received on the sale are again clearly indicative of self-employment. 16. On the evidence heard the Tribunal are entirely satisfied that she was not an employee of the Respondent company from the early 1990s up until the point of sale of the business in April of 2007. The Respondent has conceded that it accepts she was an employee thereafter. Her dismissal was in August 2007 and she cannot establish the necessary 12 month's minimum employment which is required under Section 108 of the Employment Rights Act 1996 in order to bring a claim of unfair dismissal. Inevitably the Tribunal must dismiss her claim of unfair dismissal because it has no jurisdiction to deal with it."

The Appeal

[17]On behalf of the Claimant Mr Brown submits, essentially, that the Tribunal misdirected themselves as to the correct test to be applied and therefore erred in concluding that this Claimant was not an employee of the company before 16 April 2007.

[18]In Neufeld , Rimer LJ, giving the judgment of the Court of Appeal, reviewed the authorities dealing with the question whether directors and shareholders also hold contracts of employment, and gave fresh guidance as to the applicable principles when deciding such cases.

[19]Relying on this judgment Mr Brown submits that the mere fact that an individual had a controlling or, by extension, a 50 per cent share holding in the company, does not mean that there was no contract of employment in existence between them. There was no suggestion that this company was a sham and the Tribunal seemed to accept (see paragraph 12) that, before 1992, this Claimant had been an employee when she was one of three equal shareholders. At paragraph 13, however, the Tribunal identified control as being the decisive issue in resolving the matter and he submits that that was a clear and fatal misdirection.

[20]Mr Brown submits that there were further misdirections in paragraph 15, in referring to the Claimant's financial investment on purchasing Mrs Westman's shares, and to the benefits she subsequently received on sale as being factors which pointed away from her being an employee.

[21]The erroneous approach adopted by the Tribunal meant that they failed to ask themselves the right questions, as required by the relevant case law, namely whether, prior to 16 April, a contract had existed between the Claimant and the company; how and why it had come into existence; whether it was a sham; if not, what each party did in pursuance of that contract; and whether the Constitution of the company gave the Claimant such rights that she was in reality answerable only to herself and incapable of being dismissed. Mr Brown submits that the Tribunal failed to address their minds to these issues and that their conclusion is therefore unsustainable. The Case of Neufeld and Howe

[22]The special feature of each case under appeal was that the Claimant was the controlling shareholder and a director of a company which became insolvent. The narrow questions raised by the appeals were whether the Employment Tribunal's decision, as to whether each Claimant was an employee, was correct. However, conflicting guidance in the recent authorities as to how to resolve these questions led the Court to give clear guidance as to the approach to be adopted. In our judgment, given the extensive review of these previous authorities undertaken by the Court and the clear statement as to the relevant principles which are applicable in such cases, it is now unnecessary to refer to the earlier case law on this subject.

[23]The principles were summarised at paragraphs 80-90 of the judgment of Rimer LJ and we shall set out here the relevant passages, as follows:

"80 There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee of the company under a contract of employment. There is also no reason in principle why someone whose shareholding in the company gives him control of it – even total control (as in Lee's case) – cannot be an employee. In short, a person whose economic interest in a company and its business means that he is in practice properly to be regarded as their "owner" can also be an employee of the company. It will, in particular, be no answer to his claim to be such an employee to argue that: (i) the extent of his control of the company means that the control condition of a contract of employment cannot be satisfied; or (ii) that the practical control he has over his own destiny – including that he cannot be dismissed from his employment except with his consent – has the effect in law that he cannot be an employee at all. … 81 Whether or not such a shareholder/director is an employee of the company is a question of fact for the court or tribunal before which such issue arises. In any such case there may in theory be two such issues, although in practice the evidence relevant to their resolution will be likely to overlap. The first, and logically preliminary one, will be whether the putative contract is a genuine contract or a sham. The second will be whether, assuming it is a genuine contract, it amounts to a contract of employment (it might, for example, instead amount to a contract for services). We make clear that we are not of course suggesting that cases raising the first issue are likely to be common, and we think it probable that they will be relatively exceptional. Despite the repeated references in the authorities to the theoretical possibility of a contract being a sham, no such case has been discovered in the principal authorities to which we have been referred. We make no attempt to give any prescriptive guidance as to the resolution of such issues, but we at least offer the following general observations."

[24]After referring to cases involving an alleged sham, which does not arise on the facts of the present case, the judgment continued as follows at paragraphs 84-90:

"84 In a case in which no allegation of sham is raised, or in which the claimant proves that no question of sham arises, the question (or further question) for the court or tribunal will be whether the claimed contract amounts to a true contract of employment. As we have indicated, given that the critical question in cases such as those under appeal is as to whether the putative employee was an employee at the time of the company's insolvency, it will or may be necessary to inquire into what has been done under the claimed contract: there will or may therefore need to be the like inquiry as in cases in which an allegation of sham is made. In order for the employee to make good his case, it may well be insufficient merely to place reliance on a written contract made, say, five years earlier. The tribunal will want to know that the claimed contract, perhaps as subsequently varied, was still in place at the time of the insolvency. In a case in which the alleged contract is not in writing, or is only in brief form, it is obvious that it will usually be necessary to inquire into how the parties have conducted themselves under it. 85. In deciding whether a valid contract of employment was in existence, consideration will have to be given to the requisite conditions for the creation of such a contract and the court or tribunal will want to be satisfied that the contract meets them. In Lee's case the position was ostensibly clear on the documents, with the only contentious issue being in relation to the control condition of a contract of employment. In some cases there will be a formal service agreement. Failing that, there may be a minute of a board meeting or a memorandum dealing with the matter. But in many cases involving small companies, with their control being in the hands of perhaps just one or two director/shareholders, the handling of such matters may have been dealt with informally and it may be a difficult question as to whether or not the correct inference from the facts is that the putative employee was, as claimed, truly an employee. In particular, a director of a company is the holder of an office and will not, merely by virtue of such office, be an employee: the putative employee will have to prove more than his appointment as a director. It will be relevant to consider how he has been paid. Has he been paid a salary, which points towards employment? Or merely by way of director's fees, which points away from it? In considering what the putative employee was actually doing, it will also be relevant to consider whether he was acting merely in his capacity as a director of the company; or whether he was acting as an employee. 86 We have referred in the previous paragraph to matters which will typically be directly relevant to the inquiry whether or not (there being no question of a sham) the claimed contract amounts to a contract of employment. What we have not included as a relevant consideration for the purposes of that inquiry is the fact that the putative employee's shareholding in the company gave him control of the company, even total control. The fact of his control will obviously form a part of the backdrop against which the assessment will be made of what has been done under the putative written or oral employment contract that is being asserted. But it will not ordinarily be of any special relevance in deciding whether or not he has a valid such contract. Nor will the fact that he will have share capital invested in the company; or that he may have made loans to it; or that he has personally guaranteed its obligations; or that his personal investment in the company will stand to prosper in line with the company's prosperity; or that he has done any of the other things that the "owner" of a business will commonly do on its behalf. These considerations are usual features of the sort of companies giving rise to the type of issue with which these appeals are concerned but they will ordinarily be irrelevant to whether or not a valid contract of employment has been created and so they can and should be ignored. They show an "owner" acting qua "owner", which is inevitable in such a company. However, they do not show that the "owner" cannot also be an employee. 87 We have, however, twice -- and deliberately -- used the word "ordinarily" in the last paragraph. We have used the word not because we foresee other circumstances but because "never say never" is a wise judicial maxim. 88 We respectfully agree with the essence of the factors referred to by Elias J in paragraph 98 of his judgment although we add a comment on four of them. Mr Tolley criticised his first factor as amounting to a suggestion that the mere production of a written contract purporting to be a contract of employment will shift to the opposing party the burden of proving that it was not a genuine such contract. We doubt if Elias J was intending to refer to a legal burden. In cases where the putative employee is asserting the existence of an employment contract, it will be for him to prove it; and, as we have indicated, the mere production of what purports to be a written service agreement may by itself be insufficient to prove the case sought to be made. If the putative employee's assertion is challenged the court or tribunal will need to be satisfied that the document is a true reflection of the claimed employment relationship, for which purpose it will be relevant to know what the parties have done under it. The putative employee may, therefore, have to do rather more than simply produce the contract itself, or else a board minute or memorandum purporting to record his employment. 89 We consider that Elias J's sixth factor may perhaps have put a little too high the potentially negative effect of the terms of the contract not having been reduced into writing. This will obviously be an important consideration but if the parties' conduct under the claimed contract points convincingly to the conclusion that there was a true contract of employment, we would not wish tribunals to seize too readily on the absence of a written agreement as justifying the rejection of the claim. In both cases under appeal there was no written service agreement, but the employment judges appear to have had no doubt that the parties' conduct proved a genuine employment relationship. 90 As for Elias J's seventh and eighth factors, we say no more than that we regard them as saying essentially what we have said above in our "never say never" paragraph."

Discussion

[25]Applying these principles to the present case we bear in mind the following. This case is, on its facts, one of those cases identified at paragraph 85 of Neufeld , involving a small company, with its control being in the hands of first three and then two directors/shareholders, and where such matters had been dealt with informally.

[26]There was no dispute in Neufeld as to the existence of a contract between the parties. The question for the Tribunal was, therefore, whether the contract was genuine and, if so, whether it amounted to a contract of employment. In the present case no written contract of employment was produced at the hearing and there are no findings by the Tribunal as to any oral terms which were expressly agreed. The Tribunal were, therefore, faced with having to decide on the evidence whether there was, in fact, a contract in place between the Claimant and the company for the relevant period, namely 12 months before her resignation in August 2007; and if so, what its terms were and whether it was a contract of employment. No question of sham ever arose on the facts of this case.

[27]The Tribunal therefore had to give consideration to the requisite conditions for the creation of such a contract, that is the long-standing, essential elements or "irreducible minima" referred to by the Tribunal, namely control, mutuality of obligation and personal performance.

[28]As the Court of Appeal made clear in Neufeld, the fact that the Claimant's shareholding gave her control of the company is not a relevant consideration for the purposes of enquiring, whether, if there was a contract, it was a contract of employment. The fact of her control of the company will obviously form "part of the backdrop" against which to assess what has been done under the employment contract that is being asserted. But it will not ordinarily be of any special relevance in deciding whether she has a valid such contract. Nor will the fact that she had share capital invested in the company, or that she had prospered or stood to prosper in line with its prosperity, or done any of the other things that an owner of a business will commonly do.

[29]Clearly, therefore, the Tribunal in the present case were not prevented from considering the nature and extent of this Claimant's control of the Respondent company as a factor arising as part of the backdrop to the questions they were considering. The question is whether they erred in law in their direction as to how that factor should be regarded.

[30]Mr Mallett, for the Respondent, accepts that directorship and shareholding in a company cannot be determinative of the existence of a contract of employment. He submits, however, that this Tribunal did not decide the case on that basis.

[31]The first question was whether the Claimant had shown, the burden being upon her, that there was a contract in existence and, if so, the second question was whether she had shown it was a contract of employment? These were questions of fact for the Tribunal as the industrial jury to determine.

[32]Mr Mallett pointed out that the Tribunal did not find that there had, in fact, been a contract of employment in existence before 1992, only that it was "possible" that the Claimant may have been an employee before that date. After 1992 they found that the Claimant ran the company to get it out of debt; took on all day-to-day management duties; and agreed jointly with Mr Kew on any major decisions at monthly board meetings. She was found to have been left to her own devices as to the day-to-day management of the company.

[33]Notwithstanding the wording of the Tribunal's self-direction in paragraph 13, Mr Mallett submits that they did not, in fact, give the Claimant's directorship and shareholding entitlements a significance beyond the backdrop which was recognised as appropriate in Neufeld . He accepts, for the purposes of his argument, that the Tribunal found that there was in fact a contract in existence between the parties, because they found there to have been personal performance by the Claimant in her machining and management duties and, in addition, mutuality of obligation. However, in considering the question whether that contract was a contract of employment he submits that the Tribunal went on to consider everything else that was relevant in paragraphs 14 and 15, and to apply the proper test in coming to a conclusion, on balance, that this was not a contract of employment.

[34]The crucial point in this case is, therefore, the Tribunal's direction at paragraph 13 that they had to consider the question of control "on the basis of Mrs Ashby and Mr Kew's respective shareholding entitlements and positions as directors." The question for us is whether what they said there was erroneous, rendering unsustainable the conclusions which followed. Mr Brown submits that it was. Mr Mallett submits that it was not, and that we should not therefore interfere with the Tribunal's decision. Conclusion

[35]We have considered Mr Mallett's submissions carefully, but we prefer Mr Brown's on this point.

[36]Whilst we agree that the questions which needed answering in this case were those identified by Mr Mallett, this Tribunal did not have the benefit of the guidance now available in Neufeld, in particular as to the relevance of the directorship and shareholding entitlements, in answering them.

[37]In our judgment, and notwithstanding the Tribunal's reference at paragraph 14 to the essential elements which must subsist in order to establish a contract of employment, their clear direction at paragraph 13 that they had to consider the question of control "on the basis of" the Claimant's and Mr Kew's respective shareholding entitlements and positions as directors cannot be read as a recognition by the Tribunal that these matters were to be considered only as part of the backdrop. On the contrary, the words used suggest that the Tribunal regarded them as of fundamental importance in determining whether there was here a contract of employment.

[38]Notwithstanding the subsequent direction at paragraph 14 we are not satisfied, on reading paragraphs 14 and 15 as a whole, that, when considering control, the Tribunal were considering control in the context of a contract of employment rather than the Claimant's financial and managerial control of the company, as a director and shareholder of it, in accordance with their direction at paragraph 13. The Tribunal's contrast with the position that prevailed when there were three equal shareholders, and the emphasis on the Claimant's day-to-day management and equal control with regard to financial decisions, and to her financial investments in the business and the benefits she received on sale are, in our view, more consistent with the Tribunal viewing these latter factors as determinative on the question of control.

[39]Since control was the factor which led the Tribunal to decide in this case that no contract of employment existed, we accept Mr Brown's submission that this was a misdirection and that their decision cannot stand.

[40]Some further support for this conclusion is to be found, in our view, in the Tribunal's failure to record findings on some relevant matters which Mr Brown submits were expressly referred to by the Claimant in her evidence. These include, for example, the Claimant's evidence that she had once had a written contract of employment when the company first began, but that it had since been misplaced; and that she had a regular set of weekly working hours from 8.30 to 5.30, for which she received a salary.

[41]Whilst no notes of evidence were before us, and Mr Mallett was unable to confirm whether or not this evidence had been given, Mr Brown told us that it is referred to in his own notes of evidence, he having appeared for the Claimant below. If so, these were clearly relevant factors. The conduct of the parties under the contract, what the Claimant was actually doing for the company, and when and how she was being paid were all important matters in considering whether there was a contract of employment in existence in this case. Whilst the Tribunal referred to PAYE and personal pension contributions being paid, there was no further analysis of these factors and they were, in any event, found to be "neutralised" by the Claimant's financial investment and benefits on sale as a 50 per cent shareholder.

[42]For these reasons we allow the appeal, but we find that this is not a case where we can substitute our own decision for that of the Employment Tribunal. The matter must, therefore, be remitted for determination on the evidence before a fresh Tribunal, having regard to both the guidance in Neufeld and the familiar tests for establishing the existence of a contract of employment.