Wednesday Law Report: Shareholder could also be employee

17 February 1999

Secretary of State for Trade and Industry v Bottrill

Court of Appeal (Lord Woolf, Master of the Rolls, Lord Justice Peter Gibson and Lord Justice Mantell) 12 February 1999

WHETHER A controlling shareholder of a company could also be an employee of that company for the purposes of the Employment Rights Act 1996 depended on the circumstances of the particular case.

The Court of Appeal dismissed the appeal of the Department of Trade and Industry against a decision of the Employment Appeal Tribunal that the respondent, who was sole shareholder of a company, was entitled as an employee of the company to a redundancy payment under section 166 of the Employment Rights Act 1996.

The respondent became managing director of the company and held the only issued share. It was intended in the future that an American group would hold 80 per cent of the shares in the company, and a draft shareholders' agreement to that effect had been prepared. The respondent signed a contract of employment.

The company became insolvent before the shareholders' agreement was executed. A receiver was appointed and the respondent was dismissed with effect from April 1996. His application to the DTI for a redundancy payment from the National Insurance Fund under section 166 of the Employment Rights Act 1996 was rejected on the ground that he was not an employee.

He applied to an industrial tribunal which concluded that he was an employee of the company, relying on its findings that his status as sole shareholder was only temporary, and that any control which he had had of the group was only theoretical. The tribunal laid stress on the facts that the respondent had paid National Insurance contributions and tax as if he were an employee, was entitled to sick pay, worked fixed hours and had a contract with the company which was described as a contract of employment.

The Employment Appeal Tribunal upheld the industrial tribunal's determination, and the DTI appealed, submitting, inter alia, in reliance on the decision of the EAT in Buchan and Ivey v Secretary of State for Employment [1997] IRLR 80, that whatever his position for other purposes, an individual who held the sole or controlling shareholding in a limited company was not to be regarded as an employee for the purposes of the 1996 Act.

Jennifer Eady (the Treasury Solicitor) for the DTI; Martyn Barklem (Shulmans, Leeds) for the respondent.

Lord Woolf MR said that whilst there were attractions in having a simple and clear test which would determine whether a shareholder or a director was an employee for the purposes of the Employment Rights Act 1996, the Act itself did not provide such a test and it was far from obvious what Parliament would have intended the test to be.

There was no justification for departing from the well- established position in the law of employment generally, which was that whether or not an employer or employee relationship existed could only be decided by having regard to all the relevant facts. If an individual had a controlling shareholding that was certainly a fact which was likely to be significant, but was not to be taken as determinative.

In such a case, a tribunal might wish to consider whether there was or had been a genuine contract between the company and the shareholder, and, if the contract was not a sham, whether the contract actually gave rise to an employer/employee relationship; whether there were other directors apart from the shareholder employee, and whether the company's constitution gave the shareholder rights such that he was in reality answerable only to himself and incapable of being dismissed; and whether, if he was a director, he was able under the Articles of Association to vote on matters in which he was personally interested, such as the termination of his contract of employment.

In the present case the industrial tribunal had been entitled to conclude that there was a genuine contractual relationship between the respondent and his company.