Beckett v MCH Design and Shopfitting Lim... Department for Employment and ... [2011] NIIT 00640

THE INDUSTRIAL TRIBUNALS

CASE REF: 640/11

CLAIMANT: William Edward Dean Beckett

RESPONDENTS: 1. MCH Design and Shopfitting Limited (in liquidation)

2. Department for Employment and Learning

DECISION

The claimant was an employee of the first named respondent as defined in Article 3 of the Employment Rights (NI) Order 1996 and, as such, is entitled to receive a redundancy payment.

Constitution of Tribunal:

Chairman (Sitting alone): Miss E McCaffrey

Appearances:

The claimant appeared in person and represented himself.

The first-named respondent was not represented.

The second-named respondent was represented by Mr Philip McAteer, Barrister-at-Law, instructed by The Departmental Solicitor’s Office.

The Issue

1. The issue for me to decide was whether the claimant was an “employee” within the meaning of Article 3 of the Employment Rights (Northern Ireland) Order 1996. If he were, the issue then was whether the claimant was entitled to a redundancy payment from the first named respondent MCH Design and Shopfitting Limited.

The Facts

2. The facts in relation to the case were as follows. I had the benefit of hearing evidence from the claimant and also purusing documents which were produced both by the claimant and by the second-named respondent. The crux of this issue is that the first-named respondent company is not in a position to pay the claimant any redundancy payment and therefore, if he is an employee of the first-named respondent, it will be the second-named respondent which will pay his redundancy payment under Article 227 and following of the Employment Rights (Northern Ireland) Order 1996.

3. The claimant was initially employed by the first named respondent as a salesman on 3 April 1989. At that time he was clearly an employee of the company and was issued with a Contract of employment which was produced to me. This contract however is very brief and dates from the claimant’s initial employment as a salesman.

4. The first-named respondent at that stage was owned by the claimant’s father Maurice Beckett and by Mr McAllister. In and around 2000 Mr McAllister became ill and retired from the business. At that time the claimant was appointed as a Director and acquired 30% of the shares in the business. At its height the company employed 25-27 people both in manufacturing and administration. The claimant worked often from 8.30 am until 6.00 pm and at weekends as well if necessary, carrying out and supervising shopfitting jobs.

5. The claimant indicated that his salary consisted of a basic salary and commission and that that remained the case throughout. The claimant’s evidence was that his salary stayed at a consistent level and he was then paid commission on top of that. When he became a director, he indicated that he had been paid a “top-up” by a dividend payment for approximately two years when the business was doing particularly well. He indicated however that he had not received any dividends during 2009 and 2010 when business had fallen off. In answer to questions in cross-examination, he indicated that although he sometimes worked at weekends, he did not receive an overtime payment as other workers did. His explanation for that was that he was receiving a commission on the sale and he felt that that was in effect his overtime payment. The claimant indicated that his average take home pay including commission was between £3,000.00 - £3,800.00 per month.

6. No fresh contract of employment was issued to the claimant when he became a Director but there was however a change in the claimant’s responsibilities. He indicated that he took on more responsibility for personnel matters within the organisation and that he was involved in employing people and in the running of the business but his role was still fundamentally that of Sales and Marketing Director. The claimant had two other directorships shown on the annual returns of the company but it was accepted that these were nominal matters and that the bulk of his time was spent on the business of the first named respondent.

7. In the course of the hearing there were a number of issues raised in cross examination. The claimant agreed that he probably did not take his full contractual holiday entitlement, but commented that when running a business and there was work to be done, “You do it.” He pointed out that not all other employees took their full holidays. Some of the administration staff were allowed to carry over holidays from one leave year to the next. He also pointed out that the workshop staff quite often worked on major jobs to get the job done and took their holidays another time or were paid in lieu.

8. Whereas the claimant’s contract referred to a private pension scheme, the claimant indicated that he had always had a personal pension scheme and was not aware if a company scheme existed. It transpired that this scheme related only to his father. He did however agree that only the Directors of the company had private health insurance and that only the Directors were able to take the option of having part of their remuneration paid as a dividend. Counsel for the second named respondent referred the claimant to the annual accounts which showed Director’s pension cost and asked if these related to the claimant. He was clear however that they related only to his father and not to him. Counsel also referred the claimant to the 2008 accounts, which showed Directors’ emoluments and referred him in particular to payment made to the claimant in this regard. The claimant agreed that these payments had been made and was forthright about this. The same page of the accounts refers to Mr M Beckett as having a controlling interest in the company.

9. The claimant made the point however that he was still employed by the company and could have been fired by his father if the need arose. He also pointed out that although they had generally a good working relationship they have differences from time to time and that he was in no doubt that if he had not been doing his job properly he would have been sacked.

10. The business suffered a downturn due to the recession and eventually ceased trading on 2 June 2010. All staff were given a letter the body of which read as follows:-

“As you are aware the company had been experiencing particularly difficult financial circumstances and despite our efforts this has resulted in the company having to cease its operations today,
2^nd June 2010. We therefore have no option but to give you notice of the cessation of your employment with the company with immediate effect. Your P45 will be sent to you by post as soon as possible.

We enclose your RP1 form. It is this form you need to complete if you wish to claim from the National Insurance Fund and redundancy pay, back pay, holiday pay or pay in lieu of notice you may be entitled you.

I would advise you to contact your local Social Security Office to make an appointment as soon as possible……..

This has been a difficult decision to make and both Dean and I would take this opportunity to wish you every success in the future and sincerely thank you for all your hard work and support of the MCH Design and Shop Fitting Limited.

Director”

11. It was the claimant’s evidence that he received a copy of this letter signed by his father and indicated that all staff received this letter. He also received a P45 from the company showing a leaving date of 2^nd June 2010. The claimant also agreed that he had not taken any pay for approximately two months before the company ceased trading because he was aware of the financial difficulties the company was in.

The Relevant law

12. The relevant law in relation to this matter is Article 3 of the Employment Rights (Northern Ireland) Order 1996 which provides as follows:-

“3 – (1) In this Order “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 Order “contract of employment” means a contract of service or apprenticeship, whether express or implied and, (if it is expressed) whether oral or in writing……”

13. There has been considerable case law on the issue of whether an individual is or is not an employee. Counsel in this case very helpfully referred me to the decision of Neufeld and Anor –v- Secretary of State for Business Enterprise and Regulatory Reform [2009] IRLR (D) 40, a decision of the Court of Appeal of England and Wales.

14. He also referred me to two other decisions of the Employment Tribunals in England and Wales namely Simpson and Renfrew –v- Secretary of State for Business Innovation and Skills (case number 2509165/2010) and Webb –v- Secretary of State for BIS (case number 3202089/10).

15. The decision in Neufeld sets out in some detail the history of the case law in relation to these issues and I will attempt to summarise some of the decisions to which it refers.

16. First of all the court referred to the essentials of a Contract of employment as set out by MacKenna J in Ready Mixed Concrete (Southeast) Limited –v- Minister of Pensions and National Insurance [1968] 2QB497:-

“A Contract of Service exists if three conditions are fulfilled.

(i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.

(ii) He agrees, whether expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.

(iii) The other provisions of the contract are consistent with it being a Contract of Service.”

17. The “control” condition was referred to by MacKenna J as being “The power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done.”

18. The Court of Appeal considered a number of decisions decided over quite a lengthy period of time and in particular the decision given by Elias J in Clarke –v- Clarke Construction Initiatives Limited and Anor [2008] IRLR 364 where Elias J set out a number of factors to be taken into account. Given that these factors were quoted with approval by the Court of Appeal in Neufeld, I set them out briefly here:-

“1. Where there is a contract extensively in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee: He has on the face of it earned the right to take the advantage of the benefits which employees may derive from such payments.

2. The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising. Nor does the fact that he is practicably able to exercise real or sole control over what the company does (Lee).

3. Similarly, the fact that he is an entrepreneur, or has built the company up, of a profit of its success, will not be factors militating against a finding that there is a contract in place. Indeed any controlling shareholding will inevitably benefit from the company success, as will many employees with share option schemes (Connolly).

4. If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding. For example, this would be so if the employee works the hours stipulated or does not take more than the stipulated holidays.

5. Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described in paragraph 96) or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.

6. In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced to writing (Fleming). This will be powerful evidence that the contract was not really intended to regulate the relationship in any way.

7. The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight. There is nothing intrinsically inconsistent in a person who is an employee doing these things. Indeed in many small companies it will be necessary for the controlling shareholder personally to give bank guarantees precisely because the company assets are small and no funding will be forthcoming without them. It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contact of employment.

8. Although the courts have said that the fact of there being a controlling shareholder is always relevant and may be decisive, that does not mean that that fact alone will ever justify a tribunal finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected. The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee, but of itself that fact alone does not resolve these doubts one way or another.”

19. The Court of Appeal went on to consider the principle set out by Elias J. They reiterated that there was in principle no reason why someone who was a shareholder and director of a company could not also be an employee of that company under a contract of employment. They added “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 extent with his consent – has the effect in law that he cannot be an employee at all.”

20. They went on to confirm that the question of whether or not a shareholder director was an employee of a company is a question of fact for the court or tribunal before which such issue arises. They indicated that there were two issues to be considered. The first was whether or not the putative contract is a genuine contract or a sham. The second is whether, assuming it is a genuine contract, it amounts to a contract of employment (as opposed to a contract for services).

21. Of relevance in this case is paragraph 83 of the Judgment which states as follows “An enquiry into what the parties have done under the purported contract may show a variety of things;

(i) That they did not act in accordance with the purported contract at all, which would support the conclusion that it was a sham; or

(ii) That they did act in accordance with it which will support the opposite conclusion; or

(iii) That although they acted in a way consistent with a genuine service contract arrangement, what they have done suggests the making of a variation of the terms of the original purported contract; or

(iv) That there came a point when the parties ceased to conduct themselves in a way consistent with a purported contract or any variation of it, which may invite the conclusion that, although the contract was originally a genuine one, it has been impliedly discharged.”

22. They also observed that the availability or not of a written contract of employment was not necessarily determinative. They pointed that “………… in many cases involving small companies, with their control being in the hands of perhaps just one or two directors/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 director’s fee, 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”.

23. They later observed that they had not included relevant consideration the fact that the putative employee’s shareholding in the company gave him control of the company, even total control. They indicated that this was one of a number of factors to be taken into account and observed later, “However they do not show that the “owner” cannot also be an employee.”

24. In Neufeld, the Court of Appeal found that the employment tribunal chair had erred in that he had allowed his apparently clear finding that Mr Neufeld had a genuine employment contract to be “trumped” by considerations that he had given personal guarantees for the company, lent money to it and had a controlling shareholding in it. The Court of Appeal also observed that the employment judge had taken account of the fact that Mr Neufeld did not take his full holiday entitlement. They indicated that they would not have regarded that as such a “pointer.” They also commented that it might have been different if Mr Neufeld had taken more than his entitlement: “That would have perhaps have raised a question as to whether the contract was a genuine one.” (Paragraph 91).

Decision

25. This case raises the difficult issues of whether a shareholder/Director of a small company can be considered as an employee of that company. I am grateful to both the claimant and the respondent’s representative for the manner in which they conducted this case and I accept that the claimant is genuine in his application.

26. The parties are agreed that when the claimant started working for the first named respondent he was clearly an employee and the issue really is whether his relationship and his employment status with the first named respondent changed when he became a Director and shareholder in 2000. The claimant was clear that his essential role in sales and marketing remained the same, although he then took on some responsibility for employing staff and had a more active role in the running of the business. However his father who had started the business remained active in it right up until the time when the business went into liquidation. Mr Maurice Beckett had a 70% shareholding in the company whereas the claimant had a 30% shareholding. The company accounts specifically state that “The company is under the control of Mr Maurice Beckett, a director and owner of 70% of the share capital.”

27. The second-named respondent sought to establish the ways in which the claimant’s position was different from that of other employees. In particular, Mr McAteer referred to the fact that the claimant was not paid overtime, that he had the availability of private health insurance and that in particular he was entitled to take a part of his earnings as a dividend. The claimant however confirmed that his basic salary had remained the same and he received a commission on top of it. He received a divided on his shares in the years when the company was doing particularly well but indicated that he had not received a dividend for 2009 and 2010, when the company was struggling financially.

28. I have considered all of these factors carefully. In accordance with the ruling of the Court of Appeal in Neufeld, I find that there was originally a contract of employment for the claimant and that this amounted to a genuine contract. However, it is my finding that although the parties in this case (the first named respondent and the claimant) acted in a way consistent with a genuine service contract arrangement initially, over the years there was a variation of the terms of the original purported contract. The issue for me to decide is whether they came a point where the parties ceased to conduct themselves in a way consistent with the original purported contract, inviting the conclusion that that contract has been impliedly discharged.

29. The fact that the claimant worked long hours and did not take his full holiday in my view is not conclusive. Many employees work more than their contracted hours with a view to carrying out their duties to the fullest. In the claimant’s situation where his pay was commission related, there was clearly an incentive for him to do this and he recognised this in his evidence to the tribunal. The issue of private health insurance in my view is not determinative either, as many senior employees in companies will have the benefit of a “perk” such as private health insurance.

30. The respondent indicated that the claimant’s shareholding was an important factor and suggested that he was effectively in control of his own destiny. The claimant made it clear that although he worked closely with his father he believed that if he were not doing his job properly he would certainly have been dismissed and this evidence was not contradicted in any way.

31. Unlike the Neufeld case, the claimant in this matter had not given any personal guarantees for the company or lent money to it. Nor indeed was this shareholding a controlling shareholding. The controlling shareholding was held by his father and I believe that this is also a relevant consideration. Counsel for the second named respondent suggested to the claimant that he was able to exercise the option to take part of his payment as a dividend in his shares and the claimant agreed with this. However the claimant would not have been able to take this payment as a dividend unless the other shareholder or shareholders had agreed. While the family relationship may have mitigated in favour of the claimant receiving part of his payment by dividend, it is clear that this decision was not purely his own, but was influenced by tax considerations and by his father’s agreement as the controlling shareholder. Counsel for the second named respondent suggested that the claimant had opted to take the bulk of his payment by way of a dividend. However the claimant’s evidence (which was not disputed) was that he was paid a low basic salary and commission and that his salary remained constant, although at a lowish level. This is a different situation to the situation in Webb v Secretary of State for BIS, where the claimant who was the major shareholder in a company had reduced his salary very significantly and had taken earnings as dividends at that point to top up his salary.

32. I am satisfied that on the findings of fact I have made and in accordance with the guidance of the Court of Appeal of England and Wales in Neufeld that the claimant in this case was an employee within the meaning of Article 3 of the Employment Rights (Northern Ireland) Order 1996.

33. In both Webb and Simpson and Renfrew –v- the Secretary of State for BIS, the claimants concerned where either majority or at least 50% shareholders and the factual situations where different in that the claimants took the bulk of their earnings as “dividends.” This is a different situation to that in this case and I am satisfied that the claimant carried out his duties in a way that was consistent both with his role as a Director of the company but also with his status as an employee.

34. I have not had sufficient information put before me to calculate the redundancy payment to which the claimant is entitled and I direct that, in the absence of agreement between the parties, this matter shall be re-listed for a hearing for the purposes of calculating the redundancy payment to which the claimant is entitled.

Chairman:

Date and place of hearing: 28July 2011, Belfast.

Date decision recorded in register and issued to parties:

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	Industrial Tribunals Northern Ireland Decisions
You are here: BAILII >> Databases >> Industrial Tribunals Northern Ireland Decisions >> Beckett v MCH Design and Shopfitting Lim... Department for Employment and ... [2011] NIIT 00640_11IT (07 September 2011) URL: http://www.bailii.org/nie/cases/NIIT/2011/640_11IT.html Cite as: [2011] NIIT 640_11IT, [2011] NIIT 00640_11IT

Industrial Tribunals Northern Ireland Decisions