Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld and Howe [2009] EWCA Civ 280 CA
employment status | controlling shareholders
The Court of Appeal had held that there is no reason in principle why a director and controlling shareholder cannot also be an employee.
Both Mr Neufeld and Mr Howe were directors and controlling shareholders of companies, which were insolvent. To be able to make claims for payments from the National Insurance Fund they had to be an employee of the relevant insolvent company. Both brought claims for payments under the fund, against the Secretary of State. The employment tribunal, in Mr Neufeld’s case, held that he was not an employee. Although he appeared to work under an employment contract, the fact that he gave personal guarantees on the company’s behalf, lent money to it and had the controlling shareholding, meant that he was not an employee. The Employment Appeal Tribunal (EAT) allowed Mr Neufeld’s appeal. The EAT held that the tribunal was wrong to consider factors that did not reflect the parties’ conduct when performing the contract. Applying Clark v Clark Construction Initiative Ltd [2008] IRLR 364 EAT, the EAT concluded that he was an employee. The Secretary of State appealed.
In Mr Howe’s case, the employment tribunal held that, had it relied on the Court of Appeal decision in Secretary of State for Trade and Industry v Bottrill [1999] IRLR 326 CA, it would have held that Mr Howe, as owner of all the shares could not be an employee. However, the more recent EAT decision in Nesbitt and another v Secretary of State for Trade and Industry [2007] IRLR 847 EAT required it to find that Mr Howe was an employee, unless the purported contract was a sham, for which there was no evidence. The EAT dismissed the Secretary of State’s appeal but gave permission to appeal to the Court of Appeal, to enable the two cases to be heard together.
The question for the Court of Appeal was whether or not a controlling shareholder and director of a company could be an employee of that company under a contract of employment, and if there were any guidelines for tribunals deciding whether or not a shareholder/director is an employee.
The Court of Appeal reviewed previous conflicting case law, including Bottrill, Nesbitt, Lee v Lee’s Air Farming Ltd [1961] AC 12 (a Privy Council case), Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 CS and Protectacoat Firthglow Ltd v Szilagyi [2009] EWCA Civ 98 CA. The Court of Appeal held that there is no reason why someone who is a shareholder and director of a company, even if the shareholding gives total control, cannot be an employee. This is the case even if the individual is regarded as the “owner”. Whether or not the shareholder/director is an employee is a question of fact for the relevant tribunal or court to decide. The first issue is whether or not the reputed contract is a sham. If it is not, the next issue is whether or not the contract is a contract of employment. In cases involving an alleged sham, there will usually be some form of documentation to evidence the contract. The circumstances of the creation of the documentation and the parties' conduct will usually reveal whether or not it is genuine. The fact that an individual has control of a company, and played an important part in the creation of the document will be relevant. Investigation into whether or not the parties have acted according to the contract will also help to show if the contract is genuine.
If there is no sham, the question is whether or not the contract is a true contract of employment. What has been done under the contract, and whether or not the contract still applied at the time of the insolvency, is relevant. How the individual has been paid (ie salary or fees), and what he or she has been doing, namely acting as a director or acting as an employee, are also relevant. The fact that the supposed employee has control forms a backdrop for assessing the case but it does not normally have special relevance to deciding whether or not he or she has a valid employment contract. Having share capital invested in the company, making loans to it, personally guaranteeing its obligations and having the potential to prosper as it prospers are not relevant to whether or not there is a contract of employment. They are features of ownership, but do not show that the owner cannot also be an employee.
In Mr Neufeld’s case, the employment tribunal had wrongly relied on irrelevant matters to divert it from its finding that he was an employee. The tribunal in Mr Howe’s case, relying on Nesbitt, had decided correctly. The Secretary of State’s appeal was dismissed in both cases.
Case transcript of Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld and Howe (on the BAILII website)
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