One of the more important employment law decisions in the Court of Appeal in 2009 was Secretary of State for Business Enterprise and Regulatory Reform -v- Neufeld and Howe. Mr Neufeld was the managing director of A & N Communications In Print Limited and was employed as part of the sales team. He held 90% of the shares in the Company and worked 60 hours a week. He made a loan of £20,000 to the Company and provided personal guarantees. The Company became insolvent in 2005 and he claimed redundancy, notice and holiday pay.
Mr Howe founded Track Records in 1979 and in 2004 transferred the business to a limited company. He was the sole director and held 100% of the Company’s shares. Profits were invested into the business and he was paid a salary from which tax and NICs were deducted. In 2005 he personally borrowed £50,000 to invest in the Company and gave a guarantee to the landlord of the Company’s premises. The Company became insolvent and Mr Howe claimed a redundancy payment The Court of Appeal decided that both were employees, despite the fact that they were director/controlling shareholder and controlling shareholder respectively. They were therefore entitled to the payments they were claiming. The Court stated that an individual’s share capital invested in the company, loans to the company, personal guarantees and obligations were not ordinarily relevant to determining their employment status. In order to decide whether a shareholder is also an employee tribunals should first establish whether there is a contract of employment in place and if there is, whether this is in fact a genuine contract of employment, or a sham. If it is genuine then that is the guiding factor in determining employment status.
This approach has been confirmed in the recent Employment Appeal Tribunal decision in V Ashby -v- Monterry Designs Limited. Vicki Ashby held a 50% shareholding in the Company prior April 2007 when she sold the Company to Mr and Mrs Grant. She continued to work for the Company until she claimed constructive unfair dismissal. However, this was less than 12 months after she sold her shares and it was contended successfully in the employment tribunal that she did not have a contract of employment prior to April 2007 as a result of her shareholding and, accordingly, she did not have the requisite qualifying service of 12 months to present her complaint of unfair dismissal. The tribunal took the view that prior to April 2007 the necessary elements of a contract of employment including control, mutuality of obligation and personal performance were absent. It was noted that Ms Ashby had run the business prior to the sale, she was left to her own devices in terms of its day to day management and she had equal control with her fellow shareholder in making financial decisions. She also benefited from the payment received by her when the business was sold.
The Court of Appeal decision in Neufeld was handed down after the employment tribunal decision and before the decision of the Employment Appeal Tribunal. As a result of Neufeld, an individual’s shareholding was irrelevant and exercise of control over the Company formed no more than “part of the backdrop” when considering whether the individual was an employee. Accordingly the employment tribunal decision was overturned.
The decisions in Ashby and Autoclenz reinforce the clear trend of establishing contracts of employment and corresponding employment rights in cases in which it might have been thought that no employment relationship existed. It is always important to remember that the tax treatment of individuals does not determine their employment status for employment law purposes. In most cases, the recent decisions confirm that the safest approach is to assume that an employment relationship exists. Given what appears to be the diminishing relevance of the “control test” combined with the irrelevance of a controlling interest in a business (alone or collectively with others) it can only be a matter of time before the courts are asked to determine whether partners in professional partnerships are employees and current indications suggest that they are.