The Employment Appeal Tribunal recently considered in the case of Secretary of State for Business Innovation & Skills v Knight whether or not a business owner can claim a redundancy payment.
Mrs Knight was managing director and owned 100% of the shares in Receptors Security Systems (UK) Limited. The Company was incorporated in 1991 and ceased trading, having become insolvent, in October 2011. Mrs Knight was employed under a contract providing for her to work 9.00 to 5.30 Monday to Friday for a salary of £20,000 plus discretionary bonuses. In practice she worked from 8.00 to 7.00 and was paid £1000 “take home” per month. However, as the Company faced financial difficulties she took no pay at all in the last two years of trading. In effect she forfeited her salary in order to pay other employees and suppliers.
At an Employment Tribunal it was held that she was an employee and therefore entitled to a redundancy payment from the National Insurance Fund. The Secretary of State appealed on the grounds that:
- Judging her to be an employee was based on a perverse conclusion;
- Having forfeited her pay she had changed her position so there was no mutuality of obligations sufficient to establish a continuing contract of employment; and
- The Tribunal should have considered her position at the date of the insolvency, not what might have been the position earlier.
The Secretary failed on all grounds. There was a sequence of cases from which it was clearly established that, subject to the particular facts, a controlling shareholder can still be an employee. This applies equally to a claim against the Secretary of State for payment from public funds.
Was there a subsisting contract of employment at the date of insolvency? Yes. The Company would have been obliged to pay a redundancy payment if it could have done so because, quite simply, she was an employee during the time when she drew no salary and she was therefore an employee at the time when the claimed obligation arose. There was no agreed variation or discharge of the contract. As for use of the word “forfeited” this did not mean that she had agreed not to take any salary at all or that this had brought her employment to an end.
Similarly, money is not the only consideration so the absence of payments was insufficient to establish a lack of mutuality of obligation.
Finally, perversity in the judgment had not been demonstrated, let alone overwhelmingly demonstrated, which is the relevant test.
Incidentally, confirming the views of many that legal process can be painfully slow, the hearing of this case was on 28 June 2013 and the judgment was not handed down until 9 May 2014!