THE INDUSTRIAL TRIBUNALS

CASE REF:	937/11

CLAIMANT:			Sean Quail

RESPONDENT:		Department for Employment and Learning

DECISION 
(A)	The respondent Department (“the Department”) is liable to make a payment to the claimant in respect of redundancy pursuant to Article 201 of the Employment Rights (Northern Ireland) Order 1996 (“the Order”).

(B)	The Department ought to make a payment to the claimant under Article 227 of the Order in respect of holiday pay and notice pay.  

(C) 	The parties expect to be able to agree on the amounts of the payments due to the claimant, pursuant to Article 201 and Article 227 of the Order.  However, if necessary the proceedings will be re-convened for the purpose of determining the amounts which are due to the claimant.

Constitution of Tribunal:
Chairman (sitting alone):		Mr P Buggy
	
Appearances:
The claimant appeared in person.

The respondent was represented by Mr P McAteer, Barrister-at-Law, instructed by the Departmental Solicitors Office.

REASONS

1.	The effect of Article 201 and 202 of the Order, in broad terms, is as follows.  If an employee is entitled to a redundancy payment from his employer, but the employer cannot or will not pay, and the employee has made reasonable efforts to seek to recover the payment from the employer, then the Department, in its role as statutory guarantor, must make a payment to the employee in respect of that redundancy payment.  If the Department declines to make a payment pursuant to an Article 201 application, the employee has a right of appeal to an industrial tribunal.  (See Article 205 of the Order).

2.	The Department is also the statutory guarantor in respect of the payment of certain other employment debts, including holiday pay and notice pay (see Article 227 of the Order), if the employer has been the subject of a winding-up order.  If the Department declines to pay pursuant to any Article 227 application, there is a right of appeal to an industrial tribunal.

3.	The claimant did make an Article 201 application to the Department.  That application was refused.  This is the claimant’s Article 205 appeal against that refusal.  

4.	The claimant did make an Article 227 application to the Department.  That application was also refused.  The claimant also appeals against that refusal.  

5.	This is my Decision in respect of both of those appeals.

6.	It is agreed between the parties that the claimant worked on a full-time basis at a business which was based at 18 Aghnatrisk Road, Hillsborough, Co Down from August 2002 until 9 July 2010.  There were two companies entitled “Scotframe Timber Engineering (NI) Limited”.  One of those was registered in Scotland in 2002 and the other was registered in Northern Ireland in 2006.  Both of those companies were associated with the Hillsborough business.  For the purposes of the present proceedings, it is agreed between the parties that the Scottish company was the company which ran the Hillsborough business and it is also agreed that the Scottish company was the subject of a winding-up order by the Northern Ireland High Court in September 2010.  From now on, I refer to the Scottish registered Scotframe Timber Engineering (NI) Limited as “the relevant company”.  

7.	The claimant ceased to work at the Hillsborough business on 9 July 2010 when the relevant company ceased trading, and the business ceased to operate.  

8.	The parties agree that the claimant was employed under a contract of service with the relevant company from 9 September 2002 until May 2008.  In May 2008, the claimant and three other employees of the relevant company completed a Management Buy Out of that company.  At that time, the claimant invested £25,000 of his own money on the company.  From that time onwards, until July 2010, he worked there as Financial Director.

9.	The central dispute between the parties is as follows.  According to the Department, the claimant carried out his role as Financial Director either under a contract for services or purely in his capacity as a part-owner of the company.  According to the claimant, he worked at the company from May 2008 onwards under the same contract of service under which he had worked there up to May 2008, with appropriate modifications having been made to that contract to reflect his enlarged role as Financial Director, but otherwise under the same basic terms and conditions as those under which he had been employed until the Buy Out.

10.	The parties are agreed that these appeals must fail if the claimant was not employed under a contract of service from May 2008 until 9 July 2010 and that the appeals must be successful if he was employed under a contract of service throughout that period. 

11.	I was shown a substantial bundle of documents, together with some miscellaneous documents.  I told the parties that, for evidential purposes, I would not have regard to any particular document within the bundle unless that document had been drawn to my attention by one or both of the parties.  

12.	I received oral testimony from the claimant.  

13.	There was a complicated legal, documentary and factual background to these proceedings.  Although the amount at stake in these proceedings was relatively small, Mr McAteer had thoroughly mastered all of the background complexities.  Although he was always courteous to the claimant, he did subject the claimant to a lengthy, thorough and skilful cross-examination.  

14.	Having carefully observed that cross-examination, having considered the claimant’s oral testimony in general, and having considered all of the documentary evidence which was presented to me, I was entirely satisfied that the claimant was a truthful witness.  The outcome of this case might have been very different if I had concluded that the claimant was, in significant respects, an untruthful witness, or if I had ended up having serious reservations about his truthfulness.

Article 3

15.	Article 3 of the Order provides that, for the purposes of the Order, an “employee” is an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.

16.	Article 3 defines “contract of employment” as including a contract of service, which may be express or implied, and which (if it is express) may be oral or in writing.  

The facts

17.	In this paragraph, I set out various findings of fact which are relevant to the questions which I have determined.  In order to minimise duplication, and in the interests of readability, I have set out certain other findings of fact elsewhere in this Decision.  

(1)	The claimant was employed by the relevant company from 9 September 2002 until May 2008 as its Accounts Manager.  He was employed in that capacity pursuant to a written contract of employment.  

(2)	The written contract of employment did not in all respects reflect the reality of the employment relationship between the claimant and the relevant company at that time.  For example, the written contract did not accurately describe the arrangements which had been made between the parties in relation to travel expenses.  However, all of the relevant discrepancies are probably the result of the fact that the written contract of employment was a standard form contract, which had not been tweaked, in all necessary respects, to precisely reflect all the details of the particular employment relationship between the claimant and the relevant company.

(3)	Until May 2008, the relevant company was owned by Scotframe Timber Engineering Ltd which is based in Scotland.  In May 2008, the claimant, along with Mr Adrian Peter, Mr Stephen Davis and Mr Declan Byrne bought the company under a Management Buy Out.  Mr Peter, Mr Davis, Mr Byrne and the claimant were all senior employees of the company at that time;  Mr Peter was the managing director.  

(4)	The Buy Out was organised in the following manner.  A separate company, Hillsborough Enterprises Ltd, was set up.  The shareholdings in that company were as follows.  Mr Peter put in £75,000.  The claimant, Mr Davis and Mr Byrne all put in £25,000 each.  Hillsborough Enterprises Ltd bought the relevant company.  All of the new owners were regarded as having acquired shareholdings within the relevant company which were proportionate to the amount of capital which they had respectively invested.  Accordingly, Mr Peter a 50% shareholding, whereas the claimant had a 16.6% shareholding.

(5)	All of the new owners became Directors of the relevant company after the Buy Out.  

(6)	After the Buy Out, the claimant continued to do much the same work for the company as he had previously done.  He continued to work the same hours as he had previously worked.  In general, he continued to take the same amount of holidays as the number of holidays to which he had been entitled prior to the Buy Out.

(7)	After the Buy Out, the great majority of the claimant’s remuneration from the company continued to be paid mainly by way of salary, and income tax was paid on that salary, throughout the ensuing years, under the PAYE system.  

(8)	During the ensuing years, that part of the claimant’s remuneration which was not paid as salary was paid by way of dividends.  Those dividends were paid to Hillsborough Enterprises Ltd, which passed on those dividends, to the claimant, and to the others.  The dividends were distributed strictly in accordance with the sizes of the respective shareholdings of the various owners.  

(9)	After the Buy Out, the claimant never took any sick leave.  

(10)	After the Buy Out, the claimant’s total annual remuneration package was substantially similar in extent to the package which he had enjoyed in the company prior to the Buy Out.  

(11)	Prior to the Buy Out, the claimant had been entitled to a contractual bonus in addition to his normal salary.  After the Buy Out, the claimant was never paid any bonus.  

(12)	Before the Buy Out, the claimant had had a line management reporting relationship to Mr Peters, who was Managing Director of the relevant company both before and after the Buy Out.  After the Buy Out, he continued to have that line management reporting relationship to Mr Peter.  

(13)	Before the Buy Out, the claimant (alongside the line management reporting relationship to Mr Peter) had also had a reporting relationship (a “functional” reporting relationship) to a finance officer in one of the companies which constituted the group of associated companies to which the relevant company belonged at that time.  After the Buy Out, the claimant was styled the “finance director” of the relevant company and he ceased to have any functional reporting relationship on finance matters to anybody.  For that time onwards, his only reporting relationship was to Mr Peter, in Mr Peter’s role as managing director.  

(14)	The dividend payments referred to above were made in 2008 and 2009.  Those payments stopped during 2009.

(15)	In August 2009, the claimant and the other directors reduced their salaries because of the difficult economic climate in which the relevant company then found itself.  

(16)	The company stopped trading in July 2010.  At that time, the claimant was sent a letter of termination by Mr Peter.  The letter of termination purported to be a letter dismissing the claimant from a contract of employment with the relevant company.

(17)	The claimant received no prior notice of the termination.

(18)	The applications to the Department (in the Department’s role as a statutory guarantor) were made in October 2010.  Those applications were rejected, by letter dated 4 April 2011, on the basis that the claimant had not proved to the Department’s satisfaction that he was an employee as defined by the Order.  

(19)	For the year ending 30 April 2009, the claimant was paid “dividends” of just over £15,000.  His salary for that year was approximately £38,000.

The law

18.	In Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] EWCA Civ 280, the English Court of Appeal set out principles which are relevant in the context of this case.

19.	See, in particular paragraphs 80 and 81 of the judgment of the court in that case:

“80.	There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee of the company under a contract of employment. There is also no reason in principle why someone whose shareholding in the company gives him control of it – even total control (as in Lee's case) – cannot be an employee. In short, a person whose economic interest in a company and its business means that he is in practice properly to be regarded as their "owner" can also be an employee of the company. 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 except with his consent – has the effect in law that he cannot be an employee at all. Point (i) is answered by Lee's case, which decided that the relevant control is in the company; point (ii) is answered by this court's rejection in Bottrill of the reasoning in Buchan. 

81.	Whether or not such a shareholder/director is an employee of the company is a question of fact for the court or tribunal before which such issue arises. In any such case there may in theory be two such issues, although in practice the evidence relevant to their resolution will be likely to overlap. The first, and logically preliminary one, will be whether the putative contract is a genuine contract or a sham. The second will be whether, assuming it is a genuine contract, it amounts to a contract of employment (it might, for example, instead amount to a contract for services). We make clear that we are not of course suggesting that cases raising the first issue are likely to be common, and we think it probable that they will be relatively exceptional. Despite the repeated references in the authorities to the theoretical possibility of a contract being a sham, no such case has been discovered in the principal authorities to which we have been referred. We make no attempt to give any prescriptive guidance as to the resolution of such issues, but we at least offer the following general observations.”

20.	At paragraph 84 of Nuefeld, the Court of Appeal endorsed a statement of principles which had been set out by Elias J in Clark v Clark Construction Initiatives Ltd & Another [2008] IRLR 364.  At paragraph 98 of Clark, Elias J had set out that statement in the following terms:
“98.    How should a Tribunal approach the task of determining whether the contract of employment should be given effect or not? We would suggest that a consideration of the following factors, whilst not exhaustive, may be of assistance: 
(1) 	Where there is a contract ostensibly 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 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 in practice is 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, or will profit from its success, will not be factors militating against a finding that there is a contract in place. Indeed, any controlling shareholder will inevitably benefit from the company's success, as will many employees with share option schemes (Arascene).

(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 individual 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 para.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 a 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 into 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 have 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 contract of employment.

(8) 	Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that the fact alone will ever justify a Tribunal in 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 those doubts one way or another.”

Conclusions

21.	In the following paragraphs, I explain how I have applied the relevant findings of fact and applicable law to the determination of the issue of whether the claimant was an employee.  Against the background which is described below, and for all the reasons which are set out below, I have decided that the claimant was employed by the company under a contract of service throughout the period from May 2008 until July 2010.

22.	First, I consider the factors which were set out at paragraph 98 of the Clarke judgement.  Any reference below to a numbered factor is a reference to the relevant factor number as set out at paragraph 98 of Clark.

Factor 1

23.	When the Buy Out took place, the claimant was working in the business under a contract of service, which was operated pursuant to a written contract of employment.  I accept the claimant’s testimony, which was that, at the time of the Buy Out, all of the new owners of the business agreed that the existing contracts of employment should remain in place.  I accept that testimony, because I regard the claimant as a truthful witness.  In accepting that testimony, I have taken full account of the fact that the claimant has been unable to produce any documentation to support that particular contention.  I note that after the Buy Out, and throughout the period up to July 2010, most of the claimant’s remuneration was paid under the PAYE system and on the basis that he was an employee of the business.

Factor 2

24.	The claimant did not have a controlling shareholding.  Indeed, he was the owner of a relatively small minority of shares, and he was only one of several directors of the business.  In those circumstances, his powers of control after the Buy Out were not in practice very substantially enhanced, as compared to the situation prior to the Buy Out.  

Factor 3

25.	I note that, under this Factor, Elias P observed that the fact that a claimant is an entrepreneur, or will profit from the success of the business, are not matters which militate against a finding that there is a contract of service in place.  

Factor 4

26.	On the basis of the claimant’s testimony, I accept that the conduct of the parties was generally in accordance with the previous (pre-Buy Out) contract of employment.  In particular, I am satisfied that the claimant generally worked the hours stipulated and that he generally took no more than the stipulated holidays.  

Factor 5

27.	I am satisfied that the conduct of the parties was generally not inconsistent with the continuation of the previous contract of employment.  

28.	I note that, during the tax years 07/08, 08/09 and 09/10, the claimant was obtaining part of his remuneration package in the form of dividends (which were paid to a separate company, and which were ultimately paid by that separate company to the claimant).  However, in all of those years, the dividends were a relatively small proportion of his overall remuneration package, and his overall remuneration package was not substantially in excess of the remuneration package which he had enjoyed prior to the Buy Out.

29.	In considering Factor 5, I have not lost sight of the fact that dividends were payable to the various shareholders on a basis which was proportionate to their respective shareholdings, as distinct from being payable on the basis of each individual’s work performance.  

Factor 6

30.	According to this Factor, as set out by Elias J in Clark, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing, and this will be powerful evidence that the contract was not really intended to regulate the relationship in any way.  However, that statement of principle must be read subject to the comments of the Court of Appeal in Neufeld.  At paragraph 89 of the Court’s judgment in that case, Rimer LJ commented on  Factor 6 in the following terms:

	“We consider that Elias J’s sixth factor may perhaps have put a little too high the potentially negative affect of the terms of the contract not having been reduced into writing.  This will obviously be an important consideration but if the party’s conduct under the claimed contract points convincingly to the conclusion that there was a true contract of employment, we would not wish tribunals to seize two readily on the absence of a written agreement as justifying the rejection of the claim. ..”

	In the present case, I see nothing implausible about the proposition that the new owners of the company, after the But Out, decided to continue the pre-existing contracts of employment, but did not bother to restate, or to update, those contracts, in writing.  

Factor 7

31.	In my view, the commitments which the claimant made in his role as the part-owner of the company were commitments which are of little weight, in the circumstances of this case, in determining the “employment” issue.  

Factor 8

32.	The claimant did not have a controlling shareholding.  Accordingly, Factor 8 is of limited relevance in the context of this case.  The fact that the claimant had a significant shareholding in the relevant company is of course the issue which has raised doubts as to whether he was truly an employee.  However, those doubts have been resolved, to my satisfaction, as a result of the evidence which I have received in this case, and in particular, because of the oral testimony of the claimant in these proceedings.  

The Webb Case

33.	Mr McAteer has drawn my attention to the case of Webb v Secretary of State for BIS [Case No: 3202089/10], which is a judgement of an English employment tribunal.

34.	Mr Webb was a part-owner of a limited company which got into financial difficulties.  He made a claim to the Secretary of State (in the Secretary of State’s role as the statutory guarantor in respect of redundancy payments and other employment debts).  That application was rejected.  Webb was the tribunal’s decision in respect of the claimant’s appeal against that rejection.  That appeal was unsuccessful.  Mr Webb had been paid a salary and had paid PAYE on that salary until the financial year 2002/2003, when the salary was reduced, at first to £11,990 and then, the following year, to £5,200.  He confirmed to the tribunal that, on his accountant’s advice, he had taken earnings as dividends from that time onwards, to top up his salary.  In Webb, the Secretary of State’s representative suggested that, at that point, the claimant was acting as a director and not as an employee, and that, by being able to put through that change, he was demonstrating control that an employee would not have had.  That structure of dividends and salary continued until the company went into insolvency.  Mr Webb stated that he was advised to take his last week’s pay as salary.  He was able to agree that change to his contractual terms with immediate effect.  Mr Webb’s evidence to the tribunal was that his final full weekly salary was £438.94.  

35.	Accordingly, in the Webb case, the claimant’s weekly remuneration was £438.94, but only 25% of that consisted of salary, with the rest being made up of dividends.  

36.	The conclusions of the employment judge in Webb which are of most significance, in the context of the present case, are set out at paragraphs 23 and 24 of his judgment:

	“23.	In considering whether a contract of employment continued after the change of the payment structure, I have looked at whether a valid contract was ongoing.  The payment method certainly points away from employment whilst the duties, as they had not changed, point towards employment.  At this point matters are finely balanced.  In reaching my conclusion I have therefore considered not just these points but I have also looked at the only other point on which evidence was presented to me, namely that of control.  In 2003/2003, the claimant was able to change his pay structure by exercising his control as a shareholder in a way that an employee could not.  Similarly, he was able to make a change in May 2010 with immediate effect which a mere employee could not have done.  

	24.	While I am mindful that the mere fact that an individual has control as a shareholder does not prevent a contract of employment arising, in this case, I find that the claimant was exercising a degree of control over his employment terms which was inconsistent with an employment relationship”.

37.	In my respectful view, the conclusions which the employment judge arrived at in Webb, at paragraphs 23 and 24 of the judgement, are difficult to reconcile with the observations of the Court of Appeal in Neufeld, when it applied the principle which had been established in Lee v Lee’s  Air  Farming Ltd [1961] AC 12.  (See in particular, paragraph 33 of the Neufeld judgement).   

38.	However, in the factual circumstances of this case, it is unnecessary for me to arrive at any definitive conclusion on the question of whether or not I agree with the reasoning set out at paragraphs 23 and 24 of the Webb judgement.  The facts of Webb and the facts of the present case are very different, in two main respects.  First, the extent of the dividend element of Mr Webb’s remuneration package was much greater than the extent of the dividend element of the remuneration package of the claimant in this case.  (In Webb’s case, the dividend element amounted to approximately 75% of the overall package).  Secondly, the judge in Webb found as a fact that Mr Webb was able to change his pay structure by exercising his control as a shareholder; in this case, the claimant’s role as shareholder did not empower him to unilaterally change his pay structure (because he only owned one-sixth of all shares in the company).   

General comments

39.	After the Buy Out, the claimant’s role in the company was from then onwards enlarged (so as to encompass all of the functions of a Finance Director, as distinct from extending only to the functions of an Accounts Manager), but that modification of functions was not subject of clear, contemporaneous documentation. 

40.	Before the Buy Out, the claimant had had a functional reporting relationship to a finance officer who was located in another company.  After the Buy Out, he ceased to have any reporting relationship to any such person and, from then onwards, on technical financial matters, “the buck” stopped with him.  I note that this alteration to reporting relationships was never confirmed in writing.  

41.	During the post-Buy Our period, the claimant’s remuneration package did not always consist only of his salary as an employee.  No contemporaneous documentation has been made available to me which records the reasons for that situation.  

42.	Against the background of the matters referred to the last three paragraphs above, it is hardly surprising that the Department has had considerable doubts as to whether the claimant was, as he has consistently claimed to be, employed under a contract of service throughout the post-Buy Out period.
  
43.	Ultimately, I have concluded that he was indeed employed under a contract of service throughout that latter period.  However, in arriving at that conclusion, I have been much influenced by my assessment of the truthfulness and credibility of the claimant’s oral testimony in these proceedings.  That testimony was subjected to skilful, searching and extensive cross-examination on behalf of the Department.  In all the circumstances of this case, it was appropriate that that should be done.

Next steps

44.	The parties have told me that they expect to be able to agree on the amounts which now become due to the claimant pursuant to this Decision.  If the parties are not able to reach agreement on those matters, either party can ask for the convening of a remedies hearing.  No remedies hearing should be requested until after the expiration of a period of six weeks beginning with the date on which this Decision is issued.

Chairman:

Date and place of hearing:  29 June 2011 at Belfast.		

Date decision recorded in register and issued to parties: