THE INDUSTRIAL TRIBUNALS

CASE REF:	1269/13

CLAIMANT:			Richard James Morgan	 

RESPONDENT:		Department for Employment and Learning

DECISION 
The unanimous decision of the tribunal is that the claimant was an employee of Saville Tractors (Belfast) Ltd.  He is entitled to a redundancy payment of £9,460.00, notice pay of £5,160.00, holiday pay of £2,150.00 and arrears of pay of £267.31.

Constitution of Tribunal:
Chairman:		Mr B Greene
Members:		Mr J Hughes
			Mr F Murtagh

Appearances:
The claimant was represented by Mr C Hamill, of counsel, instructed by Carson McDowell Solicitors.

The respondent was represented by Mr Michael Potter, of counsel, instructed by the Departmental Solicitors Office.

SOURCES OF EVIDENCE

1.	The tribunal heard evidence from the claimant.  The respondent elected not to adduce any evidence.  The tribunal also received two bundles of documents, one amounting to some 244 pages and the second a bundle of the leading authorities.  The parties also relied on their oral submissions in this matter.

THE CLAIM AND DEFENCE

2.	The claimant claimed a redundancy payment, notice pay of £5,400.00, holiday pay of £6,415.38 and arrears of pay of £267.31.  The respondent denied the claimant’s claims in their entirety as it asserted the claimant was not an employee for the purposes of Article 3 of the Employments Rights (Northern Ireland) Order 1996.

THE ISSUES

3.	The issues for determination were:-

(1)	Is the claimant an employee for the purposes of Article 3 of the Employment Rights (Northern Ireland) Order 1996.

(2)	If he is an employee, is he entitled to a redundancy payment?

(3)	If he is an employee, is he entitled to notice pay?

(4)	If he is an employee, is he entitled to holiday pay?

(5)	If he is an employee, is he entitled to arrears of pay?

(6)	If the claimant is entitled to any of the above payments at what amount should they be measured?

(7)	What was the claimant’s status when the company became insolvent?

FINDINGS OF FACT

4.	The claimant was born on 20 April 1967.  He was employed by Saville Tractors (Belfast) Ltd on 20 November 1989 as a management accountant under a contract of employment.

5.	Saville Contractors (Belfast) Ltd was involved in the distribution of agricultural machinery, construction machinery and motor homes.  The managing director was Mr Ernest Arnold and the finance director was Mr Denis Gill.

6.	In or about 2006, the claimant was approached by the owner of the company and asked was he interested in buying the company and becoming a 50% shareholder as the owners were retiring.  The claimant and a Mr James Wilson each bought 50% of the shareholding in the company on 22 October 2006.

7.	The claimant entered into a new contract of employment on 22 October 2006 with Saville Tractors (Belfast) Ltd.  He was provided with a written contract of employment which was signed on 22 October 2006.  All employees were provided with a revised written contract of employment.

8.	From 22 October 2006 the claimant earned £69,500.00 per annum which amounted to £5,791.67 per month gross and £3,689.00 per month net.

9.	Under the claimant’s contract of employment he was described as an employee director who reported to the Board.

10.	His contract of employment also required him to undertake such other duties from time to time as the company might reasonably require.

11.	The contract also stated at paragraph 4.3:-

“The employee is entitled to take his remuneration as dividend instead of salary if he so wishes”.

12.	The contract of employment also set out the claimant’s hours of work as being between 9.00 am and 5.30 pm and his holiday entitlement. 

13.	The claimant was required to give four weeks’ notice of any proposed holiday dates, which had to be agreed in writing by the directors and there was a limit as to the amount of holiday leave that he could take at any given time.

14.	The contract also enabled him to carry over untaken holiday leave into the next holiday year.  The contract also provided at paragraph 8.4:-

“If the employee for any reason does not take all of his/her holiday entitlement in any holiday year … the employee is entitled to a payment in lieu …”

The claimant claimed for 25 days of untaken holiday leave.  The respondent did not challenge that the claimant had 25 days of untaken holiday leave.  

15.	The contract also provided for sick absence payments to the claimant and requirements of self-certification; doctor’s certification and submission to medical examination.  The claimant also was entitled to full salary for six months if sick, followed by half salary for a further six months and thereafter statutory sick pay.

16.	The contract also contained provisions about termination and notice periods, summary dismissal, disciplinary and grievance procedures, pensions and other obligations, including post-termination obligations.

17.	The claimant explained that the provisions of the contract were those advised by his advisors Deloitte and Touche who had acted for him and his co-shareholder, James Wilson, when they purchased the shareholding in the company from the previous owners.  He explained that the provision whereby he could have his salary paid in part by dividend, did not give him any financial advantage.  He believed that there were advantages to the company, in that the liability for national insurance contribution was reduced by this method of payment and he accepted, in the course of the hearing, that there was likely to be an advantage to the company in the amount of tax payable to the HRMC by reason of this method of payment.

18.	From October 2006 onwards, the claimant’s salary was paid by way of dividend (£63,500.00) and under the PAYE scheme (£6,000.00).

19.	For the tax year to 5 April 2012, under the PAYE scheme, the claimant received £3,517.68.  The balance of the monies due to him under his annual gross salary of £69,500.00 was paid by way of dividend.  

20.	In July 2012 the claimant’s method of payment changed in that all his gross salary of £69,500.00 was paid under the PAYE scheme.  The claimant explained that this arose because the company’s bank, Danske Bank, insisted that he be paid under the PAYE scheme and not by way of dividend.  The claimant explained, and this was not challenged, that as the company had not produced a profit by July 2012 that the bank would not continue to provide the overdraft facility, on foot of covenants between the bank and the company.

21.	Historically the company’s income was such that for the first six months of the calendar year, it generally revealed a loss with recovery in the second six months, thereby giving the company a profit over the year as a whole.  

22.	From July 2012, when the claimant was paid exclusively under the PAYE scheme, his salary did not change.

23.	In or about December 2012, the company faced a VAT bill of £350,000.00, which it was unable to satisfy.  This arose by reason of a review of VAT payments made by the company.  Previously the company had operated a scheme whereby motor homes were zero rated for disabled persons for the purposes of VAT.  The company had been informed that its method of doing this was perfectly proper and they had done it.  However, despite remonstrating with the VAT authorities, they were unmoved and issued their demand for £350,000.00 in December 2012.  The company was unable to satisfy that demand and ceased trading.  The claimant’s last day of work was 1 February 2013.  It was not challenged that he did not receive any notice of the termination of his employment.

24.	On foot of losing his job on 1 February 2013, the claimant seeks a redundancy payment, notice pay, holiday pay and arrears of wages of £267.31.  While the respondent did not accept the claimant’s calculation for each of his claims it did not offer alternative calculations.  

25.	Since 2006 when the claimant and James Wilson became 50% shareholders each in the company they effectively were in charge of the business.  In relation to holiday leave, each director applied to the other director and sought his approval.  The claimant indicated that he had been, in the past, refused leave he was seeking by his co-director and he had accepted and abided by that.

26.	The company had around 22 members of staff. 

27.	The claimant was responsible for sales, administrative services and part-time staff.  The other shareholder was responsible for the day-to-day business of the company.

28.	The claimant was responsible for the signing and processing of all purchasing invoices from approximately 170 suppliers and for the payments made to them.  He did bank lodgements and was responsible for locking the premises in the evening.  He also was responsible for dealing with the bank in relation to its overdraft facility and in the preparation of audits as required.  He made all the VAT returns and Fair Employment monitoring returns.  He produced the full financial accounts to the auditor.

29.	Mr Wilson and the claimant were the only directors of the company.

30.	Prior to July 2012 the claimant’s salary, as paid under the PAYE scheme, was reduced to £3,517.68, because he availed of a child voucher provision sanctioned by HMRC, which allowed £243.00 per month to be used by employees to pay for childminding services, which amount was deducted gross from his salary before it was taxed.  He also availed of a scheme, promoted by HMRC whereby a bicycle,  bicycle materials and equipment could be bought up to a value of £1,000.00, thereby reducing the gross salary that was subject to tax by that amount.  The claimant has used the child voucher scheme since 2007.

31.	The claimant applied to the respondent for a redundancy payment, notice pay, holiday pay and arrears of pay by way of an RPI application on 28 February 2013.  The respondent rejected the application by letter of 30 April 2013.  The respondent was asked to review its decision and by letter of 31 May 2013 it informed the claimant that it continued to reject his application.

32.	The respondent rejected the claimant’s application because he was not an employee as defined by Article 3 Employment Rights (Northern Ireland) Order 1996.

THE LAW

33.	An employee is an individual who has entered into or works under or has worked under a contract of employment.  A contract of employment means a contract of service or apprenticeship whether express or implied and (if it is expressed) whether oral or in writing.  (Article 3(1) and (2) The Employment Rights (Northern Ireland) Order 1996).  

34.	A worker means an individual who has entered into or works under or worked under a contract of employment or any other contract whether express or implied and (if it is expressed) whether oral or in writing whereby the individual undertakes to do or perform personally any work or service for another party to the contract whose status is not by virtue of the contract the client or customer or any profession or business undertaking carried on by the individual (Article 3(3) The Employment Rights (Northern Ireland) Order 1996).  

35.	An employee is entitled to a notice payment equivalent to one week’s pay for each year of continuous service to a maximum of 12 weeks where the continuous period of employment is 2 years or more (Article 118 The Employment Rights (Northern Ireland) Order 1996).  

36.	A worker shall not suffer any deduction from his wages unless such deduction is authorised by virtue of a statutory provision or a relevant provision of the worker’s contract and the worker has previously signified in writing his agreement or consent to the making of the deduction (Article 45(1) The Employment Rights (Northern Ireland) Order 1996).

37.	Wages includes any bonus or holiday pay referable to the worker’s employment whether payable under his contract or otherwise (Article 59(1) The Employment Rights (Northern Ireland) Order 1996).

38.	An employee is entitled to a redundancy payment from his employer if he is dismissed by reason of redundancy (Article 170 The Employment Rights (Northern Ireland) Order 1996).

39.	An employee may make a claim to the Department for Employment and Learning for a payment out of the Northern Ireland National Insurance Fund where the employee is entitled to a redundancy payment and the employer is insolvent (Article 201 The Employment Rights (Northern Ireland) Order 1996).  

40.	The Department for Employment and Learning shall pay to a claimant such amount in accordance with the calculation set out within the Order of a redundancy payment where it is satisfied that the requirements of Article 201(2) The Employment Rights (Northern Ireland) Order 1996 have been satisfied (The Employment Rights (Northern Ireland) Order 1996 Article 202).  

41.	Where the employer has become insolvent, the employee’s employment has been terminated and the employee is entitled to be paid the whole or any part of a sum recoverable under The Employment Rights (Northern Ireland) Order 1996 the Department for Employment and Learning shall pay to the employee arrears of pay, holiday pay or notice pay to which he is entitled subject to the restrictions within the 1996 Order (Articles 227, 228, and 231 The Employment Rights (Northern Ireland) Order 1996).  

42.	In Clarke v Clarke Construction Initiatives Ltd [2008] IRLR 364, EAT Elias P gave the following guidance to tribunals when deciding whether the contract of employment of a majority shareholder should be given effect.

(1)	The onus is on the party denying a contract, where an individual has paid an employee’s tax and national insurance, prima facia he is entitled to an employee’s rights.

(2)	The mere fact of majority shareholding (or de facto control) does not in itself prevent a contract arising.

(3)	Similarly, entrepreneur status does not in itself prevent a contract arising.

(4)	If the parties conduct themselves according to the contract (eg as to hours and holidays), that is a strong pointer towards employment.

(5)	Conversely, if their conduct is inconsistent with (or not governed by) the contract, that is a strong pointer against employment. 

(6)	The assertion that there is a genuine contract will be undermined if there is nothing in writing.

(7)	The taking of loans from the company (or them guaranteeing of its debts) are not intrinsically inconsistent with employment. 

(8)	Although majority shareholding and/or control will always be relevant and may be decisive, that fact alone should not justify a finding of no employment (Harvey on Industrial Relations and Employment Law A1[125]).  

43.	The Court of Appeal in Secretary of State for Business Enterprise and Regulatory Reform v Neufeld [2009] IRLR 475, CA approved Elias P’s guidance in the Clarke decision subject to two qualifications.

(1)	guideline (1) should not be read as constituting a formal reversal of the burden of proof on the party denying employment status; it may still be necessary for the putative employee to do more than produce documentation to satisfy the tribunal.  

(2)	guideline (6) may be expressed too negatively – lack of writing may be an important consideration but if the parties’ conduct tends to show a true contract of employment ‘we would not wish tribunals to seize too readily on the absence of a written agreement to justify a rejection of the claim’.  (Harvey on Industrial Relations and Employment Law A1[125]).

44.	Courts must not be restricted to the legal form of the source of payment but focus on the character of the receipt in the hands of the recipient.

	Moses LJ stated in The Commissions for HM Revenue and Customs v PA Holdings Ltd [2011] EWCA Civ 1414 at paragraph 39:-

	“It seems to me that that approach, followed, for example in White v Franklin (q.v.supra 514), provides the answer to the essential question as to the character of the receipts in the hands of PA’s employees.  The Court should not be seduced by the form in which the payments (that is a dividends declared in respect of the shares in Ellastone) reached the employees.  It should focus on the character of the receipt in the hands of the recipients.

40.	This was the approach of the First Tier Tribunal in the instant case. The First Tier Tribunal asked whether the payments were in reference to the services rendered by the employees, as rewards for services past, present or future (Upjohn J’s test in Hochstrasser v Mayes [1959] Ch 22 at 33) and concluded the payments were emoluments or earnings falling within the definition in Section 19 ICTA [73].   

APPLICATION OF THE LAW AND THE FINDINGS OF FACT TO THE ISSUES

45.	Up to October 2006 the claimant was an employee of the company.  The respondent did not challenge that.  He earned £26,400.00 per annum approximately as a management accountant.

46.	On 22 October 2006 the claimant and John Wilson each became 50% shareholders in the company.

47.	The claimant entered into a new contract of employment on 22 October 2006 whereby he became finance director at a salary of £69,500.00.

48.	The contract permitted him to take his salary by way of dividend which he did in part receiving £6,000.00 under the PAYE scheme and £63,500.00 as a dividend.

49.	The tribunal is satisfied that looking at the substance and not the form of the money received that the so called dividend was in reality an emolument for services rendered by the claimant to the company and therefore should be treated as salary.

50.	Applying the criteria set out in the Clarke decision;

(1)	The claimant had a written contract of employment under which he has paid employee’s tax and national insurance contribution, at least, in part.

	(2)	The claimant is not a majority shareholder.  He is a joint shareholder with a fellow director with a shareholding of 50%.  

(3)	Should the claimant be described as an entrepreneur that does not prevent him from being an employee.

(4)	The claimant conducted himself according to the terms of the contract.  This was not challenged by the respondent.

(5)	On the basis of the evidence before the tribunal there was not any aspect of his employment that was not consistent with him having a contract of employment.  The only potential argument against that is his payment of salary by way of dividend and we have dealt with that matter above.

(6)	The contract was in writing.

(7)	The issue of loans does not arise.

(8)	The claimant is not a majority shareholder he is a 50% owner of the business. 

51.	From July 2012 the claimant reverted to receiving his salary under the PAYE scheme by reason by the intervention of the company’s bank.  The claimant was clearly an employee at that stage as well.

52.	The claimant therefore is an employee.  He was made redundant and is entitled to a redundancy payment of £9,460.00.

53.	The claimant is entitled to notice pay of £5,160.00.

54.	The claimant is entitled to holiday pay for 25 untaken days which amounts to £2,100.50.  As the claimant’s claim for unpaid wages of £267.31 was not challenged he is also entitled to that amount.

55.	This is a relevant decision for the purposes of the Industrial Tribunals (Interest) Order (NI) 1990.

Chairman:

Date and place of hearing:  18 September 2013, Belfast.	

Date decision recorded in register and issued to parties: