The applicant had held 65% of the shares of the company by which he was employed and was its managing director. On its insolvency, he sought payment of his arrears of wages from the defendant. The industrial tribunal concluded that he was not an employee: ‘Given that the applicant was the majority shareholder and had in fact personally guaranteed obligations of the company to the two main suppliers, I came to the conclusion that the applicant was not an employee within the meaning of the relevant legislation. There was no suggestion that the applicant was under the control of anyone within the company. He may have had another director with whom he discussed matters but at the end of the day in the event of conflict it was clear because of the nature of the applicant’s shareholding that he could overrule the other director. The argument that is advanced by the applicant in his IT1 that he was under the control of other creditors did not seem to me to be an argument that helped his case at all. The key issue is the relationship between the applicant and the limited company – not the relationship between the applicant’s limited company and outside bodies. The situation clearly would have been different had the outside bodies been shareholders in the company, but that was not the case. I came to the conclusion that the applicant was operating more like a partnership running with the protection and limitations of a company and, that being so, I could not hold that the applicant was in the employ of the company and must therefore dismiss the application.’
The Employment Appeal Tribunal had dismissed his appeal. The Secretary of State relied on three submissions – (1) that the question of whether the applicant was employed under a contract of service was a question of fact for the industrial tribunal which could only be challenged on the basis that it was perverse; (2) that that was not so on the facts of the instant case; and (3) that in any event the decision in Buchan and Ivey had established what was tantamount to a rule of law that a majority shareholder could not be treated as an employee for the purposes of the employment legislation.
Held: The Court accepted the first two submissions but not the third. As regards the two submissions which Lord Coulsfield accepted he said: ‘We agree that it is well-established that the question whether or not a person is an employee is a question of fact to be decided by the industrial tribunal and that neither the Employment Appeal Tribunal nor this court is entitled to interfere unless the industrial tribunal has in some way misdirected itself or arrived at a conclusion which cannot reasonably be supported. In the present case, it seems to us that, taking all the factors together, there was ample material to entitle the industrial tribunal to reach the conclusion that the appellant was not an employee for the purposes of the employment protection legislation. There were, as counsel for the respondent recognised, factors on which the appellant could rely on as pointing towards an employment relationship, such as the fact that the appellant worked alongside other employees of the company, with the same hours of work, and had no other employment. On the other hand, the fact that he was able to decide to draw no salary during the last month of the company’s existence, the fact that he personally guaranteed its obligations and the fact that he held a substantial majority shareholding are all factors which point in the opposite direction, as is the fact that there was no written record of his terms of employment. The fact that the salary which the appellant received was paid through the PAYE system is, in our view, neutral. In all the circumstances, therefore, we have no doubt that there was ample material on which the industrial tribunal was entitled to reach the conclusion that the appellant was not an employee.
In reaching the above conclusion, we have treated the fact that the appellant held a majority shareholding in the company as a relevant factor. We do not see how it could, in common sense, be doubted that the fact that a person is a shareholder is a relevant factor. The significance of that factor will depend on the circumstances, and the weight to be given to it may vary with the size of the shareholding. It is true that, as the appellant pointed out, a change in the size of a shareholding might, on that view, lead to a change in the view taken of the status of a particular person. The decision as to whether a person is or is not an employee must, however, be taken on all the relevant factors at the material time. The shareholding position at the material time must, in our view, be a relevant factor. It will, however, usually only be one of a number of such factors, and it is not impossible that regard might be had to the way in which the person in question comes to be a shareholder, or to be a majority shareholder. As in any such decision, all the circumstances have to be considered.’
As regards the Secretary of State’s argument based on the effect of Buchan and Ivey Lord Coulsfield said: ‘As we have indicated, the argument which we have heard in the present case is limited and we did not have the assistance of submissions from a legal representative on behalf of the appellant. In these circumstances we would not wish to go too far in expressing any opinion. Nevertheless, we can say that in view of the long-standing rule to which we have referred, that the question whether or not a person is an employee is a question of fact, we would be reluctant to see the introduction of any purported rule of law into this area of decision. We note in particular that in Buchan some reliance is placed on the proposition that a controlling shareholder can prevent the company from dismissing him. We are uncertain how that factor would apply in a case like the present, where it was the liquidator who dismissed the appellant. We did not hear argument on that matter, however, and we need express no view on it. It can easily be seen, as we have said, that the fact that the claimant is a majority shareholder is always a relevant factor. Normally it will be an important factor and there may well be cases in which it is decisive. We are not, however, convinced that it would be proper to lay down any rule of law to the effect that the fact that a person is a majority shareholder necessarily and in all circumstances implies that that person cannot be regarded as an employee, for the purposes of the employment protection legislation.’
Lord Coulsfield
[1997] IRLR 682
Scotland
Cited by:
Cited – Nesbitt v Secretary of State for Trade and Industry EAT 10-Aug-2007
EAT Contract of Employment – definition of employee
Insolvency
The Appellants were a husband and wife who entered into contracts of employment with a company which they managed and which they between . .
Lists of cited by and citing cases may be incomplete.
Employment, Insolvency
Leading Case
Updated: 11 November 2021; Ref: scu.511082