Practice group articles

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26 February 2010

The beneficial effects of workplace mediation
24 January 2010

Green light for employment claims | Religion and Belief
18 January 2010

Without prejudice communications can be admissible
17 January 2010

Default retirement age consultation
16 January 2010

Annual increase in tribunal awards
15 January 2010

Controlling shareholder can be an employee

22 June 2009



In Secretary of State for Business, Enterprise and Regulatory Reform (BERR) v 1. Richard Neufeld and 2. Keith Howe, the Court of Appeal has confirmed that a shareholder and director of a company can also be an employee under a contract of employment with the company, even where that person has a controlling interest in, or even total control of, the company.

The two cases arose because of the insolvency of companies and hinged on whether or not each claimant had been an employee of the failed company. If so, he was entitled to the protection afforded by Section 182 of the Employment Rights Act 1996 (ERA) to those who are employees at the date when the employer company has become insolvent.

The facts of Mr Neufeld’s case were as follows. He was managing director of A & N Communications in Print Ltd. (A&N) and held 90 per cent of the shares. The company went into insolvent liquidation. He first began working for Neufeld Press Ltd. in 1982 as a member of its sales team. In 1988 he became a shareholder and one of the company’s three directors. In 2001, this undertaking was transferred to A&N. Mr Neufeld continued to work as part of the sales team, managed by the sales director, and worked a 60-hour week carrying out sales as well as management duties. He had loaned money to A&N as well as providing personal guarantees on the company’s behalf. None of the three directors had a written contract of employment.

The Secretary of State had refused to meet Mr Neufeld’s claim for redundancy money, notice money and holiday pay owing at the date of insolvency to be paid from the National Insurance Fund (NIF). His claim amounted to approximately £10,000.

Mr Neufeld brought a claim under Section 188 of the ERA and the Employment Tribunal (ET) dismissed his claim. It held that the fact that he had given personal guarantees on A&N’s behalf, had lent money to the company and had control over it showed that in reality he was not an employee of the company when it became insolvent. In the ET’s view, he was running his own business as a manager and major shareholder.

The Employment Appeal Tribunal (EAT) disagreed. In its view, the correct approach was to focus on the conduct of the parties in carrying out the ‘purported’ contract of employment. Other factors were only relevant in so far as they reflected upon that conduct. The EAT held that the ET judge had erred in law in taking into account irrelevant matters.

The Secretary of State appealed to the Court of Appeal. The appeal was heard at the same time as another case because a salient factor in each was that the claimant was a controlling shareholder and a director of the company. The Secretary of State asked the Court of Appeal to clarify the approach to be adopted by the ET in these circumstances.

The Court of Appeal dismissed both appeals. In giving its judgment, Rimer LJ analysed the previous case law and authorities governing this question. In the Court’s view, the correct approach is to first determine whether the putative contract is genuine or a ‘sham’. If it is genuine, is it a contract of employment rather than, for example, a contract for services? As the critical question in such cases is whether or not the putative employee was an employee at the time of the company’s insolvency, it may be necessary to examine what has been done under the claimed contract, particularly where this is not in writing. The fact of a person’s control over the company will form a ‘backdrop’ against which the assessment of the conduct under the contract will be made, but will not ordinarily be of any special relevance in deciding whether or not that person has a valid contract of employment; nor will the fact that they have share capital invested in the company or have made loans to it or given personal guarantees on its behalf. Such considerations will ordinarily be irrelevant in determining whether or not a valid contract has been created. They show an owner acting as an owner. They do not show that the owner cannot also be an employee.

James Townsend, senior associate in the employment law team at B P Collins, notes: “This is an important case as there were 12,000 claims on the NIF by directors in 2008 and, given the current economic situation, the number in 2009 is expected to far exceed this total.”

For advice relating to any matters raised in this article, please contact the Employment law practice group on 01753 279029, complete the online enquiry form or email employmentlaw@bpcollins.co.uk.