Employment Law – Shareholders – Employees or Third Party Contractors? – Contracts of Employment – IT

The case of Nesbitt and Another v Secretary of State for Trade and Industry [2007] involved joint shareholder claimants who had contracts of employment with their company. The claimants were husband and wife. In February 1985, the second claimant incorporated a company as the vehicle for a new business providing IT training services to businesses and public bodies. In March 1986, the first claimant joined her in the business. From that date onwards, the share capital of the company consisted of 1,000 issued shares, 529 of which were held by the second claimant, and 470 of which were held by the first claimant. One share was held by F, the second claimant’s mother.

All three were members of the board. At its height, the company had 20 employees working from four offices. From the outset the claimants had written contracts of employment with the company. Those contracts were in the same form as entered into with its first employees. The claimants were also paid salaries proportionate to their roles as the senior managers of the business. They did not receive directors’ fees or dividends.

The company was managed on a day-to-day basis mostly by the claimants, although eventually a project manager was employed. Most management decisions were taken fairly informally, board meetings were held every six months, and additional meetings were convened when required.

Unfortunately during 2006 the company became insolvent. On the 3rd of July 2006, the remaining employees, including the claimants, were made redundant by the liquidator. Subsequently, the claimants applied to the insolvency service for redundancy payments and other arrears owed to them, pursuant to sections 166 to 168 and 182 to 186 of the Employment Rights Act 1996 (the insolvency provisions).

Their claims were rejected by the insolvency service on the basis that they were not employees within the meaning of the 1996 Act. Their challenge to that decision was rejected by the employment tribunal. The tribunal held, inter alia, that they could not have been employees of the company because they were, in practice, in total overall control of the company and thus able to prevent their own dismissals. The claimants appealed.

The principal issue that fell to be determined by the court was whether the tribunal had erred in treating the fact of control as determinative of the question of whether the claimants had been employed by the company. The appeal was allowed.

In the instant case, the tribunal had erred in treating the fact of control as determinative. It was merely one of the many relevant factors that fell to be considered when determining the question of whether the claimants had been employed by the company. The claimants had proper employment contracts, and those contracts were equivalent to those issued to the other initial employees. They also received their remuneration by way of salary. The fact of control aside, there were no other factors pointing away from employee status. In such circumstances, when considering the facts found by the tribunal, the only conclusion properly open to the tribunal had been that the claimants were employees of the company. Accordingly, the claim would be remitted to the tribunal for a determination of the sums due to the claimants.

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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.