Secretary of State for Trade and Industry v Bottrill

A controlling or sole shareholder may be an employee of the company for the purposes of the Employment Rights Act 1996. Shareholding control is relevant and may be decisive, but it creates no automatic bar to employee status.

The tribunal must consider all relevant circumstances. It should decide whether the contract is genuine and whether its substance creates an employer and employee relationship. Relevant matters include the parties’ conduct, the company’s control over the individual, the corporate constitution and the individual’s practical susceptibility to dismissal. A tribunal’s properly directed factual conclusion should stand.

The respondent was Magnatech UK Ltd’s managing director and sole shareholder. He worked under a three-year written contract, received employment benefits, worked fixed hours and had no other employment. Magnatech became insolvent, a receiver was appointed and the respondent was dismissed as redundant.

The Secretary of State rejected his application for payment from the National Insurance Fund on the ground that a controlling shareholder could not be an employee. An industrial tribunal found that he was an employee, and the Employment Appeal Tribunal upheld that decision.

The Secretary of State appealed. The central issue was whether a controlling shareholder could be an employee for the purposes of the Employment Rights Act 1996.

1. Appeal dismissed unanimously. In the judgment of the Court delivered by Lord Woolf MR, the industrial tribunal was entitled to find that the respondent was an employee. Its conclusion followed a careful and proper assessment of the competing circumstances and disclosed no error of law.

2. The definition of employee in section 230 of the Employment Rights Act 1996 did not impose a special rule for controlling shareholders. The court rejected the approach in Buchan and Ivey v Secretary of State for Employment [1997] IRLR 80, under which the ability to prevent dismissal excluded a controlling shareholder from employee status. That approach added a gloss which Parliament had not expressed and gave employee a special meaning in employment-protection legislation.

3. The court preferred and applied the approach in Fleming v Secretary of State for Trade and Industry [1997] 1 IRLR 682. Employee status must be determined from all relevant circumstances. A controlling shareholding is significant and may sometimes be decisive, but it is only one factor and is not determinative.

4. A tribunal should first consider whether a genuine contract existed between the company and shareholder. Relevant matters include when and why it was created, whether insolvency was then imminent and what the parties actually did under it. If the contract was not a sham, the tribunal should decide whether its substance created an employer and employee relationship.

5. The company’s control over the individual is important, but it differs from the individual’s voting control as shareholder. Relevant considerations may include the presence of other directors, the company’s constitution, the individual’s ability to vote on termination and whether the individual was in reality answerable only to himself and incapable of dismissal. The tribunal must act as an industrial jury, assigning appropriate weight to every relevant factor.

6. The court reaffirmed that contrived arrangements designed to impose inappropriate liability on the Secretary of State may fail because no genuine debt exists. Apart from such devices, a contributing shareholder-employee should not be deprived of statutory benefits merely because of share ownership. The appellant was ordered to pay the respondent’s costs on the indemnity basis.

1. Court of Appeal: Dismissed the Secretary of State’s appeal and upheld the finding that the respondent was an employee.

2. Employment Appeal Tribunal: Morison J, President, upheld the industrial tribunal’s determination and granted permission to appeal.

3. Industrial Tribunal: Held on 13 December 1996 that the respondent was an employee and was entitled to payment from the Secretary of State.